Modvat credit on inputs for exempted products must be reversed; penalty was unwarranted on the facts.

Modvat credit taken on inputs used in exempted final products was not admissible and had to be reversed. The assessee's partial reversal did not, on the available record, establish full compliance, so the exact amount of ineligible credit required fresh verification by the jurisdictional Assistant Commissioner. Penalty under Rule 173Q(i)(bb) was not considered warranted on the facts, as the assessee had reversed amounts in apparent recognition of the liability and the circumstances did not justify penal action. The quantification issue was therefore remanded for redetermination, while the penalty component was vacated.

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Issues: (i) whether Modvat credit taken on inputs used in exempted final products was liable to reversal and whether the amount reversed by the assessee adequately covered the ineligible credit; (ii) whether penalty under Rule 173Q(i)(bb) was sustainable on the facts.

Issue (i): whether Modvat credit taken on inputs used in exempted final products was liable to reversal and whether the amount reversed by the assessee adequately covered the ineligible credit.

Analysis: Credit on inputs going into exempted final products was not admissible and had to be reversed. However, the department had not furnished a complete working of the demand, and the amount already reversed by the assessee was found insufficient on the assessee's own showing. The exact quantum therefore required fresh verification by the jurisdictional Assistant Commissioner.

Conclusion: The assessee was not entitled to retain Modvat credit on such inputs, but the quantification was remanded for redetermination.

Issue (ii): whether penalty under Rule 173Q(i)(bb) was sustainable on the facts.

Analysis: In view of the assessee's reversal of amounts on its understanding of the liability and the circumstances of the case, the matter was not considered fit for penal action.

Conclusion: The penalty was set aside in full.

Final Conclusion: The matter was sent back for fresh determination of the amount liable to reversal, while the penal component was completely vacated.

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