Wrong Modvat credit can attract penalty even if described as an accounting error, though the quantum may be reduced on the facts.

Penalty for wrongful availment of Modvat credit was sustained where the assessee had taken credit on the basic customs duty component shown in the Bill of Entry, which was not eligible, and the reversal occurred only after the excess was detected. A claim of clerical error was rejected because there was no supporting material showing that the mistake was attributable to a new clerk or that proper supervision and instructions were lacking. Rule 173Q(bb) was applied on the basis that credit was taken knowingly, or with reason to believe, or that records were not properly maintained. The penalty was upheld in principle, but reduced in quantum to reflect the surrounding circumstances.

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Issues: Whether penalty imposed for wrong availment of Modvat credit on imported goods was justified, and if so, whether the quantum of penalty required reduction.

Analysis: The appellants had availed Modvat credit including the basic customs duty component shown in the Bill of Entry, which was not eligible. The credit was reversed after the excess was pointed out. The plea of clerical error was not supported by material evidence showing that the mistake was attributable to a new clerk or that adequate supervision and instructions were lacking. Rule 173Q(bb) applied where credit is knowingly, or with reason to believe, taken or records are not properly maintained. On the facts, penalty was warranted, but the circumstances justified leniency in the amount.

Conclusion: The penalty was upheld in principle, but its quantum was reduced to Rs. 25,000.

Final Conclusion: The appeal succeeded only to the extent of reduction of penalty, with refund of any amount paid in excess of Rs. 25,000.

Ratio Decidendi: Penalty for wrongful credit under Modvat provisions may be sustained even where the irregularity is described as an accounting error, but the amount can be reduced where the surrounding circumstances do not warrant the original quantum.

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