CENVAT credit — The appellant reversed credit on obsolete inputs — Penalty u/s.11AC was imposed on the ground that they reversed it only when pointed out and hence their intention was to evade duty — Held, for imposing penalty under this section there should be fraud, suppression or willful omission, etc. and for imposing such a penalty mens rea has to be proved — Also a short delay in reversal does not prove that their intention was to evade duty.

CENVAT credit — The appellant reversed credit on obsolete inputs — Penalty u/s.11AC was imposed on the ground that they reversed it only when pointed out and hence their intention was to evade duty — Held, for imposing penalty under this section there should be fraud, suppression or willful omission, etc. and for imposing such a penalty  mens rea has to be proved — Also a short delay in reversal does not prove that their intention was to evade duty.

The appellants were manufacturers of bulk drugs and they availed CENVAT credit on inputs used in the manufacture of their final products. The quality control store department rejected some inputs and with reference to a report titled ‘Status of Obsolete, slow-moving, non-moving materials’ the officers directed that the CENVAT credit availed on such inputs should be reversed immediately and the appellant reversed the same. Later the Department issued a showcause notice imposing penalty u/s.11AC on the ground that the appellant had intention not to reverse the credit and they reversed the credit only because the report regarding unusable inputs was detected by the officers of the Department. The appellant contended that the due date for reversal of duty was 20-12-2002 and they reversed the same on 4-12-2002 and the Department contended that they reversed the credit only when the appellant was caught on the wrong foot.

Held:

For imposing penalty u/s.11AC short levy of duty should have arisen by reason of fraud, collusion or any willful misstatement or suppression of facts and to impose penalty such contravention should be made with an intention to evade payment of duty. Hence to impose penalty under this section mens rea (i.e., guilty mind) has to be proved. In this case the company was in the process of writing off such inputs in their stores and there was nothing to suggest that they would not have reversed the credit at the time of writing off the inputs in their stock. A short delay in reversal did not prove that they had intention to evade duty.