2007 (8) TMI 254 - HC - Central Excise

Penalty - shortage of raw material - no misstatement or suppression because Dept has relied upon the accounts of the assessee for finding out shortage & assessee has not even suppressed that credit is not reversed to the extent of shortage held that there was no clandestine removal or manipulation, suppression or misstatement or contravention of specified Rule Demand & interest u/s 11AB are confirmed but penalty not sustainable u/s 11 AC - appeal is, therefore, partly allowed

Summary

Issues:
Challenge to CESTAT order on CENVAT credit claimed without justification.
Interpretation of Rule 7(4) of Cenvat Credit Rules, 2002.

Analysis:
1. The Department challenged a CESTAT order regarding the claim of CENVAT credit without justification. The issue arose when a shortage of raw material worth Rs. 33,42,161/- was observed during an audit, leading to a claim of CENVAT credit of Rs. 5,34,746/- without proper entitlement. The Joint Commissioner confirmed the demand notice for recovery of the credit, along with interest and penalty, emphasizing the burden of proof on the manufacturer to justify CENVAT credit under Rule 7(4) of the Cenvat Credit Rules, 2002.

2. The Commissioner (Appeals) upheld the demand and interest but reduced the penalty, noting the absence of evidence for clandestine activities. However, CESTAT set aside the entire order, including the demand, interest, and penalty. The High Court admitted the appeal based on two substantial questions of law: the power to ignore shortages within tolerance limits and the correct interpretation of Rule 7(4) of the Cenvat Credit Rules, 2002.

3. The High Court analyzed Rule 7(4) which places the burden of proof on the manufacturer to justify CENVAT credit claimed. It noted the failure of the assessee to account for the utilization of short inputs for which credit was claimed, leading to a decision against the assessee by the lower authorities. The Court disagreed with CESTAT's reliance on a Delhi Tribunal decision, emphasizing the lack of statutory foundation for exemption and the importance of accurate accounting to prevent misuse and ensure revenue to the Public Exchequer.

4. Ultimately, the High Court partly allowed the appeal, quashing the CESTAT order but restoring the confirmation of demand notice and interest. It clarified that since there was no suppression or misstatement by the assessee, no penalty under Section 11AC of the Central Excise Act, 1944, was warranted. The Court disagreed with the sympathetic view taken by CESTAT, highlighting the need for adherence to statutory provisions and accurate accounting practices to maintain the integrity of the tax system.