Penalties under excise and customs law require strict statutory preconditions, including proven contravention and confiscability of goods.

Penalty under the Central Excise Modvat scheme is not supportable where the credit was reversed before notice, no contravention of the credit provisions is established, and no clandestine removal or comparable misconduct is shown. A breach of a customs exemption condition does not by itself justify excise penalty. Customs penalty under Section 112 likewise requires a foundational finding that the imported goods are liable to confiscation; absent that finding, and where rectification occurred before proceedings, the penalty basis is not made out. The text states that the penal demand was set aside, while a further credit-reversal claim was left for the appropriate authority.

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Issues: (i) Whether penalty was sustainable for alleged contravention of the Central Excise Modvat rules and related demand provisions; (ii) whether penalty was sustainable under the Customs Act in the absence of a finding that the imported goods were liable to confiscation.

Issue (i): Whether penalty was sustainable for alleged contravention of the Central Excise Modvat rules and related demand provisions.

Analysis: The credit had been reversed before issuance of the show-cause notice, and the material on record did not establish any contravention of the Modvat scheme in the manner alleged. A breach, if any, of a customs exemption condition did not by itself establish violation of the Central Excise credit provisions so as to justify penalty under the excise penalty provisions invoked. The finding also noted that the basis for invoking Rule 9(1) was not supported on the facts, and no clandestine removal or comparable misconduct was shown.

Conclusion: Penalty under the Central Excise Rules was not sustainable and the finding went in favour of the assessee.

Issue (ii): Whether penalty was sustainable under the Customs Act in the absence of a finding that the imported goods were liable to confiscation.

Analysis: The credit reversal had been made before notice and the relevant licence transfers had been rectified before the proceedings. No finding had been recorded that any imported goods were liable to confiscation under the Customs Act, and penalty under Section 112 could not be imposed without such a foundational finding. The authority below had also acted beyond the jurisdictional basis available under the Customs Act on the facts of the case.

Conclusion: Penalty under the Customs Act was not sustainable and the finding went in favour of the assessee.

Final Conclusion: The penal demand was set aside and the assessee obtained relief in the appeal, while the unsubstantiated claim relating to a further credit reversal was left to be pursued before the appropriate authority.

Ratio Decidendi: Penalty under excise or customs law cannot be sustained unless the statutory preconditions for the specific penal provision are established on the record, including a legally tenable contravention under the invoked excise rule and, for customs penalty, a finding that the goods are liable to confiscation.

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