Mens rea and pre-notice reversal defeat penalty; duty-paid diesel generator cannot be confiscated for disputed Modvat credit.

Penalty under Rule 173Q was held unsustainable because the revenue had not proved deliberate intention to evade duty, and the Modvat credit on the diesel generating set had been reversed before the show cause notice. The assessee's bona fide belief that the equipment used in adjoining premises could qualify for credit, together with the pre-notice reversal, negatived the basis for penalty. Confiscation of the diesel generating set and the redemption fine were also found unsustainable because the goods had suffered duty and were not non-duty-paid clearances, so the credit dispute alone could not justify confiscation.

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Issues: (i) Whether penalty was leviable under Rule 173Q of the Central Excise Rules, 1944 where Modvat credit taken on a diesel generating set was reversed before issuance of the show cause notice. (ii) Whether confiscation of the diesel generating set and imposition of redemption fine were sustainable.

Issue (i): Whether penalty was leviable under Rule 173Q of the Central Excise Rules, 1944 where Modvat credit taken on a diesel generating set was reversed before issuance of the show cause notice.

Analysis: Penalty under Rule 173Q requires establishment of deliberate intention to evade duty. The appellants had taken credit under a bona fide belief that the diesel generating set installed in adjoining premises for common use could be covered by Modvat benefit. The record did not disclose a conscious design to defraud revenue, and the credit had been reversed before the show cause notice was issued. The absence of proved mens rea and the pre-notice reversal of credit negatived the basis for penalty.

Conclusion: Penalty was not leviable and the demand of penalty was unsustainable.

Issue (ii): Whether confiscation of the diesel generating set and imposition of redemption fine were sustainable.

Analysis: The diesel generating set had suffered duty and was not a non-duty-paid clearance. In those circumstances, confiscation and redemption fine could not be justified merely because the Modvat credit was disputed. The factual setting did not support treating the goods as liable to confiscation.

Conclusion: Confiscation of the diesel generating set and the redemption fine were unsustainable.

Final Conclusion: The appeal succeeded, with the penalty order and the confiscation-cum-redemption fine set aside in full.

Ratio Decidendi: Penalty under Rule 173Q cannot be sustained unless the revenue proves an intention to evade duty, and confiscation with redemption fine is not warranted where the goods are duty-paid and the credit dispute has been reversed before notice.

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