Dummy-unit duty demand upheld, but Rule 209A penalty failed for lack of proof of knowledge of confiscable goods.

A demand based on clubbing of clearances and allegation of a dummy unit was upheld where the show cause notice itself alleged the dummy arrangement and set out the basis for invoking extended demand and penalty; a separate proposal to deny Small Scale Industry exemption to the dummy concern was not necessary on those facts. Penalty against the main assessee was sustained. By contrast, penalty on the job worker under Rule 209A was set aside because mere receipt of goods on challans naming another concern as supplier did not prove knowledge that the goods were liable to confiscation. The connected appeals were therefore only partly allowed.

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Issues: (i) Whether the duty demand and consequential penalty were vitiated because no show cause notice was issued to the alleged dummy unit proposing denial of the Small Scale Industry exemption; (ii) Whether penalty could be sustained against the job worker on the basis that he knew he was dealing with goods liable to confiscation through a dummy unit.

Issue (i): Whether the duty demand and consequential penalty were vitiated because no show cause notice was issued to the alleged dummy unit proposing denial of the Small Scale Industry exemption.

Analysis: The demand was founded on clubbing of clearances on the basis that one concern was a dummy unit created to fragment turnover and wrongly avail exemption under Notification No. 1/93-C.E. The absence of a separate proposal in the notice to deny exemption to the dummy concern did not affect the demand, since the notice itself alleged the existence of a dummy unit and recorded the basis for invoking the extended demand and penal provisions. The demand and the penalty on the main assessee were therefore supported by the allegations and material relied upon in the notice.

Conclusion: The duty demand and penalty against the main assessee were upheld.

Issue (ii): Whether penalty could be sustained against the job worker on the basis that he knew he was dealing with goods liable to confiscation through a dummy unit.

Analysis: Penalty under Rule 209A required knowledge that the goods were liable to confiscation. Mere acceptance of materials on challans showing another concern as supplier, without more, was held insufficient to establish such knowledge. The evidence did not justify the inference that the job worker knew he was dealing with excisable goods liable to confiscation merely because the supplier concern was alleged to be a dummy unit.

Conclusion: The penalty on the job worker was set aside.

Final Conclusion: The demand and penalties were sustained against the main assessee, but the penalty imposed on the job worker was deleted, resulting in a partial allowance of the connected appeals.

Ratio Decidendi: A demand based on dummy-unit allegations is not invalid merely because the notice does not separately propose denial of exemption to that unit, but penalty under Rule 209A requires clear proof of knowledge that the goods were liable to confiscation.

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