Bona fide purchaser protection limits penalty where there is no evidence of knowledge of a supplier's registration default.

Penalty was held unsustainable where Modvat credit had been taken on invoices issued by a dealer who was required to obtain registration under Notification No. 32/94, but the record showed no knowledge by the assessee of the dealer's non-registration and no inducement or conduct suggesting participation in that default. The invoices had been issued before the registration due date and were valid when issued, so no wrongful act could be attributed to the assessee and the purchasers were treated as bona fide purchasers. The penal consequence was set aside, but the disallowance of Modvat credit remained undisturbed.

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Issues: Whether penalty was leviable for taking Modvat credit on invoices issued by a dealer who was required to get himself registered under Notification No. 32/94, when there was no material to show that the assessee knew of the dealer's non-registration or had induced it.

Analysis: The invoices were issued before the due date for registration and were valid when issued. The record did not show any knowledge on the part of the assessee that the dealer would not get registered, nor any conduct suggesting that the assessee had dissuaded the dealer from obtaining registration. In these circumstances, no wrongful act could be attributed to the assessee for the dealer's non-registration, and the purchasers were bona fide purchasers of the goods.

Conclusion: Penalty was not sustainable and was set aside. The disallowance of Modvat credit was left undisturbed.

Final Conclusion: Relief was granted only against the penal consequence, while the substantive denial of Modvat credit continued to stand.

Ratio Decidendi: Penalty cannot be imposed where the assessee is a bona fide purchaser and there is no evidence of knowledge of or participation in the supplier's failure to comply with the registration requirement.

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