Reduced penalty under Section 11AC applies when reversed credit, penalty, and interest are paid within the statutory period.

Where ineligible Modvat credit is reversed after detection and the assessee pays 25% of the duty amount as penalty before adjudication, with interest paid subsequently, the conditions for the reduced penalty under the proviso to Section 11AC of the Central Excise Act, 1944 are satisfied. The proviso allows penalty reduction to 25% where the duty determined under Section 11A(2) and the interest under Section 11AB are paid within the stipulated period. On these facts, the denial of the reduced penalty was unsustainable and the assessee was entitled to the statutory benefit.

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Issues: Whether the assessee was entitled to the reduced penalty under the proviso to Section 11AC of the Central Excise Act, 1944 after reversing the wrongly availed credit, paying 25% penalty, and subsequently paying interest.

Analysis: The assessee had taken ineligible Modvat credit but, after the irregularity was detected, it reversed the credit and paid 25% of the duty amount as penalty even before adjudication. The interest was also paid subsequently. The proviso to Section 11AC grants reduction of penalty to 25% of the duty where the duty determined under Section 11A(2) and the interest payable under Section 11AB are paid within the stipulated period. On these facts, the statutory conditions for the reduced penalty were satisfied.

Conclusion: The assessee was entitled to the benefit of the proviso to Section 11AC, and the denial of reduced penalty was unsustainable.

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