Mens rea for excise penalty fails where the duty status of goods was unsettled and knowledge of confiscability was not proved.

Penalties under Rule 209A of the Central Excise Rules, 1944 were not sustainable where the excisability of the goods was unsettled during the relevant period and knowledge of liability to confiscation was not proved. The goods were ammonium nitrate converted from lower to higher purity, and the question whether such conversion amounted to manufacture had remained subject to conflicting views until a later Larger Bench ruling. In that setting, the appellants were entitled to the benefit of doubt on the allegation that they knowingly dealt with confiscable goods, and the requisite mens rea for penalty was not established. The penalties were therefore set aside.

---

---

Issues: Whether penalties under Rule 209A of the Central Excise Rules, 1944 could be sustained when the liability of the goods to central excise duty was unsettled during the relevant period and the appellants were alleged to have dealt with goods knowing them to be liable to confiscation.

Analysis: The goods involved were ammonium nitrate of lesser purity converted into higher purity, and the question whether such conversion amounted to manufacture had been the subject of conflicting views until the Larger Bench settled the issue later. Since the legal position on excisability had not been conclusively settled during the period in dispute, the appellants were entitled to the benefit of doubt on the allegation that they knowingly dealt with goods liable to confiscation. The requisite knowledge for imposing penalty was therefore not established.

Conclusion: The penalties were not sustainable and were set aside.

---