Voluntary duty reversal before notice defeats penalty, and interest is not recoverable on clearance of inputs or capital goods as such.

Penalty under Rule 15 of the Cenvat Credit Rules was unsustainable where shortage of inputs was found during stock verification, the explanation for the shortage was accepted, and duty with interest was voluntarily debited before issuance of the show cause notice. On those facts, penal action was not warranted and was deleted. Interest on clearance of inputs or capital goods as such was also not recoverable, because the Tribunal applied the duty-payment facility under Rule 8 of the Central Excise Rules to such clearances and found the interest demand unjustified. The order was therefore modified by deleting penalty and interest, while the remaining duty-related relief was left undisturbed.

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Issues: (i) Whether penalty under Rule 15 of the Cenvat Credit Rules, 2004 was sustainable when the shortage of inputs was noticed during stock verification and the duty was voluntarily debited before issuance of notice; (ii) whether interest was recoverable on clearance of inputs/capital goods as such.

Issue (i): Whether penalty under Rule 15 of the Cenvat Credit Rules, 2004 was sustainable when the shortage of inputs was noticed during stock verification and the duty was voluntarily debited before issuance of notice.

Analysis: The shortage was detected during stock verification, the reason for the shortage was explained, and the duty was voluntarily debited along with interest before the show cause notice. On these facts, penal consequences were held to be unwarranted.

Conclusion: Penalty was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether interest was recoverable on clearance of inputs/capital goods as such.

Analysis: Following the Tribunal's view that the fortnightly or monthly duty payment facility under Rule 8 of the Central Excise Rules, 2004 applies to such clearances, the demand of interest was held to be unjustified.

Conclusion: Interest was not recoverable and was set aside in favour of the assessee.

Final Conclusion: The order was modified by deleting the penalty and interest, while the remaining duty-related relief was not disturbed.

Ratio Decidendi: Where the assessee voluntarily reverses the duty on detected shortage before notice and the statutory payment facility applies to the relevant clearance, penalty and interest are not warranted absent a legally sustainable basis for their levy.

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