Conditional exemption and suppression of facts justified extended limitation, while penalty was reduced under the applicable rule.

Conditional exemption under Notification No. 181/86-C.E. was denied where goods cleared as fertilizer were in fact supplied to poultry units for use as chicken feed, so suppression of facts justified invocation of the extended limitation period. Penalty under Section 11AC of the Central Excise Act, 1944 was found inapplicable because the transactions predated that provision; Rule 173Q was the proper penal basis. On the facts, the equal penalty was treated as excessive and reduced to a token amount, while the demand itself was upheld.

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Issues: (i) whether the extended period of limitation could be invoked on the ground of suppression of facts while denying exemption under Notification No. 181/86-C.E.; (ii) whether equal penalty could be sustained under Section 11AC of the Central Excise Act, 1944, and what quantum of penalty was justified.

Issue (i): Whether the extended period of limitation could be invoked on the ground of suppression of facts while denying exemption under Notification No. 181/86-C.E.

Analysis: The goods were cleared claiming exemption under Notification No. 181/86-C.E., which was conditional upon use of the goods as fertilizer. The record showed that the assessee cleared the goods to poultry units for use as chicken feed, thereby availing exemption to which it was not entitled. On those facts, the plea that there was no suppression of facts was not accepted.

Conclusion: The extended period of limitation was held invocable against the assessee.

Issue (ii): Whether equal penalty could be sustained under Section 11AC of the Central Excise Act, 1944, and what quantum of penalty was justified.

Analysis: The penalty was found unsustainable under Section 11AC because the transactions predated its enactment. The proper penal provision was Rule 173Q of the Central Excise Rules, 1944. Considering the facts, the equal penalty was found excessive and required reduction.

Conclusion: The penalty could not be imposed under Section 11AC, and the penalty was reduced to Rs. 2,000/- under Rule 173Q.

Final Conclusion: The demand was upheld, but the penalty was materially reduced on the facts, leaving the appellant only partly successful.

Ratio Decidendi: Where exemption is knowingly availed contrary to its conditional use requirement, suppression can justify invocation of the extended period, but penalty must be imposed under the provision applicable at the relevant time and may be moderated on the facts.

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