Pre-notice duty payment defeats separate differential demand and supports concessional penalty under section 11AC

Where the duty attributable to debit notes had already been fully paid before the show cause notice, a separate confirmed demand of Rs. 108, being only a residual part of the same duty computation, could not survive and was set aside. The omission of the debit notes from ER-1 returns supported suppression, so the benefit of section 11A(2B) was not available. However, because the surviving duty had been paid before notice and no interest was demanded on that amount, the conditions for the first proviso to section 11AC were met, and penalty was confined to 25% of the duty.

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Issues: (i) whether the additional demand of Rs. 108, being an alleged differential duty, could be sustained when the total duty had already been paid before issuance of the show cause notice; and (ii) whether the assessee was entitled to the benefit of the first proviso to Section 11AC of the Central Excise Act, 1944 so as to restrict penalty to 25% of the duty.

Issue (i): whether the additional demand of Rs. 108, being an alleged differential duty, could be sustained when the total duty had already been paid before issuance of the show cause notice

Analysis: The record showed that the duty payable on the debit notes had been quantified and the assessee had already paid an amount which, taken together, covered the full duty liability. The separately confirmed sum of Rs. 108 represented only a balance within the duty computation already discharged. Since the total duty had been paid prior to issuance of the show cause notice, there was no basis to confirm a further demand on that account, with interest, on the sustained duty figure.

Conclusion: The separate demand of Rs. 108 was not sustainable and was set aside, in favour of the assessee.

Issue (ii): whether the assessee was entitled to the benefit of the first proviso to Section 11AC of the Central Excise Act, 1944 so as to restrict penalty to 25% of the duty

Analysis: The debit notes were not reflected in the ER-1 returns, so the invocation of suppression was accepted and Section 11A(2B) was held inapplicable. However, the duty that ultimately survived had already been paid before issuance of the show cause notice, and the adjudication order did not demand interest on that sustained duty amount. In that situation, the conditions for the concessional penalty under the first proviso to Section 11AC were treated as satisfied.

Conclusion: The assessee was held entitled to the benefit of the first proviso to Section 11AC, and the penalty was confined to 25% of the duty, in favour of the assessee.

Final Conclusion: The appeal succeeded to the extent of deletion of the separate differential demand and reduction of penalty to the statutory concessional rate, while the finding of suppression and the liability to penalty in principle were maintained.

Ratio Decidendi: Where the entire duty determined has been paid before the show cause notice and no interest is demanded on the sustained duty, a separate confirmatory demand already included within the paid amount cannot survive, and the assessee is entitled to the concessional penalty prescribed by the first proviso to Section 11AC when its conditions are otherwise met.

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