Penalty for SSI exemption breach and Modvat credit use was unsustainable where no intent to evade duty was found.

Penalty under Rule 173Q and Rule 226 of the Central Excise Rules, 1944 was held not sustainable where the assessee had availed SSI exemption and used Modvat credit after crossing the clearance limit. The adjudicating authority accepted that the relevant restriction on credit utilisation operated under Rule 57A, not Rule 57Q, and also found no intention to evade duty or cause loss to the exchequer. As the demand itself was dropped and the factual foundation for penal action was absent, penalty could not be imposed.

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Issues: Whether penalty was leviable under Rule 173Q and Rule 226 of the Central Excise Rules, 1944, in the facts where the assessee had availed SSI exemption and utilized credit after crossing the clearance limit.

Analysis: The adjudicating authority accepted the assessee's explanation that the restriction on utilization of Modvat credit operated under Rule 57A and not under Rule 57Q. It was also found that there was no intention to evade duty or cause loss to the exchequer, and on that basis the demand itself had been dropped. In such circumstances, the foundation for penal action was absent.

Conclusion: Penalty under Rule 173Q and Rule 226 of the Central Excise Rules, 1944, was not sustainable.

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