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Issues: (i) Whether the duty demand of Rs. 9,89,248 on the disputed clearances could be sustained without giving credit for excess duty already paid on other clearances during the same period. (ii) Whether the demand of Rs. 14,66,025 under Section 11D of the Central Excise Act, 1944 could be confirmed when it was not proposed in the show cause notice. (iii) Consequentially, whether the penalty under Section 11AC and the separate penalty under the rules were sustainable.
Issue (i): Whether the duty demand of Rs. 9,89,248 on the disputed clearances could be sustained without giving credit for excess duty already paid on other clearances during the same period.
Analysis: The disputed clearances had to be valued on the basis directed earlier, namely on the cost construction method. The record showed that the assessee had paid excess duty on other clearances during the same period and had sought set-off of that excess against the short-paid amount. The denial of adjustment was not justified because the earlier proceedings had permitted re-determination of the duty liability on the relevant clearances, and settled principle allowed adjustment of excess duty against short payment for the same period.
Conclusion: The duty demand of Rs. 9,89,248 was set aside in favour of the assessee, and the connected penalty under Section 11AC was also set aside.
Issue (ii): Whether the demand of Rs. 14,66,025 under Section 11D of the Central Excise Act, 1944 could be confirmed when it was not proposed in the show cause notice.
Analysis: A demand under Section 11D can be sustained only when it is founded on a proposal in the show cause notice and the assessee has notice and opportunity to meet it. The impugned demand was introduced without such a proposal in the notice, and therefore lacked the necessary jurisdictional foundation for recovery.
Conclusion: The demand under Section 11D was set aside in favour of the assessee.
Issue (iii): Consequentially, whether the penalty under Section 11AC and the separate penalty under the rules were sustainable.
Analysis: Once the principal duty demand under Section 11AC failed, the corresponding equal penalty could not survive. The Tribunal, however, found rule violations on the record and maintained a reduced penalty in a substantially lesser amount.
Conclusion: The penalty under Section 11AC was set aside, and the separate penalty under the rules was reduced to Rs. 2,00,000.
Final Conclusion: The appeal succeeded substantially: the principal duty demand and the Section 11D recovery were set aside, the Section 11AC penalty did not survive, and only a reduced rule-based penalty was sustained.
Ratio Decidendi: Excess duty paid on clearances during the same period may be adjusted against short-paid duty on other clearances, and a recovery demand cannot be sustained unless it is founded on a proposal in the show cause notice.
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