Penalty for wrongful CENVAT credit is not automatic; statutory preconditions and culpable conduct must be established first.

Penalty under Rule 13(1) of the CENVAT Credit Rules, 2002 and Section 11AC of the Central Excise Act, 1944 is not automatic on wrongful availment of credit or short payment. Where the assessee reversed the credit and paid duty before the show cause notice, and the notice and revisional order did not set out facts establishing the statutory conditions for penalty, the penalty could not be sustained. The legal principle is that culpable conduct and a valid factual basis must exist before penalty can be invoked; on those facts, the Tribunal's cancellation of penalty was upheld.

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Issues: Whether penalty under Rule 13(1) of the CENVAT Credit Rules, 2002 and Section 11AC of the Central Excise Act, 1944 was leviable where the assessee reversed the wrongly availed credit before the show cause notice and the notice did not set out the necessary grounds for penalty.

Analysis: The credit was reversed and duty was paid immediately after intimation from the department and before issuance of the show cause notice. The notice and the revisional order did not disclose specific facts showing the conditions necessary for penalty. Penalty under Section 11AC is not automatic in every case of short payment or wrongful credit; the relevant conduct and bona fides of the assessee must be examined, and the statutory conditions for invoking penalty must exist.

Conclusion: Penalty was not leviable on the facts, and the Tribunal was in cancelling the penalty. The appeal by the Revenue failed.

Ratio Decidendi: Penalty under Section 11AC of the Central Excise Act, 1944 and Rule 13(1) of the CENVAT Credit Rules, 2002 cannot be imposed mechanically; it requires satisfaction of the statutory preconditions and a valid factual basis showing culpable conduct.

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