Pre-notice reversal of irregular credit is not a complete defence to excise penalty where non-bona fide conduct is shown.

Repeated irregular availment and reversal of Modvat/Cenvat credit before a show cause notice did not, by itself, negate penalty where the assessee's conduct showed recurring non-compliance, non-disclosure in monthly returns, and absence of bona fide. The Court held that such pre-notice reversal was not a complete defence to penalty when the factual record established a sustained pattern of default. The Tribunal therefore erred in treating reversal alone as sufficient to cancel the penalty, and the penalty was restored.

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Issues: Whether penalty under Section 11AC of the Central Excise Act, 1944 was sustainable when irregularly availed Modvat/Cenvat credit was reversed before issuance of the show cause notice and the assessee claimed absence of bona fides.

Analysis: The assessee had repeatedly cleared inputs and capital goods without payment of duty, the defaults were not isolated, and the non-payment was not duly reflected in the monthly returns. The adjudicating authority found absence of bona fide and a recurring pattern of non-compliance. In that factual setting, mere reversal of the irregular credit before the show cause notice did not establish good faith or erase the basis for penalty. The Tribunal erred in treating such reversal as a complete defence.

Conclusion: The penalty under Section 11AC was rightly attracted and the Tribunal's cancellation of penalty was unsustainable.

Final Conclusion: The appeal succeeded, the Tribunal's order was set aside, and the penalty was restored.

Ratio Decidendi: Reversal of irregularly availed credit before issuance of the show cause notice does not by itself preclude penalty where the facts show recurring non-compliance and absence of bona fide.

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