Strict compliance with exemption conditions bars CENVAT-credit payment where cash payment is required; bona fide error avoids penalty and interest.

A conditional exemption notification was construed strictly: although the assessee satisfied the input-credit condition, it failed the mandatory requirement that duty be paid only in cash or through account current, since payment was made by utilisation of CENVAT credit. The SC held that non-compliance with the prescribed mode of payment disentitled the assessee to the exemption. However, because the default was treated as bona fide, the Court distinguished denial of exemption from penal consequences and set aside both penalty and interest.

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Issues: (i) Whether the assessee was entitled to the benefit of Notification No. 10/02-CE dated 01.03.2002 despite paying duty by utilisation of CENVAT credit instead of in cash or through account current; (ii) Whether penalty and interest were payable when the non-compliance was bona fide.

Issue (i): Whether the assessee was entitled to the benefit of Notification No. 10/02-CE dated 01.03.2002 despite paying duty by utilisation of CENVAT credit instead of in cash or through account current.

Analysis: The notification granted concessional duty only if the specified conditions were satisfied. The first condition, relating to non-availment of credit on inputs and capital goods, was fulfilled. The second condition, however, expressly required payment of duty only in cash or through account current. Payment through CENVAT credit was not one of the prescribed modes. Exemption notifications must be construed strictly, and the prescribed conditions had to be complied with in the manner stipulated.

Conclusion: The assessee was not entitled to the benefit of the notification, and the Tribunal's contrary view was .

Issue (ii): Whether penalty and interest were payable when the non-compliance was bona fide.

Analysis: Although the assessee failed to satisfy the mandatory payment condition, the mistake was treated as bona fide. The Court distinguished denial of exemption from the imposition of penal consequences and held that bona fide non-compliance did not warrant penalty or interest in the facts of the case.

Conclusion: Penalty and interest were set aside.

Final Conclusion: The exemption benefit was denied for failure to comply with the prescribed mode of duty payment, but the penal and interest components were annulled because the default was bona fide.

Ratio Decidendi: Conditions attached to an exemption notification must be satisfied strictly in the prescribed manner, and non-compliance with a mandatory mode-of-payment disentitles the assessee to the exemption, though bona fide error may justify relief against penalty and interest.

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