Mala fide intent and suppression must be proved before excise penalty or interest can be imposed on exempt clearances.

Interest and penalty under the excise recovery provisions were found unwarranted where duty-free yarn was supplied to an eligible handloom cooperative society and the Revenue failed to prove the supplier's knowledge of any later diversion to powerloom units. The exemption conditions were substantially met through supply to the society, cheque payment from its own account, and the required certificate of handloom use. A discrepancy in polyester content in only one consignment did not establish deliberate misdeclaration for all clearances. In the absence of proof of mala fide intent, suppression, or conscious contravention to evade duty, liability under the penalty and interest provisions was not attracted.

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Issues: Whether interest under Section 11AB of the Central Excise Act, 1944 and penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 173Q(1)(d) of the Central Excise Rules, 1944 were sustainable where duty-free clearances were made to a handloom cooperative society and the yarn was later found to have been diverted without the assessee's knowledge.

Analysis: The exemption notifications granted full duty relief for specified yarn supplied to eligible handloom bodies, subject to payment by cheque from the society's own account and production of a certificate that the yarn would be used only on handlooms. The goods were supplied to the cooperative society and payment was received through cheque, but the record did not establish that the assessee knew of the society's subsequent diversion of the yarn to powerloom units. A discrepancy in polyester content was found only in one consignment and did not justify an inference of deliberate misdeclaration for all clearances. In these circumstances, mala fide intent, suppression, or conscious contravention to evade duty was not proved.

Conclusion: Interest under Section 11AB and penalty under Section 11AC and Rule 173Q(1)(d) were not warranted, and the assessee was entitled to succeed on those issues.

Ratio Decidendi: Penalty and interest under the excise recovery provisions are not sustainable unless the Revenue establishes mala fide conduct, suppression, or intent to evade duty; mere subsequent diversion of exempt goods by the recipient, without proof of the supplier's knowledge or complicity, does not attract such liability.

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