Cenvat credit penalty cannot rest on a ground absent from the notice, and reversal with interest can defeat penalty.

Penalty under Rule 13(2) of the Cenvat Credit Rules, 2002 could not be sustained because the show-cause notice did not propose that penalty, and imposing it on that basis travelled beyond the notice. Penalty under Rule 13(1) was also unwarranted because the wrongly availed Cenvat credit had been reversed and interest paid before adjudication. On those facts, the order imposing penalties was set aside in full.

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Issues: (i) Whether penalty could be sustained under Rule 13(2) of the Cenvat Credit Rules, 2002 when the show-cause notice did not propose that penalty; and (ii) whether penalty under Rule 13(1) was exigible when the wrongly availed Cenvat credit was reversed and interest was paid before adjudication.

Issue (i): Whether penalty could be sustained under Rule 13(2) of the Cenvat Credit Rules, 2002 when the show-cause notice did not propose that penalty.

Analysis: The notice was issued on the basis of records already available with the department and alleged wrongful availment of credit, but it did not propose penalty under Rule 13(2). The appellate authority nonetheless imposed that penalty, which amounted to travelling beyond the scope of the notice.

Conclusion: The penalty under Rule 13(2) was not sustainable and was set aside.

Issue (ii): Whether penalty under Rule 13(1) was exigible when the wrongly availed Cenvat credit was reversed and interest was paid before adjudication.

Analysis: The credit had been reversed after the mistake was noticed and interest had also been paid. On those facts, and following the view taken in a similar case where irregular credit was reversed before notice, the imposition of penalty under Rule 13(1) was not justified.

Conclusion: No penalty was liable to be imposed under Rule 13(1).

Final Conclusion: The order imposing penalties could not be sustained, and the assessee succeeded in full.

Ratio Decidendi: A penalty cannot be imposed on a ground or under a provision not proposed in the show-cause notice, and penalty for wrongful credit may be unwarranted where the credit is reversed and interest is paid before adjudication.

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