Penalty under central excise law fails when duty and interest are paid before notice and diversion is not proved.

Penalty under central excise law was held unsustainable where duty and interest had been paid before issuance of the show cause notice and the record did not support diversion of goods to the open market. The goods were cleared against valid CT-3 certificates, whose genuineness was not disputed, and there was no reliable evidence of deliberate evasion. In these circumstances, the precondition for penal action was not satisfied, following the principle that penalty is not sustainable when duty is paid prior to notice. The penalty order was set aside and the appeals were allowed.

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Issues: Whether penalty under the central excise law was sustainable where duty and interest had been paid before issuance of the show cause notice and there was no reliable evidence that the goods had been diverted to the open market.

Analysis: The goods were cleared against valid CT-3 certificates in the presence of excise , and the revenue did not dispute the genuineness of those certificates. The record did not establish diversion of the goods to the open market. Duty with interest had already been paid before the show cause notice was issued. In such circumstances, the precondition for penal action was not made out, and the principle applied by the jurisdictional High Court was that penalty is not sustainable when duty is paid prior to issuance of the notice.

Conclusion: Penalty was not imposable and the assessee succeeded.

Final Conclusion: The penalty order was set aside and the appeals were allowed.

Ratio Decidendi: Where duty and interest are paid before issuance of the show cause notice and the record does not support an allegation of diversion or deliberate evasion, penalty under the central excise law is not sustainable.

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