Revenue-neutral input clearances: interest and equal penalty were held unsustainable where duty was not legally exigible.

Differential duty on inputs cleared as such to a sister concern was held to be unsustainable because reversal of the credit taken on those inputs was sufficient and reassessment under Section 4 was not warranted. As no duty was legally payable in the first instance, the consequential interest and equal penalty could not survive. The transaction was also treated as revenue neutral, since any duty paid by the assessee would have been available as credit to the sister concern. The doctrine of election was held inapplicable, allowing the assessee to contest interest and penalty even after paying duty under departmental objection.

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Issues: Whether interest and equal penalty were sustainable on differential duty paid for inputs cleared as such to a sister concern, where the duty had been paid after departmental objection and the clearance was revenue neutral.

Analysis: The clearance of inputs as such was held to be governed by the law settled in favour of the assessee, under which reversal of the credit taken on those inputs was sufficient and reassessment on the basis of Section 4 was not warranted. In such a situation, where no duty was lawfully payable in the first instance, the consequential levy of interest and penalty could not survive. The Tribunal also accepted the revenue-neutral character of the transaction, since any duty paid by the appellant would have been available as credit to the sister concern. The doctrine of election was held inapplicable because the assessee was entitled to contest the interest and penalty even after paying duty under departmental persuasion.

Conclusion: The demand of interest and the imposition of equal penalty were unsustainable and were set aside in favour of the assessee.

Ratio Decidendi: Where duty is not legally exigible on cleared inputs and the transaction is revenue neutral, interest and penalty cannot be imposed merely because the assessee paid differential duty after departmental objection.

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