Excise duty on recharacterised sugar supplies upheld, but interest and penalty failed without proof of suppression or evasion.

Sugar cleared as levy sugar on loan basis but later recharacterised as free sale sugar attracted the duty applicable to free sale sugar, because the transaction change and differential price altered the excise liability; the differential duty was therefore upheld. Interest and penalty were not sustainable in the absence of evidence of suppression, misstatement, fraud, or intent to evade duty, particularly where the assessee was a State-owned undertaking and the record did not establish the statutory ingredients for penal action. The duty demand was sustained, while the interest and penalties were set aside.

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Issues: (i) Whether differential central excise duty was recoverable when sugar initially cleared as levy sugar on loan basis out of free sale quota was subsequently treated as free sale sugar. (ii) Whether interest and penalty were leviable in the absence of suppression of facts or intent to evade duty.

Issue (i): Whether differential central excise duty was recoverable when sugar initially cleared as levy sugar on loan basis out of free sale quota was subsequently treated as free sale sugar.

Analysis: On conversion of the transaction into purchase of sugar out of the free sale quota and payment of the differential price, the goods cleared by the sugar mills lost the character of levy sugar and became free sale sugar. The applicable rate of duty was therefore the rate relevant to free sale sugar. Since the duty structure was specific and not ad valorem, the subsequent change in the transaction and price affected the duty liability.

Conclusion: The differential duty was correctly demanded and upheld.

Issue (ii): Whether interest and penalty were leviable in the absence of suppression of facts or intent to evade duty.

Analysis: The appellant was a State-owned public-sector undertaking, and the record did not support any inference of wilful suppression, misstatement, or intent to evade duty. In those circumstances, the ingredients required for invoking the penal and interest provisions were not established.

Conclusion: Interest under Section 11AB and penalty under Section 11AC were not leviable, and the penalty under Rule 173Q(1) could not stand.

Final Conclusion: The duty demand was sustained, but the demand for interest and the penalty were set aside, resulting in a partial modification of the appellate order.

Ratio Decidendi: Where the transaction is recharacterised so that the goods become dutiable at a different rate, the differential duty is recoverable, but interest and penalty under the excise law require proof of suppression, misstatement, fraud, or intent to evade duty.

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