Pre-notice reversal of credit with interest bars notice and penalty absent suppression of facts or intent to evade tax.

When inadmissible credit is reversed with interest before issuance of a show cause notice, section 73(3) of the Finance Act, 1994 bars the notice on the tax demand and interest component. In the absence of any material showing suppression of facts or intent to evade tax, the record did not justify invoking penalty under Rule 15(3) of the Cenvat Credit Rules, 2004. The demand proceedings and penal action were therefore treated as unsustainable, and relief followed for the appellant.

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Issues: Whether the show cause notice and penalty were sustainable when the inadmissible credit along with interest had been reversed or paid before issuance of the notice and no suppression of facts was established.

Analysis: Section 73(3) of the Finance Act, 1994 bars issuance of a show cause notice where tax and interest are paid before such notice. The credit had been reversed along with interest after audit objection and before the notice was issued. The record did not contain material showing suppression or concealment of facts to evade tax, and the order under challenge also did not record any finding of suppression with intent to evade. In such circumstances, penalty under Rule 15(3) of the Cenvat Credit Rules, 2004 was held to be unjustified.

Conclusion: The demand proceedings and penalty could not be sustained; the appeal was allowed.

Final Conclusion: Prior payment of the disputed amount with interest before issuance of notice, coupled with absence of suppression, entitled the appellant to relief and vitiated the penal action.

Ratio Decidendi: Where the tax liability and interest are discharged before issuance of notice and the department fails to establish suppression of facts with intent to evade tax, the statutory bar against notice applies and penalty is not exigible.

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