Retrospective penalty barred under Rule 26(2), with relief granted for pre-commencement transactions and penalty retained only after 01.04.2007.

Rule 26(2) of the Central Excise Rules, 2002 could not be applied to transactions completed before 01.04.2007 because a penal provision operates only from its commencement. The Tribunal accepted the inculpatory statements and found no material to dislodge them, so the fraudulent issuance of invoices stood established; however, penalty could be sustained only for post-01.04.2007 transactions. Where one appellant's dealings were entirely pre-commencement, the penalty was set aside in full, while the other appellant's penalty was reduced to exclude the pre-01.04.2007 period.

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Issues: Whether penalty under Rule 26(2) of the Central Excise Rules, 2002 could be applied to transactions that took place before 01.04.2007, and whether the penalty was sustainable or liable to be reduced for transactions after that date.

Analysis: The penalty was imposed for issuing invoices without supply of goods for fraudulent passing of Cenvat credit. The Tribunal accepted that the appellants had given inculpatory statements and that cross-examination had been conducted, with no material brought on record to dislodge those statements. At the same time, it held that Rule 26(2) came into force only from 01.04.2007 and could not be applied retrospectively to transactions completed before that date. On the admitted facts, one appellant had transactions entirely prior to 01.04.2007, while the other had a mix of pre and post 01.04.2007 transactions.

Conclusion: Penalty under Rule 26(2) was inapplicable to pre-01.04.2007 transactions. The appeal of one appellant was allowed with penalty set aside, and the other appeal was partly allowed with the penalty reduced to the extent attributable to post-01.04.2007 transactions.

Final Conclusion: The decision sustains penalty only for the period when the penal rule was in force and grants full relief where all transactions preceded its commencement.

Ratio Decidendi: A penal provision cannot be applied retrospectively to transactions occurring before its commencement, even where the underlying allegation of fraudulent invoice issuance is otherwise established.

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