Duty-paid goods cannot be confiscated and penalty for evasion needs proof of intent, with pre-notice debit excluded.

Pre-notice duty debit could not remain in the demand, and amounts wrongly included for a cancelled invoice and reprocessed goods already subjected to duty were excluded. Duty-paid raw materials found in excess stock were treated as non-excisable goods, so confiscation and redemption fine under Rule 173Q were not sustainable. Penalty was confined to the admitted Modvat credit issue because there was no specific finding or proof that the excess raw materials were held with intent to evade duty. The order was therefore modified to vacate the unsustainable demand and confiscation, while reducing the penalty.

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Issues: (i) Whether the duty demand was sustainable in full when a substantial part had already been debited before the show cause notice and the balance was not properly chargeable; (ii) Whether duty-paid raw materials found in excess stock were liable to confiscation and redemption fine under Rule 173Q; (iii) Whether the penalty imposed under Rule 173Q could be sustained in full, or only to the extent of the Modvat credit issue.

Issue (i): Whether the duty demand was sustainable in full when a substantial part had already been debited before the show cause notice and the balance was not properly chargeable.

Analysis: The amount of duty already debited before issuance of the show cause notice could not survive as a demand. As to the remaining amount, the record showed that part related to a cancelled invoice and part related to reprocessed goods that had already suffered duty. Those amounts were not properly includible in the demand.

Conclusion: The duty demand was set aside to the extent of the pre-notice debit and the wrongly included balance, in favour of the assessee.

Issue (ii): Whether duty-paid raw materials found in excess stock were liable to confiscation and redemption fine under Rule 173Q.

Analysis: Rule 173Q applies to excisable goods manufactured, produced or stored by the party. The seized raw materials were undisputedly duty-paid goods and had ceased to be excisable goods. On that basis, they were not liable to confiscation, and redemption fine could not be imposed consequentially.

Conclusion: The confiscation and redemption fine were set aside, in favour of the assessee.

Issue (iii): Whether the penalty imposed under Rule 173Q could be sustained in full, or only to the extent of the Modvat credit issue.

Analysis: The assessee accepted the adverse finding on Modvat credit relating to inputs already consumed, so that part of the penalty could stand. However, there was no finding or proof that the excess raw materials were kept with intent to evade duty, and the penalty could not be sustained under the clause dealing with such intent. The penalty therefore required reduction.

Conclusion: The penalty was reduced to the extent relatable to the Modvat credit issue and was not sustained on the alleged intent to evade, in favour of the assessee.

Final Conclusion: The order was modified by vacating the unsustainable duty demand and the confiscation with redemption fine, while sustaining only the Modvat-related adverse finding and reducing the penalty accordingly.

Ratio Decidendi: Duty-paid goods are not excisable goods for the purpose of confiscation under Rule 173Q, and a penalty for intent to evade duty cannot be sustained without a specific finding and supporting proof of such intent.

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