Invoice cancellation and re-credit of duty can defeat a demand when no evasion is shown; major penalty may be reduced.

Duty already paid on clearances later covered by cancellation of invoice and fresh documentation under the prescribed procedure, with credit re-adjusted in the personal ledger, was treated as not supporting a further demand where there was no clandestine removal or short payment. The demand under Rule 9(2) read with Section 11A was therefore unsustainable. Penalty under Rule 173Q likewise required evidence of intent to evade duty; a mere procedural lapse in maintaining the ledger and making adjustments did not justify the major penalty. In the stated reasoning, only the minimum penalty was considered appropriate.

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Issues: (i) Whether the duty demand was sustainable when the assessee had cancelled the invoice, issued a fresh invoice under the prescribed procedure, and adjusted the earlier debit in the personal ledger account; (ii) Whether penalty under Rule 173Q was warranted in the absence of any intention to evade duty.

Issue (i): Whether the duty demand was sustainable when the assessee had cancelled the invoice, issued a fresh invoice under the prescribed procedure, and adjusted the earlier debit in the personal ledger account?

Analysis: The adjustment made by the assessee arose from an erroneous payment of duty on clearances later covered by cancellation of invoice and fresh documentation under the prescribed procedure. Rule 173G(2) proviso VII permitted cancellation of the invoice with intimation to the proper officer and taking credit of duty in the account-current. The record showed no clandestine removal or short payment of duty, and the department's demand proceeded without properly addressing the cancellation, intimation, and re-credit mechanism. In these circumstances, the demand under Rule 9(2) read with Section 11A could not stand.

Conclusion: The duty demand was not sustainable and was set aside, in favour of the assessee.

Issue (ii): Whether penalty under Rule 173Q was warranted in the absence of any intention to evade duty?

Analysis: Penalty under Rule 173Q, as applicable then, required more than a mere accounting irregularity; the record had to disclose a contravention accompanied by intention to evade duty for the serious penalty imposed. Although the assessee did not maintain the personal ledger account in the prescribed manner and adopted its own adjustment method, the materials did not show any duty evasion or guilty intent. The violation was therefore procedural and did not justify the heavy penalty imposed; only the minimum penalty prescribed was considered appropriate.

Conclusion: The penalty was not sustainable in the amount imposed and was reduced to the minimum, in part favour of the assessee.

Final Conclusion: The duty demand was annulled and the penalty was substantially reduced, so the appeal succeeded only to that limited extent.

Ratio Decidendi: Where duty has already been paid but is later lawfully re-credited after cancellation of invoices under the prescribed procedure, and there is no clandestine removal or intention to evade duty, a demand under Rule 9(2) and a major penalty under Rule 173Q cannot be sustained.

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