Pre-show cause payment does not bar penalty where exemption conditions were deliberately breached and duty was not paid voluntarily.

Pre-show cause notice payment does not automatically bar penalty and interest where duty was initially evaded by wrongly availing an exemption and failing to satisfy a mandatory notification condition. The assessee cleared goods without duty under Notification No. 5/98 without obtaining the required certificate; the later deposit was made only after departmental scrutiny exposed the wrongful exemption claim. In these circumstances, the rationale protecting voluntary pre-notice payment from penalty under Section 11AC was inapplicable. The appellate order setting aside penalty and interest was therefore unsustainable, and the adjudicating authority's action was restored, though the penalty was reduced on the facts.

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Issues: Whether penalty and interest could be set aside merely because the duty was paid before issuance of the show cause notice, notwithstanding non-compliance with the exemption notification condition and the subsequent demand.

Analysis: The respondents cleared the goods without payment of duty while availing exemption under Notification No. 5/98 and without obtaining the certificate required by the mandatory condition of the notification. The duty was not paid voluntarily in the sense recognised by the earlier decisions relied upon, but was deposited after the departmental scrutiny revealed wrongful availing of the exemption. In such circumstances, the rationale that pre-show cause notice payment bars penalty under Section 11AC was held inapplicable. The deliberate breach of the notification condition and the intent to derive wrongful gain justified restoration of the adjudicating authority's order. However, the penalty was moderated having regard to the facts of the case.

Conclusion: The setting aside of penalty and interest by the Commissioner (Appeals) was unsustainable. Penalty and interest were restored, with the penalty reduced to Rs. 10,000/-.

Ratio Decidendi: Pre-show cause notice payment does not by itself preclude penalty and interest where duty was not paid voluntarily and the assessee deliberately violated a mandatory exemption condition.

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