Penalty and interest cannot survive once the underlying excise demand is set aside on merits

When the underlying Modvat demand was set aside on merits, the penalty imposed solely in relation to that demand could not survive and was quashed under Rule 173Q. On the same reasoning, interest collected pursuant to the unsustainable demand was refundable, and the assessee was entitled to recover the interest paid. The decision applies the principle that consequential penal and monetary liabilities fall away once the substantive excise demand is defeated.

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Issues: Whether penalty under Rule 173Q was sustainable after the demand relating to Modvat credit was set aside and whether the assessee was entitled to refund of interest paid.

Analysis: The appeal was decided on merits in favour of the assessee. Once the demand had been set aside, the interest collected on that demand could not be retained and was liable to be refunded. On the same reasoning, the penal provision could not survive when the assessee had succeeded on the substantive issue.

Conclusion: Penalty under Rule 173Q was not sustainable and was set aside. The assessee was also entitled to refund of the interest paid.

Final Conclusion: The assessee succeeded on the substantive excise dispute, and the penalty was quashed with consequential monetary relief.

Ratio Decidendi: When the underlying demand is set aside on merits, a penalty imposed solely in relation to that demand cannot survive, and any interest collected pursuant to the unsustainable demand is refundable.

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