Reversal of wrongly taken credit before proceedings defeats interest and penalty where the mistake was bona fide and non-contumacious.

Interest under the central excise regime was held unsustainable where the disputed credit had already been reversed before the show cause notice, because the underlying liability had been regularised before proceedings began. Penalty was also held inapplicable where the credit arose from a bona fide mistake in customs assessment, was reversed on detection, and the record did not show mala fides, conscious contravention, or reason to believe that the credit was impermissible. On those facts, both the interest demand and penalty could not be maintained.

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Issues: (i) Whether interest under Section 11AB of the Central Excise Act, 1944 was payable when the credit amount had already been reversed before issuance of the show cause notice; (ii) Whether penalty was leviable under Rule 173Q of the Central Excise Rules, 1944 read with Rule 13 of the Central Excise Rules, 2001 where the credit was taken due to a bona fide mistake and was reversed on detection.

Issue (i): Whether interest under Section 11AB of the Central Excise Act, 1944 was payable when the credit amount had already been reversed before issuance of the show cause notice.

Analysis: The demand for interest was examined on the footing that the principal amount had been discharged well before the show cause notice. In such circumstances, the interest demand could not be sustained, following the principle that interest under Section 11AB does not survive where the underlying liability has already been regularised before initiation of proceedings.

Conclusion: Interest under Section 11AB of the Central Excise Act, 1944 was not payable and the demand was unsustainable.

Issue (ii): Whether penalty was leviable under Rule 173Q of the Central Excise Rules, 1944 read with Rule 13 of the Central Excise Rules, 2001 where the credit was taken due to a bona fide mistake and was reversed on detection.

Analysis: The credit entry arose from an error in customs assessment and was reversed by the assessee on its own before the department initiated proceedings. On these facts, no mala fides or conscious knowledge of ineligibility could be established, and the conduct did not satisfy the penal requirements of Rule 173Q, which contemplate knowledge or reason to believe that the credit was impermissible.

Conclusion: Penalty under Rule 173Q of the Central Excise Rules, 1944 read with Rule 13 of the Central Excise Rules, 2001 was not leviable.

Final Conclusion: The impugned order was set aside and the appeal succeeded in full, as neither the interest demand nor the penalty could be sustained on the facts found.

Ratio Decidendi: Interest and penalty under the central excise regime cannot be sustained where the disputed credit is reversed before initiation of proceedings and the record discloses a bona fide mistake without conscious contravention or mala fides.

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