Imposition of penalty under Section 11AC for inadmissible CENVAT credit blocked where duty and interest paid before SCN issued.

Audit found alleged wrongful availment of CENVAT credit on input services attributable to an exempted unit; the respondent paid the disputed credit and interest before any show cause notice was issued. Payment prior to issuance of SCN precludes initiation of demand proceedings and invocation of the extended limitation, so issuance of the SCN and invocation of extended limitation were unsustainable. Consequentially, penalty under the relevant penalty provision was dropped and the departmental appeal was dismissed; cross objection disposed accordingly.

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Issues: Whether penalty under Section 11AC of the Central Excise Act could be imposed where the assessee deposited the allegedly inadmissible CENVAT credit along with interest prior to issuance of the show cause notice and whether issuance of the SCN invoking extended limitation was sustainable in law in view of Section 11A(2) of the Act.

Analysis: The Tribunal examined whether the facts established a bona fide case and the legal effect of payment of duty and interest prior to issuance of SCN under Section 11A(2) of the Act. The material shows that upon detection of alleged irregular CENVAT credit, the assessee paid the entire disputed amount with interest before any SCN was issued. The Tribunal considered the statutory protection afforded by Section 11A(2) where duty and interest are paid prior to issuance of notice and surveyed the effect of that provision on proceedings for demand and penalty. The Tribunal also assessed the consequence of invoking extended period of limitation where the statutory bar in Section 11A(2) applies.

Conclusion: The SCN invoking the extended period was not sustainable because the assessee had paid the disputed duty along with interest prior to issuance of the SCN, thereby attracting the protection of Section 11A(2) of the Act; accordingly, imposition of penalty under Section 11AC was rightly dropped and the appeal by the Revenue is dismissed.

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