Extended limitation fails where misstatement is unverified and the show cause notice is held time-barred.

The extended limitation period could not be invoked on a bare allegation of misstatement that steel tubes were capital goods components under Rule 57Q, because the Department had not undertaken the factual verification needed to support that allegation. The record showed that credit was taken and verified on the same day, and the goods were treated as falling within the machinery entry for distillation under Chapter sub-heading 84.19. In the absence of proper enquiry into the use and character of the steel tubes, mere lack of further evidence from the assessee was insufficient to sustain extended limitation. The show cause notice was time-barred, and the demand and penalty were unsustainable.

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Issues: Whether the show cause notice invoking the extended period of limitation on the allegation of misstatement that steel tubes were components of capital goods under Rule 57Q was sustainable, and whether the demand and penalty could survive if the notice was time-barred.

Analysis: The dispute turned on whether the allegation of misstatement could be sustained without a proper factual verification of the use and character of the steel tubes. The goods were treated as falling within the machinery entry for distillation under Chapter sub-heading 84.19, and the record showed that credit had been taken and verified on the same day. In these circumstances, the finding that the assessee had to disprove eligibility was not accepted. The factual enquiry needed to support an allegation of misstatement was not undertaken by the Department, and mere absence of further evidence from the assessee was insufficient to justify the extended limitation period.

Conclusion: The show cause notice was barred by limitation. The demand and the penalty were unsustainable and were set aside in favour of the assessee.

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