Commissioner of Central Excise Commissionerate vs K.C. Alloys and Steel Castings

Ajay Kumar Mittal, J.—This order shall dispose of a bunch of three appeals bearing CEA Nos. 77 of 2005, 63 and 129 of 2006 as according to the learned counsel for the appellant(s), the issue involved in these cases is identical. For brevity, the facts are being extracted from CEA No. 77 of 2005. This appeal has been preferred by the revenue u/s 35G of the Central Excise Act, 1944 (in short "the Act") against the order dated 15.2.2005 (Annexure A-3) passed by the Customs, Excise and Service Tax Appellate Tribunal, New Delhi (hereinafter referred to as "the Tribunal"). In this appeal, the following substantial question of law has been framed:--

Whether on the facts and circumstances of the case, the Tribunal was justified in reducing the penalty levied on the assessee under Rule 96ZO(3) (ii) of the Central Excise Rules, 1944?

The assessee is engaged in the business of manufacture of Non-alloy Steel Ingots falling under Chapter 72 of the Schedule to the Central Excise Tariff Act, 1985 which were chargeable to duty upto 31.3.2000 in terms of Section 3A of the Act read with notification dated 1.8.1997. The assessee opted to pay duty on lump-sum basis in terms of Rule 96ZO(3) of the Central Excise Rules, 1944 (for brevity "the Rules"). The monthly duty liability of the assessee was determined at Rs. 5,00,000/-, which was to be discharged in two instalments, first instalment by 15th of the month and the second instalment by the last day of the month. During the month of December, 1997, the assessee failed to discharge its full duty liability. Accordingly, the assessee was issued show cause notice for recovery of Rs. 1,12,903/- along with interest and penalty. The Adjudicating Authority vide order dated 27.8.2003 (Annexure A-1) confirmed the duty amounting to Rs. 1,12,903/- along with interest and also imposed penalty of an equal amount under Rule 96ZO(3) of the Rules. Feeling aggrieved, the assessee filed an appeal before the Commissioner (Appeals) who vide order dated 27.2.2004 (Annexure A-2) reduced the penalty to Rs. 30,000/-. Against the order dated 27.2.2004 (Annexure A-2), the revenue filed an appeal before the Tribunal. The Tribunal vide order dated 15.2.2005 (Annexure A-3) dismissed the appeal. Hence, the present appeal.

Learned counsel for the revenue submitted that though this Court has held the provisions of Rule 96ZO(3) of the Rules to be ultra vires in Bansal Alloys and Metals Pvt. Ltd. Vs. Union of India (UOI), in so far as it did not confer any discretion on the authority to levy lesser penalty. According to the learned counsel, the SLP filed against the said decision is pending in the Hon''ble Supreme Court.

After hearing learned counsel for the appellant(s), we do not find any merit in the appeal. This Court in Bansal Alloys & Metals (P.) Ltd.''s case (supra) deciding the question of vires of Rules 96ZO(3), 96ZP and 96ZQ of the Rules held the said provisions to the extent of providing for mandatory minimum penalty without mens rea and without any element of discretion as excessive and unreasonable restriction on fundamental rights being arbitrary and were accordingly declared to be ultra vires the Act and the Constitution. It was recorded as under:--

Applying the above principles to the present situation, the provision for minimum mandatory penalty equal to the amount of duty even for slightest bonafide delay without any element of discretion is beyond the purpose of legislation. The object of the rule Is to safeguard the revenue against loss, if any. The penalty has been provided in addition to interest. Mere fact that without mens rea, an can (sic) be punished or a penalty could be imposed is not a blanket power without providing for any justification. In the Indian Constitutional scheme, power of legislature is circumscribed by fundamental rights. Judicial review of legislation is permissible on the ground of excessive restriction as against reasonable restriction which is also described as proportionality test.

Conclusion

For the above reasons, we hold that the impugned provision to the extent of providing for mandatory minimum penalty without any mens rea and without any element of discretion is excessive and unreasonable restriction on fundamental rights and is arbitrary. Moreover, exercise of such power by way of subordinate legislation is not permissible when rule making authority for levying penalty is limited to default "with intent to evade duty".

The writ petitions of the assessees are allowed and impugned provisions in Rules 96ZO, 96ZP and 96ZQ permitting minimum penalty for delay in payment, without any discretion and without having regard to extent and circumstances for delay are held to be ultra vires the Act and the Constitution. In CWP No. 8555 of 2010, penalty has been sustained by the Tribunal to the extent of 100% which will stand quashed without prejudice to any fresh order being passed in accordance with law. It is made clear that if penalty has attained finality as in CWP No. 18099 of 2009 upto this Court, this order will not affect the finality of such order. The appeals filed by the revenue against the orders of the Tribunal sustaining penalty proportionate to the default will stand dismissed.

Further, following the aforesaid judgment in Bansal Alloys & Metals Pvt. Ltd. ''s case (supra), Gujarat High Court in Krishna Processors Vs. Union of India, decided the issue in favour of the assessee therein by observing as under:--

20.15 The above view taken by this court finds support in the decision of the Punjab & Haryana High Court in the case of Bansal Alloys and Metals Pvt Ltd. v. Union of India (supra) wherein the court has held that the provision for minimum mandatory penalty equal to the amount of duty even for slightest bona fide delay without any element of discretion is beyond the purpose of legislation. The object of the rule is to safeguard the revenue against loss, if any. The penalty has been provided in addition to interest. Mere fact that without mens rea, an assessee can be punished or a penalty could be imposed is not a blanket power without providing for any justification. The court, accordingly, held the provisions of Rules 96ZO, ZP and ZQ permitting penalty for delay in payment, without any discretion and without having regard to the extent and circumstances for delay to be ultra vires the Act and the Constitution.

Himachal Pradesh High Court in Shubh Timb Steel Ltd. Vs. Union of India, in view of the judgment in Bansal Alloys & Metals (P.) Ltd.''s case (supra) while deciding the issue in favour of the assessee had held in the following terms:--

This issue was discussed threadbare by a Division Bench of the Punjab and Haryana High Court in the judgment cited above wherein after discussing the entire law, the Court held as follows:-

Applying the above principles to the present situation, the provision for minimum mandatory penalty equal to the amount of duty even for slightest bona fide delay without any element of discretion is beyond the purpose of legislation. The object of the rule is to safeguard the revenue against loss, if any. The penalty has been provided in addition to interest. Mere fact that without mens rea, an can (sic) be punished or a penalty could be imposed is not a blanket power without providing for any justification. In the Indian Constitutional scheme, power of legislature is circumscribed by fundamental rights. Judicial review of legislation is permissible on the ground of excessive restriction as against reasonable restriction which is also described as proportionality test.

For the above reasons, we hold that the impugned provision to the extent of providing for mandatory minimum penalty without any mens rea and without any element of discretion is excessive and unreasonable restriction on fundamental rights and is arbitrary. Moreover, exercise of such power by way of subordinate legislation is not permissible when rule making authority for levying penalty is limited to default "with intent to evade duty.

We are in agreement with the aforesaid judgment. We feel that when Section 37, which is the rule making power, is clear that penalty can be imposed only when the assessee is guilty of intending to evade the payment of duty, the penalty cannot be imposed without such intention. Furthermore, even when intention may be there, the penalty must be reasonable and cannot, in all cases, be fixed at 10096 of the excise leviable. Each case must be decided on its own facts and circumstances. There may be cases where the delay is only of a day or two and the authorities must be given the discretion to impose the penalty which they feel is reasonable in the facts and circumstances of the case.

In view of the above, the substantial question of law is answered accordingly. Consequently, all the appeals are dismissed.