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PJ/Case Laws/2010-11/1048

Penalty for delay in payment of Duty under Rules 96 (ZO), (ZP) & (ZQ)

Case: Bansal Alloys & Metals Pvt. Ltd. v/s Union of India
 
Citation: 2010 (260) ELT 343 (P & H)
 
Issue:- Minimum penalty for delay in payment under Rules 96 (ZO), (ZP) and (ZQ) without any discretion and regard to extent and circumstances for delay are held to be ultravires to the Act and the constitution. 

Brief Facts:- The petitioner is manufacturer of non alloy steel ingots falling under chapter heading 72 of the first schedule to the Central Excise Tariff Act, 1985. By section 3A of the Act, compounded levy scheme was introduces providing for the lump sum amount of duty on the basis of capacity instead of actual production of goods. Rules 96ZO provided for discharge of duty liability by 15th and last day of each month. The petitioner could not fully discharge its duty of first fortnight of the month of April 1999 and instead deposited the same after one week i.e. on 22.4.1999 along with interest. For the said default, it was required to pay penalty equal to the outstanding amount of duty under the proviso to Rule 96ZO (3) vide order. On appeal it was held that since duty had already been deposited and there was delay only of seven days, there was no justification for imposing minimum penalty. Accordingly, quantum of penalty was reduced. 

Appellant’s Contention:- Even though it may be permissible to provide for penalty for breach of civil obligation without mens rea in certain cases, legislature could not act arbitrarily and provide for minimum heavy penalty for slightest default. Principle of proportionality was part of reasonableness and even a legislative measure has to pass the test of reasonableness. If a legislative measure is held to be arbitrary and provide for minimum heavy penalty for slightest default. Principles of proportionality were part of reasonableness and even a legislative measure has to pass the test of reasonableness. If a legislative measure is held to be arbitrary, the same can be struck down to enforce fundamental rights under Articles 14, 19 and 21. The rules are beyond the scope of the delegate legislation permitted under the Act. 

Respondent’s Contention:- U/s 37 (4) of the Act, the central government could make a rule providing for the levy of penalty on contravention of rule with intent to evade duty regarding removal of excisable goods, accounting for such goods, engaging in manufacture, production or storage of goods without registration. There being no compulsion to imply mens rea, minimum penalty was permissible and was neither arbitrary nor unreasonable and thus, there was no violation of fundamental rights nor the provisions were beyond the scope of delegated legislation. 

Reasoning of the Judgment:- The High Court discussed the following provisions:

  • Section 37: Power of the Central Government to make Rules
  • Rule 96ZO: Procedures to be followed by the manufacturer of ingots and billets
  • Scope of Rule making power
  • Reasonableness and Proportionality 

Applying the above provisions to present situation, the provisions for minimum mandatory penalty equal to the amount of duty even for slightest bona fide delay without any elements 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, can anyone 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, the High Court holds that the impugned provisions 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 96 (ZO), (ZP) and (ZQ) 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 to the Act and the constitution. In CWP, 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 the law. It is made clear that if penalty has attained finality 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 proportionate to the default will stand dismissed. 

Decision:- Appeal dismissed. 

Comment:- This is very important decision that the mandatory penalty cannot be imposed for small default in payment of duty. 

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