2010 (11) TMI 83 - HC - Central Excise

Penalty Mandatory penalty Delay in payment of duty compounded levy scheme - power to make rule for levying penalty equal to the outstanding amount of duty could be exercised only if the default was with intent to evade payment of duty - rule making authority could not go beyond the Act and when the Act provides for requirement of mens rea the rule could not dispense with the said requirement - 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 Held that - Mere fact that without mens rea an can be punished or a penalty could be imposed is not a blanket power without providing for any justification - power of legislature is circumscribed by fundamental rights - 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 the Act and the Constitution - 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 - appeal disposed of

Issues Involved:
1. Mandatory Penalty under Rule 96ZO(3) of the Central Excise Rules, 1944
2. Constitutional Validity of Rules 96ZO, 96ZP, and 96ZQ
3. Requirement of Mens Rea for Levying Penalty
4. Proportionality and Reasonableness of Penalty Provision
5. Scope of Rule-Making Power under Section 37 of the Central Excise Act, 1944

Detailed Analysis:

1. Mandatory Penalty under Rule 96ZO(3) of the Central Excise Rules, 1944
The appeals were filed by the revenue under Section 35G of the Central Excise Act, 1944, challenging the Tribunal's judgments that held the penalty equal to the amount of duty was not mandatory under Rule 96ZO(3). The Tribunal had previously concluded that the penalty under Rule 96ZO was different from Section 11AC, as the latter required mens rea for the levy of a minimum mandatory penalty. The Tribunal emphasized that the extent of the penalty under Rule 96ZO should be discretionary, depending on the period of delay and other circumstances.

2. Constitutional Validity of Rules 96ZO, 96ZP, and 96ZQ
The writ petitions sought a declaration that Rules 96ZO, 96ZP, and 96ZQ were ultra vires the rule-making power under the Act and also arbitrary, discriminatory, and confiscatory. The High Court examined whether the provision for levying a minimum penalty equal to the amount of duty without any requirement of mens rea and without any discretion was consistent with Articles 14, 19, and 21 of the Constitution. The Court held that such provisions were excessive and unreasonable restrictions on fundamental rights and were arbitrary.

3. Requirement of Mens Rea for Levying Penalty
The judgment discussed the requirement of mens rea in the context of penalty provisions. It referred to the Supreme Court's decision in Union of India v. Dharamendra Textile Processors, which held that the plea of inbuilt discretion in Rules 96ZO and 96ZQ could not be accepted. The Court concluded that the rule-making authority could not dispense with the requirement of mens rea when the Act itself required it for imposing penalties.

4. Proportionality and Reasonableness of Penalty Provision
The principle of proportionality was discussed extensively. The Court noted that legislative measures must pass the test of reasonableness and should not be arbitrary or excessive. It held that the provision for a mandatory minimum penalty without discretion was disproportionate and did not maintain a proper balance between the rights guaranteed and the control permissible under the Constitution. The Court emphasized that penalties should be reasonable and proportionate to the default.

5. Scope of Rule-Making Power under Section 37 of the Central Excise Act, 1944
The High Court examined the scope of the rule-making power under Section 37 of the Act. It concluded that the power to make rules for levying penalties could only be exercised if the default was with intent to evade payment of duty. The rule-making authority could not go beyond the Act, and any rule that did so was ultra vires.

Conclusion:
The High Court allowed the writ petitions of the assessees and held that the impugned provisions in Rules 96ZO, 96ZP, and 96ZQ, which permitted a minimum penalty for delay in payment without any discretion and without considering the extent and circumstances of the delay, were ultra vires the Act and the Constitution. The appeals filed by the revenue were dismissed, and the penalties imposed were quashed to the extent they were found to be disproportionate and unreasonable.

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