2006 (7) TMI 36 - HC - Central Excise

Central Excise Penalty Section 11AC of CEA, 1944 leaves no room for discretion in quantum of penalty Matter remanded back to Tribunal for fresh decision on question of levy of penalty

Issues Involved:
1. Whether CESTAT was correct in reducing the penalty amount imposed as an equivalent amount of duty under Section 11AC of the Central Excise Act, 1944.
2. Whether CESTAT is empowered to reduce the penalty amount imposed by the adjudicating authority without reducing the duty amount and without legal sanctity of any rule or section.

Issue-wise Detailed Analysis:

1. Reduction of Penalty by CESTAT:
The primary issue is whether the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) was correct in reducing the penalty amount imposed under Section 11AC of the Central Excise Act, 1944. The assessee had not included the value of "Bush" in the assessable value of "Pulsator," leading to a demand of duty and an equivalent amount of penalty under Section 11AC. The adjudicating authority confirmed this demand, which was later set aside by the Commissioner (Appeals) on the ground of limitation. However, the Tribunal reversed this decision, confirming the duty demand but reducing the penalty to Rs. 10,000.

2. Empowerment of CESTAT to Reduce Penalty:
The second issue revolves around whether CESTAT has the authority to reduce the penalty amount without reducing the duty amount and without any legal basis. The Revenue argued that under Section 11AC, the penalty must be equal to the duty determined when there is evidence of fraud, collusion, or any willful misstatement or suppression of facts. The statute does not provide discretion in the quantum of penalty, and the Tribunal erred in not imposing a penalty equal to the duty determined.

Legal Precedents and Statutory Interpretation:
The Revenue cited several judgments, including *Zunjarrao Bhikaji Nagarkar v. Union of India* and *Sony India Limited v. Commissioner of Central Excise*, to support the argument that once the conditions for penalty are met, the penalty must be equal to the duty. The assessee, on the other hand, argued that the penalty should not be imposed mechanically and should consider the presence of mens rea (intention to evade tax). They cited cases like *State of Madhya Pradesh v. Bharat Heavy Electricals* and *Ambuja Synthetics Mills v. Union of India*, which suggested that penalties should be proportional and not necessarily equal to the duty.

Judicial Interpretation of Penalty Provisions:
The court examined the concept of penalty and its imposition, referring to several Supreme Court decisions. It was held that penalties should not be imposed merely for procedural failures and should consider proportionality. However, the court noted that Section 11AC explicitly requires the penalty to be equal to the duty when conditions like fraud or willful misstatement are met, leaving no room for discretion.

Constitutional Considerations:
The court also considered constitutional principles, including fairness and reasonableness under Article 21 of the Constitution. It was observed that while the legislature can prescribe minimum penalties, such provisions must be fair and just. The court upheld the principle that mandatory minimum penalties are permissible if they are not arbitrary or oppressive.

Conclusion and Remand:
The court concluded that the language of Section 11AC is clear and mandates a penalty equal to the duty in cases involving fraud or willful misstatement. The Tribunal's decision to reduce the penalty was found to be incorrect. The appeal was allowed, and the case was remanded to the Tribunal for a fresh decision on the levy of penalty, with the direction that if penalty is warranted, it must be equal to the duty determined.

Final Order:
The appeal was disposed of with instructions for the parties to appear before the Tribunal for further proceedings on October 9, 2006.

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