Compounded levy penalty and enhancement upheld where belated duty payment after detection did not erase default liability.

Under the compounded levy regime, belated payment of duty and interest after detection by the Revenue did not extinguish penalty liability, because the default continued without sufficient cause and the payment was not voluntary in the sense of an unconditional retraction. The penalty under Rule 96ZP(3)(ii) was also held liable to enhancement, as the default involved substantial unpaid duty, the assessee had retained the use of government revenue during the period of non-payment, and the reduced penalty was found disproportionate to the duty evaded. The assessee's appeal failed and the Revenue's appeal succeeded.

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Issues: (i) Whether penalty was exigible under the compounded levy scheme despite payment of the outstanding duty and interest before issuance of the show cause notice; (ii) whether the penalty imposed under Rule 96ZP(3)(ii) deserved enhancement having regard to the conduct of the assessee and the extent of duty default.

Issue (i): Whether penalty was exigible under the compounded levy scheme despite payment of the outstanding duty and interest before issuance of the show cause notice.

Analysis: The assessee had failed to pay the full duty amount at the end of the relevant months under Section 3A and the default continued without sufficient cause. The later payment was not voluntary in the sense of an unconditional retraction but was made only after detection by the Revenue. In these circumstances, the mere deposit of duty and interest before notice did not wipe out liability to penalty.

Conclusion: Penalty was rightly imposed on the assessee.

Issue (ii): Whether the penalty imposed under Rule 96ZP(3)(ii) deserved enhancement having regard to the conduct of the assessee and the extent of duty default.

Analysis: The default involved substantial duty amounts and the assessee had enjoyed the use of Government revenue during the period of non-payment. The penalty as reduced by the appellate authority was found to be too low and disproportionate to the duty evaded. The conduct of the assessee justified a higher penalty under the rule.

Conclusion: The penalty was liable to be enhanced.

Final Conclusion: The assessee's appeal failed and the Revenue's appeal succeeded, with the penalty enhanced to Rs. 3 lakhs.

Ratio Decidendi: Under the compounded levy regime, belated payment of duty and interest after detection does not bar penalty, and the quantum of penalty may be enhanced where the default is substantial and the reduced penalty is disproportionate to the duty evaded.

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