Compounded levy duty lapses on closure and surrendered registration, but delayed-payment penalty under Rule 96ZP(3) remains mandatory.

Under the compounded levy regime, duty was not enforceable for the period when the factory remained closed and central excise registration had been surrendered, because the factual basis for continuing liability no longer survived. By contrast, penalty for delayed payment of duty under Rule 96ZP(3) was treated as mandatory once payment was made after the due date, and the lower authority had no discretion to reduce it below the prescribed amount. The demand was therefore unsustainable, while the penalty reduction was inconsistent with the rule and had to be reversed.

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Issues: (i) Whether duty was payable under the Compounded Levy Scheme for the period when the factory was closed and the excise registration had been surrendered. (ii) Whether the penalty for delayed payment of duty under Rule 96ZP(3) could be reduced below the prescribed amount.

Issue (i): Whether duty was payable under the Compounded Levy Scheme for the period when the factory was closed and the excise registration had been surrendered.

Analysis: The unit had remained closed during the relevant period and the registration under central excise had been surrendered. On these admitted facts, the basis for treating the assessee as continuing to work under the Compounded Levy Scheme for that period did not survive. The demand was also sought to be justified on the footing that duty should first be paid and abatement claimed, but the closure and surrender of registration were not disputed.

Conclusion: The demand was not sustainable and was rightly dropped in favour of the assessee.

Issue (ii): Whether the penalty for delayed payment of duty under Rule 96ZP(3) could be reduced below the prescribed amount.

Analysis: The duty had admittedly been paid after the due date. Rule 96ZP(3), as interpreted by the binding precedent relied upon, treats the penalty as mandatory upon failure to pay by the prescribed date and does not confer discretion to scale it down to a lesser amount. The reduction of penalty by the lower appellate authority was therefore inconsistent with the rule.

Conclusion: The reduction of penalty was set aside and the original penalty was restored in favour of the Revenue.

Final Conclusion: The assessee succeeded on the demand issue, while the Revenue succeeded on the penalty issue, resulting in a partial allowance of the Revenue's appeal.

Ratio Decidendi: Under the compounded levy regime, duty cannot be enforced for a period when the unit was closed and registration had been surrendered, but penalty under Rule 96ZP(3) for delayed payment is mandatory and cannot be reduced below the prescribed amount.

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