Ultra vires penalty provision cannot support duty-default penalty or refund appropriation against an unsustainable demand.

Penalty for default in payment of duty could not be sustained because Rule 96ZQ(5)(ii) had already been held ultra vires, so the levy imposed for the relevant period was set aside. Refund sanctioned to the assessee could not be appropriated towards that penalty because the underlying demand had no legal basis, and the adjustment was also quashed.

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Issues: (i) Whether penalty could be imposed for default in payment of duty for the relevant period under Rule 96ZQ(5)(ii) of the Central Excise Rules, 1944. (ii) Whether the refund sanctioned could be appropriated towards the penalty demanded.

Issue (i): Whether penalty could be imposed for default in payment of duty for the relevant period under Rule 96ZQ(5)(ii) of the Central Excise Rules, 1944.

Analysis: The Tribunal followed the binding view that Rule 96ZQ(5)(ii) had been held ultra vires. Once the rule itself could not sustain the levy of penalty for delay in payment of duty, the penalty imposed for the relevant months could not survive.

Conclusion: The penalty for default in payment of duty was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether the refund sanctioned could be appropriated towards the penalty demanded.

Analysis: Since the penalty itself could not be sustained, the adjustment of the sanctioned refund towards such penalty had no legal basis. The appropriation was therefore liable to be undone along with the penalty demand.

Conclusion: The appropriation of the refund towards penalty was set aside in favour of the assessee.

Final Conclusion: Both appeals succeeded and the assessee obtained relief against both the penalty demand and the refund adjustment.

Ratio Decidendi: A penalty provision held ultra vires cannot be enforced, and any refund appropriated only towards such unsustainable penalty must also be set aside.

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