Mandatory Section 11AC penalty cannot be reduced merely because duty was paid after show cause notice.

Section 11AC of the Central Excise Act, 1944 was treated as mandatory once its conditions were satisfied, leaving no discretion to reduce the penalty on equitable grounds. Payment of duty after receipt of the show cause notice did not wipe out liability to penalty where the statute required its imposition in the prescribed measure. The Tribunal's reduction of the penalty as excessive was inconsistent with the statutory scheme, so the reduced penalty was unsustainable.

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Issues: Whether penalty under Section 11AC of the Central Excise Act, 1944 could be reduced or waived on the ground that the duty was paid after receipt of the show cause notice, and whether the Tribunal was justified in treating the penalty as excessive.

Analysis: The demand arose under Section 11A of the Central Excise Act, 1944 and penalty was imposed under Section 11AC read with Rule 173Q of the Central Excise Rules. The legal position was governed by the Supreme Court's exposition that Section 11AC operates mandatorily once its conditions are attracted, and that the authority has no discretion to reduce the penalty below the statutory measure. Payment of duty after the show cause notice does not extinguish the liability to penalty where the statute mandates its imposition. The Tribunal's view that the penalty was harsh was therefore inconsistent with the statutory scheme.

Conclusion: The reduction of penalty by the Tribunal was unsustainable. The question of law was answered in favour of the Revenue, and the penalty under Section 11AC could not be reduced on the ground of post-notice payment of duty.

Ratio Decidendi: Once Section 11AC of the Central Excise Act, 1944 is attracted, penalty is mandatory and must be imposed in the statutory measure, leaving no discretion to reduce it on equitable considerations such as payment of duty after notice.

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