Mandatory excise penalty provisions lacking discretion were treated as unconstitutional and could not sustain the departmental demand.

Penalty under Rule 96ZO(3) of the Central Excise Rules, 1944 was treated as non-mandatory where it operated as an inflexible minimum levy without discretion to consider the circumstances of delay. The Court distinguished the Supreme Court authorities relied on by the Revenue as confined to Section 11AC of the Central Excise Act, 1944, and accepted the view that the rigidity of Rules 96ZO, 96ZP and 96ZQ, insofar as they excluded discretion and imposed equal penalty even for bona fide delay, was inconsistent with Article 14 and the principle of proportionality. The impugned rules were accordingly treated as ultra vires for the purpose of sustaining the departmental demand.

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Issues: (i) Whether the penalty prescribed under Rule 96ZO(3) of the Central Excise Rules, 1944, could be treated as mandatory and imposed without discretion to reduce it. (ii) Whether Rules 96ZO, 96ZP and 96ZQ of the Central Excise Rules, 1944, to the extent they provide for minimum penalty without discretion and without regard to the circumstances of delay, were liable to be treated as ultra vires.

Issue (i): Whether the penalty prescribed under Rule 96ZO(3) of the Central Excise Rules, 1944, could be treated as mandatory and imposed without discretion to reduce it.

Analysis: The Court noted that the Supreme Court authorities relied upon by the Revenue were explained as being confined to Section 11AC of the Central Excise Act, 1944, and did not conclusively govern the vires of Rules 96ZO, 96ZP and 96ZQ. The Court accepted that the later High Court decisions had treated the rigidity of these rules, in so far as they excluded discretion and imposed minimum penalty even for bona fide delay, as inconsistent with Article 14 of the Constitution of India and the principle of proportionality.

Conclusion: The penalty could not be enforced as an inflexible mandatory levy merely on the basis of those rules.

Issue (ii): Whether Rules 96ZO, 96ZP and 96ZQ of the Central Excise Rules, 1944, to the extent they provide for minimum penalty without discretion and without regard to the circumstances of delay, were liable to be treated as ultra vires.

Analysis: The Court relied on the consistent view of other High Courts that the impugned penalty provisions, in so far as they did not admit any discretion, imposed an unreasonable restriction and were unconstitutional. Holding that a rule declared ultra vires by a court of competent jurisdiction could not be relied upon by the Revenue, the Court applied that reasoning to the present appeals and rejected the contention that the rules still mandated equal penalty. It accordingly answered the question of law against the Revenue.

Conclusion: The impugned rules, to the extent they excluded discretion in levying penalty, were not available to sustain the departmental demand and were treated as ultra vires for the purpose of these appeals.

Final Conclusion: The departmental appeals failed because the penalty provision invoked against the assessee could not be applied as an inflexible mandatory levy in the face of the constitutional challenge accepted by the Court.

Ratio Decidendi: A penalty provision that removes all discretion and mandates an equal penalty for delayed payment, without regard to the circumstances of default, cannot be relied upon where it has been treated as constitutionally invalid; once such a rule is held ultra vires, it cannot support the imposition of penalty in the appeal.

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