Penalty under compounded levy scheme reduced where duty was later paid, no clandestine removal was found, and mens rea was absent.

Penalty for short-payment of duty under the compounded levy regime was reduced because the dispute arose during the unsettled initial period of Rule 96ZO(3), and the duty was later discharged with interest after the legal position was settled. As there was no clandestine removal, no total non-payment, and no evidence of deliberate evasion, no mens rea could be attributed. The prescribed penalty under Rule 96ZO was treated as a maximum and discretionary measure, so reduction of the penalty was justified and required no interference.

---

---

Issues: Whether, in the facts of the case, the penalty imposed for non-payment of duty under the compounded levy scheme was liable to be reduced, and whether any mens rea could be attributed to justify interference with the reduced penalty.

Analysis: The dispute arose in the initial period of the compounded levy regime, when the mode of duty determination under Rule 96ZO(3) of the erstwhile Central Excise Rules, 1944 was unsettled. The duty short-paid was subsequently discharged with interest after the legal position was settled by the Supreme Court. The matter was not one of clandestine removal or total non-payment, and the facts did not indicate any deliberate intent to evade duty. In these circumstances, no mens rea was attributable. The penalty prescribed under Rule 96ZO was treated as a maximum and discretionary measure.

Conclusion: The reduction of penalty from Rs. 53,33,336/- to Rs. 2 lakhs was justified and required no interference.

Ratio Decidendi: Where duty short-paid under the compounded levy scheme is later paid with interest in a bona fide dispute over the legal regime, and there is no clandestine removal or deliberate evasion, penalty under Rule 96ZO is discretionary and absence of mens rea supports reduction of penalty.

---