Ultra vires penalty under Central Excise Rules must rest on material justification; enhanced levy reduced to the minimum sustainable amount.

Rule 96-ZO of the Central Excise Rules, 1944 was treated as ultra vires to the extent it authorised a penalty equal to the outstanding duty. In that setting, only the minimum penalty of Rs. 5,000, or a higher penalty supported by material justification, could be sustained. Because no basis existed for a penalty of Rs. 1,00,000, the enhanced penalty was found unsustainable and was reduced to the minimum amount.

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Issues: Whether the penalty imposed for delayed payment of excise duty under Rule 96-ZO of the Central Excise Rules, 1944 could be sustained at Rs. 1,00,000 after the rule stipulating penalty equal to the outstanding duty had been held ultra vires.

Analysis: Rule 96-ZO, to the extent it authorised a penalty equal to the amount of outstanding duty, had already been declared ultra vires. In that situation, only the minimum penalty of Rs. 5,000 or a reasonable higher amount supported by material could be imposed. As no material or basis existed to justify a penalty of Rs. 1,00,000, the penalty sustained by the Tribunal lacked justification.

Conclusion: The penalty of Rs. 1,00,000 was held to be illegal and was reduced to Rs. 5,000.

Final Conclusion: The appeal succeeded and the assessee obtained relief by reduction of the penalty to the minimum sustainable amount.

Ratio Decidendi: Where the statutory provision authorising penalty equal to the outstanding duty is ultra vires, any enhanced penalty must rest on material justification and cannot exceed a reasonable amount; in the absence of such basis, the minimum penalty alone is sustainable.

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