Dishonoured cheque for excise duty barred Section 11AC penalty, but a nominal procedural penalty was upheld

Duty paid by cheque that was later dishonoured, followed by immediate payment of duty and interest on departmental intimation, was treated as a bona fide lapse without intent to evade. Penalty under Section 11AC of the Central Excise Act, 1944 was therefore not attracted. However, the removal without valid payment still constituted breach of the duty-payment procedure under the Central Excise Rules, 2002, justifying a nominal penalty instead of an equal penalty. The equal penalty was set aside and a lesser penalty under Rule 27 was sustained.

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Issues: (i) Whether penalty under Section 11AC of the Central Excise Act, 1944 was attracted where duty was debited on the basis of a cheque that was later dishonoured and the duty with interest was paid on notice; (ii) whether a lesser penalty was nevertheless warranted for removal without valid payment of duty under the Central Excise Rules, 2002.

Issue (i): Whether penalty under Section 11AC of the Central Excise Act, 1944 was attracted where duty was debited on the basis of a cheque that was later dishonoured and the duty with interest was paid on notice.

Analysis: The payment failure arose because the cheque issued towards duty was not honoured by the bank, and the assessee deposited the duty along with interest immediately after receipt of the departmental intimation. The default was treated as a bona fide mistake and an isolated lapse. In such circumstances, although there was removal without payment of duty under Rule 8 of the Central Excise Rules, 2002, the element of intent to evade payment of duty required for the penal consequence under Section 11AC was not established.

Conclusion: Penalty under Section 11AC of the Central Excise Act, 1944 was not attracted.

Issue (ii): Whether a lesser penalty was nevertheless warranted for removal without valid payment of duty under the Central Excise Rules, 2002.

Analysis: Even though the transaction was not treated as one involving intent to evade duty, the assessee remained responsible for ensuring that the debit in PLA was backed by real payment. The dishonoured cheque resulted in removal without payment of duty due, which constituted a breach warranting penal consequences. Considering the nature of the lapse, a nominal penalty was found appropriate instead of the equal penalty imposed earlier.

Conclusion: A penalty of Rs. 5,000 under Rule 27 of the Central Excise Rules, 2002 was justified in place of the equal penalty.

Final Conclusion: The penalty was substantially reduced, with the demand for equal penalty set aside and a nominal penalty sustained for the procedural default in duty payment.

Ratio Decidendi: Where duty is paid belatedly after dishonour of the cheque and the lapse is bona fide without intent to evade, Section 11AC of the Central Excise Act, 1944 is not attracted, though a lesser penalty may still be imposed for breach of the duty-payment procedure.

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