Excise duty on deteriorated molasses and penalty for alleged rule breach were both set aside

Excise duty was held not leviable on molasses that had deteriorated, become unfit for consumption and marketing, and were actually drained out after the assessee had first sought permission and remission; such loss by natural causes was treated as not amounting to a duty-triggering removal. The duty demand was set aside. Penalty was also unsustainable because the assessee had applied for permission before drainage, waited for the expiry of the State Excise permission period, and no wilful contravention of the excise rules was established. The impugned order was annulled and consequential relief followed.

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Issues: (i) Whether excise duty was payable on molasses that had deteriorated, become unfit for consumption and marketing, and were drained out after the assessee had sought permission and remission. (ii) Whether penalty was sustainable for alleged contravention of the Central Excise Rules.

Issue (i): Whether excise duty was payable on molasses that had deteriorated, become unfit for consumption and marketing, and were drained out after the assessee had sought permission and remission.

Analysis: The molasses were found to be unfit for marketing and consumption, and the fact of actual drainage was not in dispute. The application for permission to drain out and the application for remission were filed before the drainage. The governing principle applied was that molasses which have become unfit for consumption and marketing are not liable to duty, and that loss or deterioration by natural causes does not amount to removal attracting duty until actual removal in a manner contemplated by law.

Conclusion: The duty demand was not sustainable and was set aside.

Issue (ii): Whether penalty was sustainable for alleged contravention of the Central Excise Rules.

Analysis: The assessee had sought permission before draining out the molasses and waited for the expiry of the State Excise permission period before acting. The Department did not decide the request for permission. In these circumstances, the alleged breach of Rules 173F and 173G was not established so as to justify penalty under Rules 9, 52A and 173Q of the Central Excise Rules.

Conclusion: The penalty was not warranted and was set aside.

Final Conclusion: The impugned order was annulled and the assessee obtained consequential relief.

Ratio Decidendi: Excise duty is not leviable on molasses that have become unfit for consumption and marketing and are lost or deteriorated by natural causes before legally relevant removal, and penalty cannot be sustained where the assessee has sought permission and no wilful contravention of the excise rules is established.

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