Imposition of penalties is not justified when no duty liability arises.

( 1 ) THIS is a reference under Section 35g (3) of the Central Excise Act by which the following questions have been referred to us for our opinion :

(I) Whether the Honble Tribunal was justified in maintaining the order of imposition of penalties though reduced in view of its own observation and finding that duty liability does not arise hence the demand of duty is not correct and not sustainable in law? (II) Whether the order of imposition of penalties can be sustained when the penalties were proposed to be imposed merely on the allegation that glass bottles were sold during the period in question on which Modvat Credits were already availed of and the said allegation has been set aside by the Honble Tribunal? (III) Whether the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT), for short impose penalty on an assessee after holding that the charge of evasion of duty, against the assessee had not been proved and the liability for duty itself do not arise? (IV) Whether CEGAT after holding as not proved the charge under Rule 57f (Under which alone it was necessary for an assessee to seek permission/give intimation and pay duty before removing Modvat credit availed inputs), still impose penalty on the ground of lack of permission/intimation even for pre-modvat period duty paid inputs when no Rule required such permission/intimation? (V) Whether the CEGAT after holding as not proved the only charge levelled against the assessee in terms of Rule 57f, sustain the imposition of penalty in terms of non-observance of a new Rule 173-H which has never been enforced by the department in respect of duty paid inputs purchased from the market and on which no Modvat credit was taken and when the said new rule was not invoked either in the show cause notice or in the adjudicating Commissioners order or in the CEGATs final order.

( 2 ) THE assessee is a Company registered under the Indian Companies Act, which manufactures aerated waters of brand name Thumps Up, Limca, Gold Spot, Fanta etc. Modvat credit became admissible on glass bottles for manufacture of aerated waters from July, 1991.

( 3 ) IT was alleged by the department that an Intelligence report indicated that the assessee was selling glass bottles after availing and utilizing Modvat credit. It was also alleged that after the scrutiny of the records submitted by the assessee also revealed that the glass bottles were sold on higher rate as compared to the purchase rate, which indicated that the glass bottles sold, were in good condition and were of usable nature. It was further alleged that neither the duty was paid nor Modvat credit was reversed on clearance of these motivated glass bottles. A show cause notice was issued to the assessee to explain as to why duty be not demanded on the glass bottles sold. The Commissioner demanded duty of Rs. 19,54,994. 00 under Rule 9 (2), read with Section 11a of the Central Excise Act from the assessee. He also imposed a penalty of Rs. 19,61,566/under rules 9 (2) 52a, 173q and 226. He also imposed a penalty of Rs. 3 lacs on Shri Ashish sethi, Director of the Company. Aggrieved the assessee filed an appeal before the Tribunal, which was allowed by order, dated 6-10-98. True copy of the order of the Tribunal dated 6-10-98 [1999 (110) E. L. T. 862 (Tri.)] is Annexure-6 to the paper book. Paragraph 11 of that order states :

"the department has not been able to make out a case that the bottles sold during the year 1992-93, 1993-94 and 1994-95 were out of stock of glass bottles on which Modvat credit was taken. We therefore give the appellants the benefit of doubt and hold that duty liability does not arise and hence the demand of duty is not correct and not sustainable in law. "

( 4 ) HOWEVER, the Tribunal went on to observe that penalty was imposable because even if the bottle were of pre-modvat period it was necessary for the appellant to intimate the department, which they do not do. However, penalty was reduced to Rs. 5 lacs on t