Stock shortages shift the burden to the assessee, while Modvat denial needs reliable evidence of substituted inputs.

Duty is payable on shortages of finished excisable goods found during stock verification where the shortage is admitted in an unretracted statement and not contemporaneously disputed; in that situation, the burden shifts to the assessee to explain the discrepancy, and the absence of direct proof of clandestine removal does not defeat the demand. Modvat credit on fresh HDPE granules cannot be denied, and connected confiscation cannot be sustained, where the revenue fails to rebut the assessee's explanation that the material was mixed with carbon black and produces no test report or other reliable evidence showing the goods were regenerated granules. The demand on shortages was upheld, while the credit denial and confiscation were set aside.

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Issues: (i) whether duty was payable on the shortage of finished excisable goods found during stock verification; and (ii) whether Modvat credit on fresh HDPE granules could be denied and the related confiscation and penalty sustained.

Issue (i): Whether duty was payable on the shortage of finished excisable goods found during stock verification.

Analysis: The shortage was noticed on physical verification and was supported by the statement of the authorised representative, who admitted the shortages and stated that he was responsible for excise records. That statement was not retracted. The challenge to the manner of stock verification was raised belatedly and was not supported by any contemporaneous protest or evidence. In a case of shortage of final products, the onus shifts to the assessee to explain the discrepancy, and the absence of direct proof of clandestine removal by the department does not by itself dislodge the demand.

Conclusion: The demand of duty on the shortage of finished goods was upheld.

Issue (ii): Whether Modvat credit on fresh HDPE granules could be denied and the related confiscation and penalty sustained.

Analysis: The denial of credit was founded on an inference that fresh granules had been substituted by regenerated granules. However, the assessee offered an explanation that the granules were mixed with carbon black before use, and that explanation was not rebutted by the revenue. The samples drawn were not supported by any test report establishing that the goods were regenerated granules. In the absence of such scientific verification, the evidence was insufficient to sustain denial of credit or the connected confiscation.

Conclusion: The denial of Modvat credit and the confiscation of granules were set aside, and the penalty was reduced.

Final Conclusion: The appeal succeeded only in part: the duty demand on shortages was maintained, while the Modvat denial, confiscation, and part of the penalty did not survive.

Ratio Decidendi: Where shortage of finished goods is admitted in an unretracted statement and not contemporaneously disputed, the burden shifts to the assessee to explain the discrepancy; conversely, denial of credit based on substitution of inputs cannot be sustained without reliable supporting evidence such as test results or other rebuttal of the assessee's explanation.

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