Clubbing of clearances and clandestine removal require positive evidence; consequential penalties fail when the duty demand collapses.

Clubbing of clearances for small-scale exemption requires cogent material showing that separately registered units are in substance one manufacturer, supported by evidence of financial flow back or other real interdependence; common facilities or family connection alone are insufficient. On the stated record, the clearances could not be clubbed. A demand for clandestine manufacture and removal must rest on positive evidence of production capacity, process, and actual removal of finished goods; stock discrepancies or alleged raw-material shortages by themselves are not enough. The alleged clandestine demand therefore failed. Penalties and interest, being consequential to a valid duty demand, also could not survive once the duty demand failed.

---

---

Issues: (i) Whether the clearances of the two units could be clubbed for denial of small-scale exemption and consequent duty demand. (ii) Whether the demand based on alleged clandestine manufacture and removal of goods was sustainable. (iii) Whether the penalties and interest imposed could survive once the duty demand failed.

Issue (i): Whether the clearances of the two units could be clubbed for denial of small-scale exemption and consequent duty demand.

Analysis: Clubbing of clearances requires a legally sustainable basis showing that the units are not genuinely separate and that there is material indicating a real extra-commercial relationship or financial flow back sufficient to treat them as one manufacturer. Mere common use of office space, telephone, staff, machinery, raw materials, or family relationship among partners is not enough where the record also shows separate registrations and separate existence of the firms. The order was internally inconsistent because it treated one unit as an independent assessee for some purposes while denying separate existence for clubbing, and it also departed from the governing departmental guidance on clubbing without satisfying the necessary criteria.

Conclusion: The clearances could not be clubbed; the finding on clubbing was set aside in favour of the assessee.

Issue (ii): Whether the demand based on alleged clandestine manufacture and removal of goods was sustainable.

Analysis: Clandestine removal must be proved by positive evidence. A mere discrepancy in stock records or an alleged short account of raw material, without reliable proof of the manufacturing process, the time required, and the actual removal of finished goods, is insufficient to sustain the charge. On the record, the inference of clandestine manufacture and clearance was unsupported by adequate evidence.

Conclusion: The demand founded on alleged clandestine removal was not sustainable and was set aside.

Issue (iii): Whether the penalties and interest imposed could survive once the duty demand failed.

Analysis: Penalty and interest are consequential to a valid duty demand. When the underlying duty demands were not upheld, the foundation for penalties and interest also disappeared.

Conclusion: The penalties and interest were set aside.

Final Conclusion: The impugned order could not be sustained on clubbing, clandestine removal, or consequential penalty and interest, and the appeals succeeded.

Ratio Decidendi: Clubbing of clearances and punitive consequences cannot be sustained unless the department establishes, with cogent evidence, that separate units are in substance one manufacturer or that clandestine removal is proved by positive material.

---