Central excise duty cannot rest on raw material shortage alone without proof of clandestine manufacture and removal.

Central excise duty cannot be demanded solely from shortage of raw material unless there is independent evidence of actual clandestine manufacture and removal of the finished goods. Here, only a shortfall in molasses was established; there was no shortage of finished product, no admission by any responsible functionary, and no material showing that the raw material deficiency was converted into denatured ethyl alcohol and cleared without duty. The inference of clandestine production was therefore arbitrary and subjective. Proceedings could at most relate to the raw material shortage itself, but the duty demand and penalty based on a hypothetical assumption of manufacture and clearance were set aside.

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Issues: Whether a duty demand and penalty could be sustained merely on the basis of shortage of raw material, by presuming clandestine manufacture and removal of the finished goods without independent evidence.

Analysis: The only established was shortage of molasses, which was the raw material. There was no allegation or evidence of shortage of the finished product, no statement from any responsible functionary admitting clandestine removal, and no material showing that the shortfall in raw material had actually been converted into denatured ethyl alcohol and removed without payment of duty. In the absence of evidence, the inference drawn by the lower authorities that the raw material must have been used in clandestine manufacture and clearance was held to be arbitrary and subjective. At most, proceedings could be taken for the shortage of raw material as permissible in law, but duty could not be demanded on a hypothetical assumption of manufacture and removal.

Conclusion: The duty demand and penalty were not sustainable and were set aside.

Ratio Decidendi: A demand of central excise duty cannot rest solely on shortage of raw material without evidence of actual clandestine manufacture and removal of the finished goods.

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