Clandestine removal cannot be inferred from accounting lapses alone where the shortage matches accepted processing loss and no evidence of evasion exists.

Alleged shortage in production records did not justify duty demand or penalties where the quantity was consistent with processing loss in job-work grinding and the contracts permitted wastage up to 1%. Mere accounting irregularities, procedural lapses, or doubt over the opening balance were insufficient to prove clandestine manufacture or removal. In the absence of positive, independent evidence of evasion, the demand, interest, and penalties were held unsustainable and were set aside.

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Issues: Whether the duty demand and penalties could be sustained on the basis of an alleged shortage in production records when the shortage was attributable to processing loss and no positive evidence of clandestine removal was brought on record.

Analysis: The shortage was examined in the context of the manufacturing process, the job-work arrangements for grinding, and the commercial terms permitting wastage up to 1%. The record showed that the disputed quantity represented a very small proportion of the total and that the loss claimed by the assessee was within the normal commercial limits accepted in the job-work contracts. Mere non-maintenance of accounts or procedural non-compliance was held insufficient to establish clandestine manufacture or removal, especially where the opening balance itself was in doubt and no reliable independent evidence supported the allegation.

Conclusion: The demand, interest, and penalties were not sustainable and were set aside in favour of the assessee.

Ratio Decidendi: Clandestine removal cannot be inferred merely from accounting irregularities or procedural lapses where the alleged shortage is consistent with accepted processing loss and no positive evidence proves evasion of duty.

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