Clandestine removal and shortage-based demand: inconsistent invoices and missing records sustained duty, while the company's penalty was reduced.

In the absence of contemporaneous commercial evidence, inconsistent invoicing, unexplained shortages and corroborative surrounding circumstances were treated as sufficient to support a finding of clandestine manufacture and removal, and the corresponding duty demand was sustained. The separate demand based on shortage of inputs was excluded because that shortage was treated as indicative only of consumption in the clandestine production process, not as an independent recoverable liability. Penalties were considered justified in light of the fraudulent record-making, but the company's penalty was reduced having regard to the reduced duty liability and interest, while the director's penalty was sustained due to direct involvement.

---

---

Issues: (i) Whether the goods were manufactured and removed clandestinely without payment of duty in the guise of waste. (ii) Whether the separate demand based on shortage of inputs could survive independently. (iii) Whether the penalties imposed on the company and its director required interference.

Issue (i): Whether the goods were manufactured and removed clandestinely without payment of duty in the guise of waste.

Analysis: The discrepancy between invoice copies, the unexplained shortages in inputs and finished goods, and the absence of contemporaneous purchase records or payment particulars rendered the explanation of resale of purchased goods unacceptable. The conduct of maintaining inconsistent invoices was held to be contrary to faithful account keeping and violative of the Central Excise Rules. The surrounding evidence, including the transport-related material relied upon in the adjudication, supported the inference of clandestine production and clearance.

Conclusion: The finding of clandestine manufacture and removal was upheld and the duty demand on that basis was sustained.

Issue (ii): Whether the separate demand based on shortage of inputs could survive independently.

Analysis: The shortage of inputs was treated as indicative of their consumption in clandestine production, and not as a distinct recoverable demand in addition to the demand on the final products. Accordingly, the demand attributable to missing inputs was required to be excluded from the separate computation.

Conclusion: The separate demand on missing inputs was held not to survive independently.

Issue (iii): Whether the penalties imposed on the company and its director required interference.

Analysis: In view of the fraudulent and duplicitous conduct found against the appellants, penalty was considered justified. However, taking into account the reduced duty liability and the interest component, the penalty on the company was scaled down. No basis was found to interfere with the penalty on the director because of his direct involvement in the false record-making exercise.

Conclusion: The company's penalty was reduced, while the director's penalty was sustained.

Final Conclusion: The duty liability was partly reduced by excluding the separate input-shortage component, the company's penalty was lowered, and the appeal of the director was rejected.

Ratio Decidendi: In the absence of contemporaneous commercial evidence, inconsistent invoicing and corroborative surrounding circumstances can sustain a finding of clandestine removal, while a shortage-based demand may not be separately maintained where it merely reflects consumption in such clandestine production.

---