Confiscation and duty demand fail when register entries and retracted statements are outweighed by documentary and test evidence.

Shortages found during search supported an undisputed duty demand, so that liability was maintained. Goods seized from the godown and factory were not liable to confiscation or redemption fine because the delivery challan, the explanation of return as defective goods, and the in-process status of factory stock were accepted, while the record did not establish the necessary mens rea for confiscation. A larger duty demand alleging clearance of manmade fabrics as cotton fabrics under an exemption notification failed because test reports and the statutory lot register supported the assessee, and the grey inward register and retracted statements were treated as unreliable. Penalties on individuals were set aside, and the assessee's penalty was reduced because only the shortage-based liability survived.

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Issues: (i) whether the undisputed duty demand arising from shortages found during search was liable to be confirmed; (ii) whether goods seized from the godown and within the factory were liable to confiscation and redemption fine for want of duty-paying documents or non-entry in the RG1 register; (iii) whether the demand of duty on the allegation that processed manmade fabrics were cleared in the guise of cotton fabrics by claiming exemption under Notification No. 253/82-C.E. was sustainable; and (iv) whether the penalties imposed on the assessee and the individuals were justified.

Issue (i): whether the undisputed duty demand arising from shortages found during search was liable to be confirmed.

Analysis: The demand relatable to shortages was not contested. Once the assessee did not dispute the shortage-based liability, there was no basis to re-examine that component on merits.

Conclusion: The duty demand on account of shortages was confirmed and was against the assessee.

Issue (ii): whether goods seized from the godown and within the factory were liable to confiscation and redemption fine for want of duty-paying documents or non-entry in the RG1 register.

Analysis: For the goods found in the godown, the delivery challan and the explanation that the goods had been returned as defective were accepted as sufficient accounting of the goods, and the department did not discharge the burden of showing that the goods were not duty paid. For the goods seized within the factory, the stock was still in process and had not reached the stage of RG1 entry. In addition, confiscation under Rule 173Q(1)(b) required more than a mere omission in accounting, and the record did not establish the necessary mens rea. The entries in the relevant register could not, by themselves, sustain confiscation on these facts.

Conclusion: The redemption fines on both sets of seized goods were not sustainable and were set aside in favour of the assessee.

Issue (iii): whether the demand of duty on the allegation that processed manmade fabrics were cleared in the guise of cotton fabrics by claiming exemption under Notification No. 253/82-C.E. was sustainable.

Analysis: The demand rested mainly on the grey inward register and on statements of the director, employees and suppliers. The test reports, however, showed that the samples described as polyester or blended fabrics were actually 100% cotton fabrics, and the statutory lot register tallied with the test results. The grey inward register was not a reliable record for determining quality, and the statements were treated as unreliable because they were retracted, alleged to have been recorded under duress, and were inconsistent with the independent documentary and scientific evidence. On that basis, the allegation of misdeclaration was not established.

Conclusion: The duty demand of Rs. 52,73,773/- was not sustainable and was set aside in favour of the assessee.

Issue (iv): whether the penalties imposed on the assessee and the individuals were justified.

Analysis: In view of the partial confirmation of the shortage-based duty demand, some penalty on the assessee was warranted, but the larger allegations forming the basis of confiscation and the major duty demand did not survive. As no goods were held liable for confiscation, the penalties on the director, the manager and the office superintendent had no independent foundation.

Conclusion: The assessee's penalty was reduced to Rs. 1,00,000/-, and the penalties on the individuals were set aside, all in favour of the respective appellants.

Final Conclusion: The order resulted in partial relief to the assessee, with the shortage-based duty liability maintained, the confiscation-based fines and the major demand cancelled, and the individual penalties quashed.

Ratio Decidendi: Confiscation and duty demand cannot rest solely on unreliable register entries or uncorroborated/retracted statements when independent documentary and test evidence disproves the alleged misdeclaration; moreover, a mere accounting lapse without established mens rea is insufficient to sustain confiscation under Rule 173Q(1)(b) of the Central Excise Rules, 1944.

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