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Issues: (i) whether the duty demand could be sustained on the basis that all the processed fabrics had undergone stentering and were liable to central excise duty; (ii) whether a demand could be founded on a legal objection not raised in the show cause notice and whether the extended period of limitation was available on the allegation of suppression; and (iii) whether confiscation of the goods and the consequential penalty and interest were justified.
Issue (i): Whether the duty demand could be sustained on the basis that all the processed fabrics had undergone stentering and were liable to central excise duty.
Analysis: The finding of universal stentering was based only on a purported random verification of a limited number of entries, but the verification itself was shown to be unreliable. Many of the entries were found to relate to goods cleared on payment of duty, some to exempt goods, some to goods sent for reprocessing, and some to entries already recorded as dutiable in the statutory register. The remaining entries were not clear enough to support a conclusion that stentering had been carried out in every case. The connected records showed separate treatment of finishing and dutiable processing, and the Revenue had not undertaken a proper verification of the nature and disposal of the consignments.
Conclusion: The duty demand based on the allegation that all consignments underwent stentering was not sustainable.
Issue (ii): Whether a demand could be founded on a legal objection not raised in the show cause notice and whether the extended period of limitation was available on the allegation of suppression.
Analysis: The objection based on the proviso to Notification No. 297/79 was not part of the show cause notice and could not be introduced for the first time in adjudication. The record also showed that classification lists, returns, and invoices describing the goods as PV shirting had been filed before the authorities, so the Revenue had sufficient material to raise any dispute within the normal period. In these circumstances, the allegation of suppression was not established and the extended limitation period was not available.
Conclusion: The demand could not be sustained on a ground not set out in the show cause notice, and the extended period of limitation was not attracted.
Issue (iii): Whether confiscation of the goods and the consequential penalty and interest were justified.
Analysis: The goods were in-process materials that had not been folded and packed, and manufacturing was not complete. They were therefore not yet liable to entry in the finished goods register. Since they were already reflected in the raw material account, the allegation of non-accountal in the finished goods record and clandestine removal was not made out. Once the duty demand failed, the basis for penalty and interest also disappeared.
Conclusion: The confiscation, penalty, and interest were not justified.
Final Conclusion: The impugned order was set aside and the appeal succeeded in full.
Ratio Decidendi: A duty demand and connected penal consequences cannot rest on an unreliable limited verification or on a ground not pleaded in the show cause notice, and in-process goods not yet fit for entry in the finished goods register cannot be treated as clandestinely removed merely for want of such entry.
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