Clandestine removal needs corroborated evidence; private chits alone fail, while shortage-based duty and limited penalty were sustained.

A demand for clandestine removal could not be sustained on private chits recovered from a contractor's premises and an uncorroborated co-accused statement, because the records did not reliably connect the writings to the appellant's officers or to factory clearances. Duty relating to shortages found from the appellant's own statutory records was upheld where the amount had already been deposited before notice and was not shown to have been paid under coercion; the connected penalty was correspondingly reduced to the minimum statutory level. Penalty on the second appellant was set aside because no confiscable goods were identified and there was no proof of knowing dealing with such goods.

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Issues: (i) whether the duty demand based on private chits and the statement of the co-accused could sustain a finding of clandestine removal, (ii) whether the duty confirmed on shortages found in the factory and the corresponding penalty under Rule 173Q(1) were sustainable, and (iii) whether the penalty on the second appellant under Rule 209A could be upheld.

Issue (i): whether the duty demand based on private chits and the statement of the co-accused could sustain a finding of clandestine removal.

Analysis: The chits recovered from the folding contractor's premises did not, by themselves, establish that processed fabrics were removed from the appellant's factory without payment of duty. The only supporting material was the statement of the co-accused, which required corroboration on material particulars. There was no reliable material showing that the writings on the chits were within the knowledge of the appellant's officers or employees, or that they evidenced clearances from the factory.

Conclusion: The demand founded on the chits and the co-accused statement was not sustainable.

Issue (ii): whether the duty confirmed on shortages found in the factory and the corresponding penalty under Rule 173Q(1) were sustainable.

Analysis: The shortages were found from the appellant's own statutory records and the duty relating to those shortages had already been deposited before the show cause notice. Since that duty payment was not shown to have been made under coercion, the demand to that extent could be upheld. At the same time, the penalty had to be commensurate with the limited demand sustained, and the minimum statutory penalty was considered sufficient.

Conclusion: The duty demand relating to shortages was upheld, and the penalty under Rule 173Q(1) was reduced to Rs. 5,000/-.

Issue (iii): whether the penalty on the second appellant under Rule 209A could be upheld.

Analysis: No goods were held liable to confiscation, and there was no material to show that the second appellant knowingly dealt with goods liable to confiscation under the central excise law.

Conclusion: The penalty on the second appellant under Rule 209A was not sustainable and was set aside.

Final Conclusion: The demand based on private chits was rejected, the duty on shortages already paid was sustained, the penalty on the main appellant was substantially reduced, and the connected penalty on the second appellant was annulled.

Ratio Decidendi: A demand for clandestine removal cannot rest on uncorroborated private records and a co-accused's statement alone, and penalty under Rule 209A requires proof that the person knowingly dealt with goods liable to confiscation.

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