Stock shortage duty demand sustained, but penalty failed for lack of fraud or suppression under Section 11AC.

Duty demand arising from shortage detected during stock verification was sustained where the assessee's representative admitted the shortage, agreed to pay duty, and the amount was deposited before the show cause notice; the later objection to the stock-taking method was not accepted, so appropriation of the deposited amount was held proper. Penalty under Rule 25 read with Section 11AC was deleted because the record did not establish fraud, collusion, wilful misstatement, suppression of facts, or intent to evade duty. The matter therefore resulted in sustenance of the duty demand but rejection of the mandatory penalty.

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Issues: (i) Whether the duty demand based on shortage detected during stock verification and the appropriation of the amount already deposited were sustainable; (ii) Whether penalty under Rule 25 of the Central Excise Rules, 2001/2003 read with Section 11AC of the Central Excise Act, 1944 was justified.

Issue (i): Whether the duty demand based on shortage detected during stock verification and the appropriation of the amount already deposited were sustainable.

Analysis: The shortage was detected by Central Excise officers during stock verification, and the representative of the assessee admitted the shortage and agreed to pay duty. The duty was deposited before issuance of the show cause notice, and the assessee did not dispute the stock verification method or the deposit until after the notice was issued. In these circumstances, the later objection to the stock taking methodology was not accepted, and the appropriation of the amount by the adjudicating authority was held to be proper.

Conclusion: The duty demand and appropriation were upheld.

Issue (ii): Whether penalty under Rule 25 of the Central Excise Rules, 2001/2003 read with Section 11AC of the Central Excise Act, 1944 was justified.

Analysis: Penalty under Section 11AC requires fraud, collusion, wilful mis-statement, suppression of facts, or contravention with intent to evade duty. The shortage in this case was noticed during stock verification, and no material was produced to establish the necessary ingredients for invoking Section 11AC. The facts did not justify a mandatory penalty on the record presented.

Conclusion: The penalty was set aside.

Final Conclusion: The duty demand was sustained, but the penalty was deleted, resulting in a partial success for the Revenue's appeal.

Ratio Decidendi: A penalty under Section 11AC cannot be sustained unless the statutory ingredients of fraud, collusion, wilful mis-statement, suppression of facts, or intent to evade duty are established on the evidence.

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