Theoretical production norms based on furnace oil consumption cannot sustain duty demand without corroborative evidence of clandestine removal.

Duty demand based on furnace oil consumption and an assumed production norm was rejected because the record showed damage to the furnace, repairs, changed consumption patterns, and no independent evidence of clandestine manufacture or removal. The corrigendum demand was also held time-barred, since the fuel figures were already reflected in statutory records and monthly returns, leaving no basis for invoking the extended period of limitation. The assessee's penalty was reduced to the statutorily permissible level after payment of admitted duty, while personal penalties on the other noticees were set aside for want of proof of confiscation-related liability.

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Issues: (i) Whether the demand of duty raised on the basis of furnace oil consumption and assumed production could be sustained on merits; (ii) Whether the extended period of limitation could be invoked for the demand raised in the corrigendum; (iii) Whether the penalty on the assessee and the penalties on the other noticees were sustainable.

Issue (i): Whether the demand of duty raised on the basis of furnace oil consumption and assumed production could be sustained on merits.

Analysis: The demand in the corrigendum was founded on a theoretical norm that a fixed quantity of furnace oil would yield a fixed quantity of finished goods. The record showed that the furnace had suffered damage, repairs were carried out, consumption patterns had changed, and the assessee had produced corroborative material to explain the higher fuel consumption. The demand was not supported by independent evidence establishing clandestine manufacture and removal for the quantified quantity. A demand cannot be confirmed merely by extrapolating from furnace oil consumption without sufficient corroboration.

Conclusion: The demand based on furnace oil consumption was not sustainable and was set aside.

Issue (ii): Whether the extended period of limitation could be invoked for the demand raised in the corrigendum.

Analysis: The furnace oil figures relied upon by the department were taken from the assessee's statutory records and monthly returns. The basis for the demand was therefore available from the records themselves, and no new material was shown to justify invocation of the extended period. On that footing, the demand suffered from time-bar as well as want of merit.

Conclusion: The demand raised in the corrigendum was barred by limitation.

Issue (iii): Whether the penalty on the assessee and the penalties on the other noticees were sustainable.

Analysis: The assessee had already discharged the admitted duty liability before the impugned order, warranting reduction of the penalty to the statutorily permissible level. As regards the other noticees, the record did not establish liability to confiscation or actual confiscation of goods, and the personal penalties under Rule 26 could not be sustained.

Conclusion: The penalty on the assessee was reduced to Rs. 3 lakhs and the penalties on the other noticees were set aside.

Final Conclusion: The duty demand based on furnace oil consumption failed, the admitted duty demand was maintained, the assessee's penalty was curtailed, and the connected penalties on the other appellants were annulled, resulting in a partial success for the assessee and full relief to the remaining appellants.

Ratio Decidendi: A demand of central excise duty cannot be sustained on a purely theoretical production formula based on fuel consumption unless supported by corroborative evidence of clandestine manufacture and removal, and a demand founded on the assessee's own statutory records cannot ordinarily justify invocation of the extended period of limitation.

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