Penalty for shortage of finished goods survives pre-notice duty payment, while employee penalty needs proof of personal involvement.

Penalty under Section 11AC of the Central Excise Act remained exigible where shortage of finished goods was admitted and the duty, together with 25% of the duty amount, had been deposited before the show cause notice; such pre-notice payment did not by itself extinguish the statutory penalty liability. The deletion of penalty on the company was therefore unsustainable and was set aside. By contrast, penalty on an employee under Rule 26 of the Central Excise Rules was not upheld in the absence of evidence of his independent involvement in the alleged evasion.

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Issues: (i) whether penalty under Section 11AC of the Central Excise Act, 1944 was exigible on the respondent company despite payment of duty and 25% of the duty amount before issuance of the show cause notice; (ii) whether penalty on the company for shortage of finished goods could be deleted on the ground that clandestine removal was not established by corroborative evidence; and (iii) whether penalty on the employee under Rule 26 of the Central Excise Rules, 2002 was sustainable.

Issue (i): whether penalty under Section 11AC of the Central Excise Act, 1944 was exigible on the respondent company despite payment of duty and 25% of the duty amount before issuance of the show cause notice.

Analysis: The duty liability on the shortage of finished goods was not in dispute, and the respondent had deposited the duty along with 25% of the duty amount before the show cause notice. The order noted that the lower appellate authority had relied on earlier precedent to confirm the duty and 25% penalty, but it had then proceeded to hold that no further penalty was imposable on the company. That view was found inconsistent with confirmation of duty and penalty already sustained. The absence of a satisfactory explanation for the shortage and the reversal of the earlier Tribunal view in Machino Montell supported continuation of penalty.

Conclusion: Penalty under Section 11AC remained exigible against the respondent company, and the relief deleting further penalty on the company was set aside.

Issue (ii): whether penalty on the company for shortage of finished goods could be deleted on the ground that clandestine removal was not established by corroborative evidence.

Analysis: Shortage of finished goods was admitted, and the facts did not justify treating the shortage as innocuous merely because a separate corroborative chain was not discussed. The order held that the finding of no penalty on the company could not stand when the duty demand and statutory penalty component had already been upheld. The explanation of high burning loss was not accepted as sufficient to neutralize the shortage-based demand and penalty.

Conclusion: The deletion of penalty on the company was not sustainable and was set aside.

Issue (iii): whether penalty on the employee under Rule 26 of the Central Excise Rules, 2002 was sustainable.

Analysis: The record showed no evidence of the employee's independent involvement in the alleged evasion, and he was only an employee of the company. In the absence of material showing personal participation warranting penal action, interference with the appellate relief was not justified.

Conclusion: Penalty on the employee was not disturbed.

Final Conclusion: The order was modified to sustain the company's penalty while leaving intact the deletion of penalty on the employee, resulting in only partial success for the Revenue.

Ratio Decidendi: Where duty evasion is established in respect of shortage of finished goods and the statutory ingredients for penalty are satisfied, pre-show-cause deposit of duty and part penalty does not by itself extinguish liability to penalty on the assessee; separate penalty on an employee requires evidence of personal involvement.

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