2009 (4) TMI 722 - AT - Central Excise

Appellant not liable for penalty under Section 11AC of Central Excise Act for accounting error

The court found that the appellant's case involved a simple shortage in finished goods due to faulty accounting practices, not clandestine activities. The ... Penalty - Imposition of Issues: Detection of shortage in finished goods, imposition of duty demand, penalties under Rule 25 of Central Excise Rules and Rule 15 of Cenvat Credit Rules, enhancement of penalty under Section 11AC of Central Excise Act, 1944.Detection of Shortage in Finished Goods:The case involved a surprise visit to the factory of the appellant, where officers discovered a shortage of finished goods (MSCTD bars) compared to the daily stock register. The shortage was attributed to the appellant's faulty accounting method, where they accounted for scrap based on supplier-declared weight and production based on a manufacturing process loss without verifying the actual quantity produced. The Original Adjudicating Authority confirmed the amount to be reversed on raw materials purchased by the appellants, on which Cenvat credit was availed.Imposition of Duty Demand and Penalties:Following the discovery of the shortage, a duty demand of Rs. 62,373/- with applicable interest, penalty of Rs. 10,000/- under Rule 25 of Central Excise Rules, 2002, and a penalty of Rs. 10,000/- under Rule 15 of Cenvat Credit Rules were imposed in the Order-in-Original. Subsequently, on appeal by the Revenue, the penalty was enhanced to an amount equal to the duty under Section 11AC of the Central Excise Act, 1944.Enhancement of Penalty under Section 11AC:The appellant contended that the case was not related to clandestine manufacturing and removal, as no evidence was presented to support such claims. The Commissioner (Appeals) had enhanced the penalty based on the authorized signatory's awareness of the shortage and the reversal of Cenvat credit after departmental intervention. The appellant argued that the shortage was due to accounting discrepancies, not clandestine activities, and thus, penalty under Section 11AC was unwarranted.Judgment:After considering the submissions, the judge found the case to be one of a simple shortage in finished goods due to faulty accounting practices, similar to a precedent where no evidence of clandestine removal warranted penalty under Section 11AC. Consequently, the judge set aside the Commissioner (Appeals)'s order and allowed the appeal, emphasizing that the penalty under Section 11AC was not justified in the absence of evidence supporting clandestine activities.