Shortage of raw material demand fails where diversion or non-receipt is not proved, and penalty falls with it.

A demand based on shortage of raw material cannot be sustained unless the department proves diversion, non-receipt of the goods, or another basis showing non-discharge of duty by the supplier. Here, the shortage was explained by the manner of accounting and invoice weighment, and the available records were not properly verified or investigated. In the absence of evidence of diversion or an admission by the assessee, the burden remained on the department and was not discharged, so the demand failed. As the demand did not survive, the penalty under Rule 15(2) of the Central Excise Rules also fell away.

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Issues: Whether the demand arising from shortage of raw material and the consequential penalty could be sustained in the absence of proof of diversion or non-receipt of the goods.

Analysis: The shortage was explained at the time of inspection as resulting from the manner in which the inputs were accounted for and the weighment reflected in the invoice. The explanation could have been checked from the records, but no such verification or investigation was carried out. In the absence of evidence showing diversion of the raw material, or an admission by the assessee to that effect, the burden remained on the department to establish non-receipt of the goods or non-discharge of duty by the supplier. As that burden was not discharged, the demand could not be sustained. Once the demand failed, the penalty imposed under Rule 15(2) of the Central Excise Rules did not survive.

Conclusion: The demand was unsustainable and the assessee succeeded; the penalty issue also failed with the demand.

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