Clandestine removal demands cogent evidence under physical excise control; unsupported duty computation and penalty were unsustainable.

Allegations of clandestine production and removal of excisable goods under physical excise control required cogent proof, and the Department's burden was heavy because the factory was under continuous departmental scrutiny. The evidence was found insufficient: there was no seizure of the alleged goods, no buyer or payment trail evidence, and the duty computation was treated as arbitrary, including an unsupported annualisation method. With the primary allegation not proved to the required standard, the consequential challenge to the exemption notification and recomputation of duty also failed. The duty demand and penalty were therefore not sustainable, and the impugned order was set aside with relief to the assessee.

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Issues: Whether the Department had established clandestine production and removal of excisable goods without accountal and without payment of duty so as to sustain the duty demand and penalty, and whether the exemption notification and consequential re-computation of duty could survive if such clandestine removals were not proved.

Analysis: The factory was under the physical control system throughout the relevant period, with a Central Excise Inspector required to scrutinise production, assess clearances, verify statutory records, and countersign gate passes. In such a regime, an allegation of clandestine manufacture and removal over a long span of years required strong proof, and the burden on the Department was correspondingly heavy. The material relied upon was found insufficient: there was no seizure of the alleged goods, no supporting evidence from buyers or payment trails, and the method of computation contained arbitrariness, including doubling the production of one half-year to estimate the whole year. The acceptance of the assessee's plea of double accounting in part also indicated that the case needed fuller investigation. Since the primary allegation of clandestine removal was not established to the requisite standard, the consequential objection regarding inapplicability of the exemption notification also could not stand.

Conclusion: The demand of duty and the penalty were not sustainable, and the appeal succeeded in favour of the appellants.

Final Conclusion: The impugned order was set aside with consequential relief because the Department failed to prove the alleged clandestine removals on the evidence available.

Ratio Decidendi: Where an assessee operates under physical excise control, allegations of clandestine production and removal must be supported by cogent evidence, and in the absence of such proof the demand and any consequential duty re-computation cannot be sustained.

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