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Issues: (i) Whether shortages detected on an earlier stock verification could be adjusted against later stock position so as to sustain confiscation and penalty for alleged excess raw material on the later date. (ii) Whether duty was payable on shortages of raw material when the excess finished goods found on the same date were reasonably co-related to such short raw material, and whether confiscation and penalty on the excess goods and related penalties could be sustained.
Issue (i): Whether shortages detected on an earlier stock verification could be adjusted against later stock position so as to sustain confiscation and penalty for alleged excess raw material on the later date.
Analysis: The earlier shortage was itself the basis on which duty was demanded by treating the recorded book balance as correct. Once that approach was adopted, the manufacturer could not again be required to rewrite the books by reducing the earlier shortage and then be visited with a later allegation of excess stock on that basis. The later verification had to be tested against the unadjusted statutory records as they stood on the relevant date.
Conclusion: The demand, confiscation and penalty founded on treating the earlier shortage as a notional adjustment against the later stock were not sustainable, and the assessee succeeded on this issue.
Issue (ii): Whether duty was payable on shortages of raw material when the excess finished goods found on the same date were reasonably co-related to such short raw material, and whether confiscation and penalty on the excess goods and related penalties could be sustained.
Analysis: Where the quantity of finished goods found in excess broadly corresponded with the quantity of raw material found short, the inference that the excess finished goods had been manufactured out of the short raw material was accepted. On that footing, separate duty demand on the short raw material was unjustified to that extent. However, the shortages of certain other inputs and finished goods remained unexplained, and the confiscation of excess goods was maintained for want of satisfactory explanation. The penalty under Section 11AC was also upheld in relation to the sustained demand.
Conclusion: The duty demand on the correlated shortage of pig iron and c.i. scull scrap was set aside, while the remaining duty demand, confiscation and penalty were sustained in part against the assessee.
Final Conclusion: The appeal of the manufacturer was partly allowed by setting aside the duty demand on the correlated raw material shortage, while the departmental appeal was dismissed and the rest of the adjudication was substantially maintained.
Ratio Decidendi: Once the Department treats the stock register as correct for demanding duty on shortage, it cannot require a retrospective adjustment of that shortage to create a later excess allegation, and where excess finished goods broadly correspond to short raw material, the raw material demand may be displaced by that correlation.
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