Stock shortage supports duty demand, but absent proof of clandestine removal the penalty may be reduced.

Duty on shortage of finished goods detected during stock verification may be sustained where the assessee cannot show lawful removal or proper accounting of the missing stock, and an admission of shortage supports the demand. However, where the discrepancy is found on physical verification and there is no clear proof of clandestine removal, the higher penalty under Section 11AC or Rule 25 need not be imposed in full, and a reduced penalty may be appropriate. On these facts, the duty demand was maintained but the penalty was substantially reduced.

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Issues: (i) Whether duty was payable on the shortage of finished goods detected during stock verification. (ii) Whether penalty under Section 11AC of the Central Excise Act, 1944 or Rule 25 of the Central Excise Rules, 2002 was warranted, and if so, to what extent.

Issue (i): Whether duty was payable on the shortage of finished goods detected during stock verification.

Analysis: The shortage was noticed during physical verification by Central Excise officers, and one of the appellant's representatives had admitted the shortage. The explanation offered for the missing quantity was not supported by evidence showing lawful removal or proper accounting of the finished goods from the bonded store room. In the absence of such proof, the demand of duty on the shortage was sustained.

Conclusion: Duty demand on the shortage of finished goods was upheld against the assessee.

Issue (ii): Whether penalty under Section 11AC of the Central Excise Act, 1944 or Rule 25 of the Central Excise Rules, 2002 was warranted, and if so, to what extent.

Analysis: The shortage arose from stock verification rather than from proof of clandestine removal. On that basis, the higher penalty under Section 11AC or Rule 25 was not justified in full, although the shortage still reflected a contravention of the Act and the Rules. The penalty was therefore moderated.

Conclusion: Full penalty was not sustained and the penalty was reduced to Rs. 10,000.

Final Conclusion: The duty demand was maintained, but the penalty was substantially reduced in view of the nature of the discrepancy detected during stock verification.

Ratio Decidendi: Where shortage of finished goods is detected during stock verification and the assessee fails to substantiate lawful removal or accounting, duty demand can be sustained; however, absent clear proof of clandestine removal, a reduced penalty may be appropriate instead of the full statutory penalty.

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