Extended limitation in clandestine removal cases fails without specific allegations of collusion by supervising departmental officers.

In alleged clandestine removal from a cigarette factory under physical control of departmental officers, the extended period of limitation could not be invoked unless the department specifically alleged and proved collusion or supervisory failure by the officers responsible for the prescribed checks. Because the notice did not proceed against the supervising officers and the record showed they were following the Cigarette Manual and Standing Instructions, the suppression basis for extended limitation failed. On that reasoning, the show cause notice and demand were treated as unsustainable, and the duty demand, penalties, confiscation and interest order were set aside.

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Issues: (i) Whether the demand of duty could be sustained by invoking the extended period of limitation in a case where the factory was under physical control of departmental officers and no collusion with those officers was alleged. (ii) Whether the show cause notice and demand were vitiated for want of allegations against the departmental officers who were in charge of the factory.

Issue (i): Whether the demand of duty could be sustained by invoking the extended period of limitation in a case where the factory was under physical control of departmental officers and no collusion with those officers was alleged.

Analysis: The relevant period related to manufacture of cigarettes in a unit working under physical control, where the officers were required to follow the Cigarette Manual and Standing Instructions. In such a regime, suppression for the purpose of the extended period could not be inferred merely from private records or alleged clandestine removals unless the department also established collusion or failure of the supervising officers to perform their duties. The record showed that the officers posted in the factory were cross-examined and stated that they had followed the prescribed instructions. The department did not allege collusion against the officers and did not show that the statutory supervisory system had been ignored.

Conclusion: The invocation of the extended period of limitation was not sustainable and the duty demand could not be upheld on that basis.

Issue (ii): Whether the show cause notice and demand were vitiated for want of allegations against the departmental officers who were in charge of the factory.

Analysis: Where the alleged evasion is said to have occurred in a factory under departmental physical control, any charge of suppression or clandestine clearance that seeks to extend limitation must be supported by a corresponding allegation of collusion or complicity on the part of the supervising officers, particularly when the officers were responsible for the mandated checks under the special cigarette control regime. The notice in the case did not proceed against the departmental officers, although their role was integral to the control system. That omission created a fatal defect in the foundation of the demand.

Conclusion: The show cause notice and the consequent demand were unsustainable.

Final Conclusion: The duty demand, penalties, confiscation and interest order were set aside, the assessee's appeals succeeded, and the Revenue's appeal failed.

Ratio Decidendi: In a case of alleged clandestine removal from a factory under physical control, the extended period of limitation cannot be invoked without a specific allegation and proof of collusion involving the supervising departmental officers.

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