Clandestine removal not proved where stock shortages were treated as accounting discrepancies and duty demand was set aside.

Shortages of finished goods, inputs and packing materials were examined for whether they evidenced clandestine removal or merely accounting discrepancies. The stock differences were assessed against the assessee's manufacturing activity, the volume of products handled, the difficulty of maintaining accounts for bulk and packed goods, and the presence of both shortages and excesses. A mere admission at stock verification that physical stock differed from book stock was treated as insufficient on its own to prove clandestine removal. The discrepancy was therefore attributed to improper accounting rather than removal without duty payment, and the duty demand and penalty were set aside.

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Issues: Whether duty and penalty could be sustained on shortages of finished goods, inputs and packing materials on the footing of clandestine removal, or whether the discrepancies were attributable to improper accounting.

Analysis: The shortages were examined in the light of the nature of the assessee's manufacturing activity, the large number of products handled, the accounting difficulties in relation to bulk and packed goods, and the fact that both shortages and excesses were found. The mere admission at the time of stock verification that there was a difference between accounted stock and physical stock was treated as insufficient by itself to establish that the accounted stock was correct or that there had been clandestine removal. On the overall facts, the discrepancy was viewed as arising from accounting errors rather than removal without duty payment. The demand based on shortage was therefore considered inappropriate on these facts, though proper maintenance of accounts was emphasised.

Conclusion: The duty demand and the penalty were set aside in favour of the assessee.

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