Physical shortage of finished goods sustained duty demand, while reduced penalty applied after statutory payment conditions were met.

Physical verification of finished goods, recorded in the panchnama and admitted by the factory manager, was treated as reliable evidence of shortage rather than a mere eye estimation. The unexplained shortage was taken to support a finding of removal of goods without payment of duty, so the duty demand was sustained. The reduced-penalty benefit was available because the duty had been paid before the show-cause notice and 25% of the penalty was paid within the prescribed time after adjudication, so the penalty was confined to 25% of the duty amount.

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Issues: (i) Whether the shortage of finished goods found on physical verification could be treated as a mere case of eye estimation and whether the duty demand based on such shortage was sustainable; (ii) whether the assessee was entitled to reduction of penalty to 25% of the duty amount.

Issue (i): Whether the shortage of finished goods found on physical verification could be treated as a mere case of eye estimation and whether the duty demand based on such shortage was sustainable.

Analysis: The stock verification was conducted by officers in the factory premises and the shortage was recorded in numbers in the panchnama. The factory manager also admitted the shortage in his statement recorded during investigation. On that basis, the plea that the shortage resulted from eye estimation was rejected. The unexplained shortage supported the conclusion that the goods had been removed without payment of duty.

Conclusion: The duty demand was upheld against the assessee.

Issue (ii): Whether the assessee was entitled to reduction of penalty to 25% of the duty amount.

Analysis: Since the duty had been paid before issuance of the show-cause notice and 25% of the penalty had been paid within the stipulated period after the adjudication order, the conditions for the reduced penalty benefit were satisfied.

Conclusion: The penalty was reduced to 25% of the duty amount in favour of the assessee.

Final Conclusion: The demand of duty was sustained, while the penalty was modified downward to the statutory reduced amount, resulting in only partial relief to the assessee.

Ratio Decidendi: A shortage established by physical verification and admitted by the factory representative can sustain duty demand as unexplained removal, and statutory reduced-penalty benefit applies when the prescribed payment conditions are fulfilled.

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