Unretracted admissions of clandestine removal sustained penalty, with reduced relief where duty was paid before notice.

Unretracted admissions of clandestine clearance, coupled with unexplained shortage in RG-1, were sufficient to sustain penalty under Section 11AC of the Central Excise Act, even though production entries and RG-23A balances were relied on by the assessee. Because duty on the short-found goods had been paid before issuance of the show cause notice, the assessee was entitled to the reduced penalty of 25% under the proviso to Section 11AC. Penalty under Rule 26 of the Central Excise Rules was also upheld against the partner who made the incriminating statements, as the admissions established knowledge of removal without duty and without invoices.

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Issues: (i) Whether penalty under Section 11AC of the Central Excise Act, 1944 was attracted on shortage of finished goods recorded in RG-1, where the shortage was explained by unretracted statements admitting clearance without payment of duty and without invoices; (ii) Whether the appellant was entitled to the benefit of the proviso to Section 11AC reducing the penalty to 25% where duty had been paid before issuance of the show cause notice; (iii) Whether penalty under Rule 26 of the Central Excise Rules, 2002 was sustainable against the partner who had given the incriminating statements.

Issue (i): Whether penalty under Section 11AC of the Central Excise Act, 1944 was attracted on shortage of finished goods recorded in RG-1, where the shortage was explained by unretracted statements admitting clearance without payment of duty and without invoices.

Analysis: The shortage of finished goods vis-a -vis RG-1 balance was not disputed. The partner's statements recorded on the date of stock taking and later were not retracted, and they admitted that the goods found short had been removed without payment of duty and sold in cash without invoices. The fact that production had been entered in RG-1 or that there was balance in RG-23A did not negate the inference of clandestine removal once the shortage remained unexplained. The finding of the lower authority that clandestine removal was not sustainable was treated as inconsistent with its own reasoning and was not accepted.

Conclusion: Penalty under Section 11AC was held to be attracted and sustainable against the appellant.

Issue (ii): Whether the appellant was entitled to the benefit of the proviso to Section 11AC reducing the penalty to 25% where duty had been paid before issuance of the show cause notice.

Analysis: It was undisputed that the duty on the goods found short had been paid before issuance of the show cause notice. Since no option for reduced penalty under the proviso to Section 11AC had been given in the adjudication order, the statutory benefit could not be denied. The pre-notice payment of duty brought the case within the remedial scope of the proviso.

Conclusion: The appellant was held entitled to the reduced penalty of 25% under the proviso to Section 11AC.

Issue (iii): Whether penalty under Rule 26 of the Central Excise Rules, 2002 was sustainable against the partner who had given the incriminating statements.

Analysis: The partner's statements admitted removal of goods without payment of duty and sale in cash without invoices, and those statements were not retracted. On that basis, it was concluded that he had dealt with excisable goods which he knew or had reason to believe were liable for confiscation. The requisite ingredients for Rule 26 were therefore satisfied.

Conclusion: Penalty under Rule 26 of the Central Excise Rules, 2002 was upheld against the partner.

Final Conclusion: The liability to penalty was sustained, but the quantum of penalty on the appellant firm was reduced to 25% of the duty demand while the penalty on the partner remained undisturbed.

Ratio Decidendi: Unretracted admissions of clandestine clearance without duty and without invoices can sustain penalty under Section 11AC and Rule 26, and where duty has been paid before the show cause notice, the assessee is entitled to the reduced penalty prescribed by the proviso to Section 11AC.

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