Internal stock discrepancies alone cannot sustain excise duty or Section 11AC penalty without clear proof of removal or clandestine clearance.

Excise duty demands based only on internal stock discrepancies cannot be sustained unless the record contains a clear, reasoned finding that goods were actually removed from the factory or clandestinely cleared. The High Court noted that the Tribunal had not properly evaluated the assessee's explanation on manufacturing process, work-in-progress and stock-taking methodology, and had not assessed the evidence with sufficient clarity. Penalty under Section 11AC of the Central Excise Act also requires a proper factual foundation of fraudulent suppression or clandestine removal; absent that, penalty cannot stand. The Tribunal's order was set aside and the matter remanded for fresh adjudication on duty liability and penalty.

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Issues: (i) Whether the demand of excise duty could be sustained on shortages and excesses reflected in internal stock records without a clear finding of removal of goods from the factory; (ii) Whether penalty under Section 11AC of the Central Excise Act, 1944 could be imposed without a finding of fraudulent or clandestine removal and without proper consideration of the evidence.

Issue (i): Whether the demand of excise duty could be sustained on shortages and excesses reflected in internal stock records without a clear finding of removal of goods from the factory.

Analysis: The demand was based on discrepancies noticed in internal audit and stock records. However, the Tribunal had not properly appreciated the appellant's explanation regarding the manufacturing process, work-in-progress and stock-taking methodology. There was also no clear finding on whether the goods had actually been removed from the premises, which was necessary for sustaining the duty demand on the facts recorded.

Conclusion: The duty demand could not be finally upheld on the existing findings and required fresh consideration.

Issue (ii): Whether penalty under Section 11AC of the Central Excise Act, 1944 could be imposed without a finding of fraudulent or clandestine removal and without proper consideration of the evidence.

Analysis: Penalty under Section 11AC required a proper factual foundation. The Tribunal had not recorded cogent reasons showing fraudulent suppression or clandestine removal, and the explanation offered by the appellant was not examined in its correct perspective. The evidentiary material on record, including the internal audit figures and statements of officers, had not been assessed with sufficient clarity for fastening penalty.

Conclusion: The penalty could not be sustained on the present findings and had to be reconsidered.

Final Conclusion: The order of the Tribunal was set aside and the matters were remanded for fresh adjudication on duty liability and penalty after hearing both sides.

Ratio Decidendi: Excise duty and penalty cannot be sustained merely on internal stock discrepancies unless the authority records a clear, reasoned finding of removal, suppression, or clandestine clearance based on proper appreciation of evidence.

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