Clandestine removal needs reliable stock verification; eye estimation alone cannot prove shortage, though inadmissible credit may still face reduced penalty.

A charge of clandestine removal cannot be sustained on stock shortage found only by eye estimation, without actual weighment, a supporting worksheet, or other reliable corroboration; the confiscation and related penalty were therefore set aside. The inadmissible Modvat credit on LDO was not disputed and the demand to that extent was upheld, but the appellant's reversal of the credit justified interference with the quantum of penalty, which was reduced. The decision confirms that unscientific stock verification is insufficient to prove clandestine removal, while admitted inadmissible credit continues to attract penal consequences subject to reduction on the facts.

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Issues: (i) Whether the allegation of clandestine removal based on stock shortage and the consequential confiscation and penalty could be sustained when the stock was taken by eye estimation; (ii) Whether the penalty for inadmissible Modvat credit on LDO and capital goods was liable to be sustained in full.

Issue (i): Whether the allegation of clandestine removal based on stock shortage and the consequential confiscation and penalty could be sustained when the stock was taken by eye estimation.

Analysis: The stock verification recorded in the panchnama showed that the alleged quantity of finished goods and inputs was arrived at by counting bundles and by eye estimation, without actual weighment of representative bundles or a supporting worksheet. Such a method was held to be unscientific and incapable of proving the exact shortage. In the absence of conclusive proof of shortage, the presumption of clandestine removal could not stand.

Conclusion: The allegation of clandestine removal, confiscation of excess stock of inputs, and the related penalty were not sustainable and were set aside.

Issue (ii): Whether the penalty for inadmissible Modvat credit on LDO and capital goods was liable to be sustained in full.

Analysis: The amount of inadmissible credit on LDO was not disputed, and the demand to that extent was upheld. However, the appellant had reversed the inadmissible credit once pointed out, and the circumstances justified interference only with the quantum of penalty. The violation attracted penal consequences, but the original penalty required reduction.

Conclusion: The demand of inadmissible credit was upheld, but the penalty was reduced to Rs. 25,000/-.

Final Conclusion: The appeal succeeded on the issue of clandestine removal and related confiscation and penalty, while the demand of inadmissible credit was maintained and the penalty was reduced.

Ratio Decidendi: A charge of clandestine removal cannot be sustained on the basis of unscientific stock estimation or eye estimation in the absence of actual physical weighment and other reliable corroboration.

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