Clandestine removal cannot be inferred from mere input shortage; penalty and interest fail without corroborative evidence and a proved credit period.

Penalty under Section 11AC of the Central Excise Act could not be sustained on the basis of admitted shortage of inputs alone, because clandestine removal must be supported by corroborative evidence such as statements or private records; in the absence of such proof, the penalty was held not exigible. Interest under Section 11AB was also not recoverable, since the credit had been reversed on the date of search and the period for which the credit remained availed was not established. The departmental challenge therefore failed, and the assessee retained the relief granted by the appellate authority.

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Issues: (i) Whether penalty under Section 11AC of the Central Excise Act, 1944 could be sustained on the basis of admitted shortage of inputs when there was no proof of clandestine removal. (ii) Whether interest under Section 11AB of the Central Excise Act, 1944 was recoverable when the credit had been reversed on the date of search and the month of availment of credit was not established.

Issue (i): Penalty under Section 11AC requires conduct amounting to suppression, fraud, collusion, wilful misstatement, or other analogous culpable behaviour. Mere shortage of inputs, even if admitted, does not by itself establish clandestine removal. In the absence of corroboration by statements or private records, the charge of clandestine removal could not be sustained.

Conclusion: Penalty under Section 11AC was not exigible.

Issue (ii): Interest under Section 11AB depends upon ascertainment of the period for which credit remained availed. Since the credit was reversed on the date of search and no clandestine removal was proved, the basis for computing interest was not established.

Conclusion: The demand of interest was not sustainable.

Final Conclusion: The departmental challenge to the order setting aside penalty and interest failed, and the assessee retained the relief granted by the appellate authority.

Ratio Decidendi: Clandestine removal cannot be inferred from mere shortage of inputs without corroborative evidence, and penalty or interest under the excise provisions cannot be sustained unless the requisite legal basis for such demand is established.

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