Normal shrinkage in job-work fabrics defeated duty demand and related penalty on alleged diversion.

Where fabrics sent for job work were received back with only a small shortfall, the record showed that the shortage was attributable to normal shrinkage during processing rather than diversion of goods. The tribunal noted that the shortfall was about 3% and was consistent with the reported shrinkage range for similar fabrics, so duty demand on the alleged shortage was not sustainable. Because the penalty was based on the same failed demand and the exemption benefit had not been denied on the facts, the penalty also could not survive and was set aside.

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Issues: (i) Whether duty could be demanded on the quantity short received back from job work on the ground that the shortage represented diversion of fabrics, and (ii) whether penalty could be sustained for the alleged contravention of the exemption notifications and the connected provisions.

Issue (i): Whether duty could be demanded on the quantity short received back from job work on the ground that the shortage represented diversion of fabrics.

Analysis: The shortage was only about 3% of the total quantity sent for job work. The record included a Textile Committee report showing that shrinkage in similar fabrics ranged from 2.01% to 8.49%, and the departmental verification also recorded that the shortage occurred due to shrinkage during job work. On these facts, the shortage was consistent with normal processing loss and did not indicate any illegal diversion of goods sent under the job-work challans.

Conclusion: Duty demand on the alleged shortage was not sustainable, and the assessee succeeded on this issue.

Issue (ii): Whether penalty could be sustained for the alleged contravention of the exemption notifications and the connected provisions.

Analysis: Penalty was founded on the same demand that failed on merits. As to the notifications, the benefit had been allowed by the adjudicating authority, which showed that the alleged contravention was not treated as serious enough to justify denial of exemption. In these circumstances, the basis for penalty under the penal provision did not survive.

Conclusion: The penalty could not be sustained and was set aside in favour of the assessee.

Final Conclusion: The impugned order was set aside in full, and the appeal was allowed.

Ratio Decidendi: Where the record shows that a shortfall in fabrics returned after job work is attributable to normal shrinkage within a reasonable range, no illegal diversion can be inferred and duty cannot be demanded on the shortfall; consequential penalty also fails.

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