Shortage-based duty demand sustained, but penalty under Section 11AC deleted and Rule 173Q penalty reduced for rule breach.

A shortage of finished goods accepted during stock verification can sustain a duty demand where the later explanation is unverified and unsupported at the time of inspection. The appellant's claim that the goods were in the finishing room and later cleared on duty payment was not accepted, so the duty liability was upheld. Penalty under Section 11AC was held unwarranted because the demand was founded on the appellant's own statutory records rather than extraneous material, but penalty under Rule 173Q remained sustainable for contravention of the rules and was reduced to Rs. 20,000 in the facts.

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Issues: (i) Whether the duty demand raised on the basis of shortage of finished goods recorded during stock verification was sustainable. (ii) Whether the penalties imposed under Section 11AC of the Central Excise Act, 1944 and Rule 173Q of the Central Excise Rules, 1944 were justified.

Issue (i): Whether the duty demand raised on the basis of shortage of finished goods recorded during stock verification was sustainable.

Analysis: The shortage was detected during the visit of central excise officers and the representative of the appellant accepted the shortage. The explanation that the goods were lying in the finishing room and were later cleared on payment of duty was not supported by verification at the relevant time. The appellant did not produce the goods for inspection when the officers visited, and the explanation raised later was not found acceptable.

Conclusion: The duty demand was upheld.

Issue (ii): Whether the penalties imposed under Section 11AC of the Central Excise Act, 1944 and Rule 173Q of the Central Excise Rules, 1944 were justified.

Analysis: Since the duty demand was based on the appellant's own statutory records and not on extraneous material, the penalty under Section 11AC was held to be unwarranted. At the same time, the shortage constituted contravention of rules, making a penalty under Rule 173Q sustainable, though the quantum required moderation in the facts of the case.

Conclusion: The penalty under Section 11AC was set aside and the penalty under Rule 173Q was sustained with reduction to Rs. 20,000.

Final Conclusion: The duty liability remained intact, but the penalty under Section 11AC was deleted and the Rule 173Q penalty was reduced, resulting in partial relief to the appellant.

Ratio Decidendi: A shortage of finished goods accepted at the time of stock verification can sustain duty demand when the contrary explanation is unverified, but penalty must still be tested separately on the basis of the nature of evidence and the specific rule invoked.

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