Estimated stock shortages alone do not prove clandestine removal; admitted shortages may still support a limited duty demand.

Clandestine removal demands cannot be sustained on estimated or hypothetical stock taking alone; the note states that, without corroborative evidence such as transit seizure, excess raw material, excess power consumption, or other positive material, alleged shortages are insufficient to prove duty liability. It also records that inventories based on different methods, especially where one includes unsorted production and the other only sorted finished goods, may not provide a reliable basis for demand. By contrast, an admitted shortage of 6.750 MT of Silico Manganese in packed condition was treated as a separate, confirmable shortage and was liable to duty if not already accounted for in stock records.

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Issues: (i) Whether the stock taking and stock valuation adopted by the revenue authorities could sustain a finding of clandestine removal and duty demand in respect of the alleged shortages of finished goods; (ii) Whether the admitted shortage of 6.750 MT of Silico Manganese in packed condition was liable to be upheld and duty demanded thereon.

Issue (i): Whether the stock taking and stock valuation adopted by the revenue authorities could sustain a finding of clandestine removal and duty demand in respect of the alleged shortages of finished goods.

Analysis: The stock verification done by the departmental authorities was found to be based on estimation and not on reliable physical weighment. The method adopted by the Income Tax authorities was also not shown to have been disclosed or tested by cross-examination, and the inventories differed materially in approach because one included unsorted production while the other dealt only with sorted finished goods. The record also showed that the heaps of ferro alloys were irregular and heterogeneous, making weight determination by volume uncertain. In the absence of corroborative evidence such as transit seizure, excess raw material, excess power consumption, or other positive material, the alleged shortages could not be treated as proof of clandestine removal. The demand founded only on presumptions and estimated stock figures was therefore unsustainable.

Conclusion: The finding of clandestine removal based on the bulk of the alleged shortages was not sustainable and the demand and penalties were set aside to that extent, in favour of the assessee.

Issue (ii): Whether the admitted shortage of 6.750 MT of Silico Manganese in packed condition was liable to be upheld and duty demanded thereon.

Analysis: The assessee had ed the shortage of 6.750 MT of Silico Manganese both in the appeal and in the reply to the show cause notice. That quantity stood on a different footing from the disputed estimated shortages and was required to be accounted for in the daily stock records. To that limited extent, the adjudication required confirmation.

Conclusion: The shortage of 6.750 MT of Silico Manganese was upheld and was liable to duty if not already accounted for, against the assessee.

Final Conclusion: The appeal succeeded substantially, with the clandestine removal demand and connected penalties being set aside except for the limited confirmed shortage of 6.750 MT of Silico Manganese, which was upheld.

Ratio Decidendi: A demand for clandestine removal cannot rest on estimated or hypothetical stock taking alone and must be supported by tangible corroborative evidence; an admitted shortage may, however, still be upheld to the extent specifically ed.

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