Excise demands based on stock calculations alone fail without corroborative evidence of excisable goods, diversion, or clandestine removal.

Excise demands and confiscation cannot rest on theoretical stock reconciliation alone where the manufacturing process involves open-yard fabrication, mixed scrap and work-in-progress, and no clear identification of excisable goods is made. On that basis, confiscation of alleged excess work-in-progress, duty demands for alleged shortages, and denial of Cenvat credit were held unsustainable in the absence of corroborative evidence of diversion or clandestine removal. Input services used to construct a labour dormitory or rest facility within factory premises were treated as having sufficient nexus with business activity, so credit was admissible. A demand relating to alleged clearance of M.S. plates, and consequential penalties, also failed for lack of supporting evidence.

---

---

Issues: (i) Whether confiscation of alleged excess work-in-progress was sustainable in the absence of a clear finding that the goods were excisable and properly identified; (ii) whether denial of Cenvat credit and duty demands based on alleged shortage of input materials and scrap were justified on the basis of stock calculations alone; (iii) whether Cenvat credit was admissible on input services used for construction of labour dormitory/rest facility within the factory premises; and (iv) whether the demand relating to M.S. plates allegedly cleared to other units and the consequential penalties could be sustained without corroborative evidence.

Issue (i): Whether confiscation of alleged excess work-in-progress was sustainable in the absence of a clear finding that the goods were excisable and properly identified;

Analysis: Rule 25 of the Central Excise Rules, 2002 applies only to excisable goods. The alleged excess was treated as work-in-progress without identifying its nature, tariff classification, or whether it had attained the character of excisable goods. The manufacturing activity involved open-yard fabrication with continuous generation and inter-mixture of scrap and work-in-progress, making a precise segregation of scrap and WIP unrealistic. The finding of excess was based on arithmetic stock reconstruction rather than physical verification and did not properly account for the nature of the process.

Conclusion: The confiscation of the alleged excess work-in-progress was not sustainable.

Issue (ii): Whether denial of Cenvat credit and duty demands based on alleged shortage of input materials and scrap were justified on the basis of stock calculations alone;

Analysis: The shortages were worked out largely by theoretical comparison of opening balances, receipts, dispatches, and scrap declarations, without adequate appreciation of the appellant's fabrication process, packing/support materials, rolling margin, sectional weight method, and consumables. The record did not establish diversion or clandestine removal by corroborative evidence. In an industry of this nature, minor weight differences and stock variation could reasonably arise from use of inputs in packing, support, and manufacturing losses. Mere arithmetical shortage was insufficient to sustain denial of credit or duty demand.

Conclusion: The demand of duty and denial of Cenvat credit on the alleged shortages were not sustainable.

Issue (iii): Whether Cenvat credit was admissible on input services used for construction of labour dormitory/rest facility within the factory premises;

Analysis: The labour facility was located within the factory premises and was intended to support the business and manufacturing operations. Services used for creating such an internal welfare facility had a sufficient nexus with the business activity. The Tribunal treated such construction-related input services as eligible for credit in similar situations.

Conclusion: The Cenvat credit on the construction service for the labour facility was admissible.

Issue (iv): Whether the demand relating to M.S. plates allegedly cleared to other units and the consequential penalties could be sustained without corroborative evidence;

Analysis: The demand was founded on a general statement and an internal worksheet, but there was no corroboration regarding actual clearance, destination, transport, or identifiable consignments. In the absence of supporting evidence, the assumption of removal could not be upheld. Once the substantive demands failed, the consequential penalties also lacked foundation.

Conclusion: The demand relating to alleged clearance of M.S. plates and the penalties were not sustainable.

Final Conclusion: The appeals succeeded to the extent that the impugned demands, confiscation, and penalties were set aside except for the undisputed and already paid disallowance relating to TMT bars used for civil construction.

Ratio Decidendi: A demand or confiscation under excise law cannot rest on theoretical stock reconciliation alone where the assessee's manufacturing process explains variations and no corroborative evidence of excisable goods, diversion, or clandestine removal is produced.

---