Mere stock shortage does not sustain duty demand absent proof of clandestine removal or diversion.

Duty demand on alleged input shortages in a 100% EOU was not sustainable where stock verification showed both shortages and excesses, suggesting accounting discrepancies rather than clandestine removal. The inputs were tiny and issued on weighment basis, making exact tally difficult, and the shortage represented only a negligible portion of annual consumption. In the absence of evidence that the goods were cleared without duty or diverted away from manufacture of export goods, mere shortage could not justify the demand. The demand was therefore set aside in favour of the assessee.

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Issues: Whether duty demand on shortages of inputs found during stock verification in a 100% EOU was sustainable when the stock records also showed excesses and there was no evidence of clandestine removal or diversion.

Analysis: The inputs were extremely tiny and were issued on weighment basis, making exact count difficult. The stock verification revealed both shortages and excesses, indicating accounting discrepancies rather than actual unaccounted removal. The shortage value was only about 0.36% of the total materials consumed during the year. In the absence of any evidence that the short items were cleared without payment of duty or not used in the manufacture of export goods, the demand could not be sustained. The reasoning was supported by the principle that mere shortages, without a clandestine removal allegation or supporting evidence, do not by themselves justify duty demand.

Conclusion: The duty demand on the alleged shortages was not sustainable and was set aside in favour of the assessee.

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