Common-pool inventory needs net source-wise verification before duty demand; penalties fail without proof of clandestine removal.

When duty-paid and duty-free inputs were stored in a common pool, alleged diversion of duty-free soda ash could not be quantified merely from a stock statement. The tribunal held that the demand had to be worked out by a net source-wise determination covering all receipts and removals, with an opportunity to produce supporting records, and remanded the matter for fresh quantification of any duty-free quantity actually removed. It also held that penalties on the assessee and its General Manager were unsustainable because the clearances were reflected in invoices, clandestine removal was not shown, export obligation under the advance authorisation scheme had been met, and mens rea for penal action was not established.

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Issues: (i) Whether the quantity of duty-free soda ash allegedly removed from the factory could be determined on the basis of the stock statement without considering the merged receipts from different sources; (ii) whether the penalties imposed on the appellant and its General Manager were sustainable.

Issue (i): Whether the quantity of duty-free soda ash allegedly removed from the factory could be determined on the basis of the stock statement without considering the merged receipts from different sources.

Analysis: The raw material was received both on duty payment and under advance licence or advance authorisation, and additional quantities were also procured locally. Since all the soda ash was stored together, the source-wise identity of the material removed could not be mechanically inferred from the stock statement alone. The basis of demand required a net working after taking into account all receipts and removals, and the assessee was entitled to place further documentary evidence to establish the actual quantity, if any, cleared from the duty-free stream.

Conclusion: The quantification of the alleged removal could not be sustained on the existing material and the matter was rightly remanded for de novo determination of the net duty-free quantity, if any, removed.

Issue (ii): Whether the penalties imposed on the appellant and its General Manager were sustainable.

Analysis: The clearances were made under invoices and the record did not disclose clandestine removal. The export obligation under the advance authorisation scheme had been fulfilled. In these circumstances, though differential customs duty could arise on the quantity found to have been removed in breach of import conditions, the element of mens rea necessary for penal consequences was not established on the facts recorded.

Conclusion: The penalties imposed on the appellant and on the General Manager were set aside.

Final Conclusion: The demand aspect was sent back for fresh quantification, while the penal consequences were annulled, leaving the matter open only to the extent of recalculation of duty, if any, on proper verification.

Ratio Decidendi: Where duty-paid and duty-free inputs are stored and used in a common pool, alleged diversion of duty-free material must be established by a net source-wise determination based on the entire receipt and removal pattern, and penalties cannot stand in the absence of clandestine removal or proven mala fides.

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