Stock shortage in duty-free imports does not by itself prove breach unless unauthorised diversion or non-compliance is shown.

Stock shortage in duty-free gold imported under an exemption notification did not, by itself, prove breach of the notification conditions where permissible wastage and recovered dust had already been accounted for. In the absence of evidence of unauthorised removal from the export processing zone, or material showing failure to secure the Development Commissioner's satisfaction on proper utilisation, the foundation for customs duty and penalty was not made out. The principle stated is that a shortage alone cannot justify demand or penalty unless the department establishes diversion or other violation of the exemption conditions.

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Issues: (i) Whether shortage found during stock verification of duty-free gold imported under Notification No. 177/94-Cus dated 21.10.1994, after accounting for permissible wastage and recovered dust, by itself established non-compliance with the notification conditions; (ii) Whether demand of customs duty and penalty could be sustained in the absence of evidence of removal from the export processing zone or failure to satisfy the Development Commissioner regarding proper utilisation.

Issue (i): Whether shortage found during stock verification of duty-free gold imported under Notification No. 177/94-Cus dated 21.10.1994, after accounting for permissible wastage and recovered dust, by itself established non-compliance with the notification conditions.

Analysis: The notification granted exemption subject to conditions governing use, maintenance of accounts, and disposal of processing loss. The factual findings showed that the computation of export quantity had already taken into account wastage within the permissible limit, and gold recovered from dust, findings, and mountings was also added while arriving at stock position. On that basis, the recorded shortage could not automatically be treated as an infraction of the exemption conditions.

Conclusion: The shortage, by itself, did not establish breach of the notification conditions.

Issue (ii): Whether demand of customs duty and penalty could be sustained in the absence of evidence of removal from the export processing zone or failure to satisfy the Development Commissioner regarding proper utilisation.

Analysis: The governing notification required compliance with conditions as to utilisation and prohibited removal to the domestic tariff area otherwise than in accordance with procedure. The decisive factor was whether there was evidence of unauthorised diversion or non-compliance with the prescribed utilisation regime. In the absence of evidence of removal from the export processing zone without following proper procedure, and in the absence of material showing failure to obtain the Development Commissioner's satisfaction, the foundation for levy of duty and penalty was not made out.

Conclusion: The demand of duty and penalty was not sustainable.

Final Conclusion: The impugned order was set aside and the appeal succeeded because the alleged stock shortage, without proof of unauthorised diversion or statutory non-compliance, could not justify customs demand or penalty.

Ratio Decidendi: A stock shortage in goods imported under an exemption notification does not, by itself, justify customs duty or penalty unless the department establishes unauthorised removal or other violation of the notification conditions.

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