Scrap entries and clandestine removal: excise demand and penalty fail without concrete proof of clearance.

Demand of central excise duty on scrap entries in a job-work assessee's balance sheet was held unsustainable because the department relied on assumptions rather than concrete evidence of clandestine removal or clearance of rejected finished goods. The assessee had explained that the polythene bags were only minor defective goods capable of rectification, and the inference that scrap necessarily represented duty-paid removals was not supported by the record. In the absence of proof that the alleged scrap was diverted or misused, the duty demand and equal penalty were set aside.

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Issues: Whether the demand of central excise duty and equal penalty could be sustained on the footing that the quantity shown as scrap in the balance sheet polythene bags rejected by the job-work principal and cleared without payment of duty.

Analysis: The assessee manufactured polythene bags and tubings and also undertook job work. The department proceeded on the premise that the quantity of scrap reflected in the balance sheet represented rejected finished goods of the principal and, therefore, was liable to duty. The finding below rested mainly on the high percentage of scrap and on an inference that the assessee had not proved return of rectified bags to the principal. The record, however, showed that the assessee had consistently disputed the allegation, explained that the rejected bags had only minor defects capable of rectification, and challenged the department's assumption that scrap necessarily meant cleared finished goods. In the absence of concrete evidence establishing clandestine removal or misuse of the scrap entry, the conclusion drawn below remained speculative.

Conclusion: The duty demand and penalty were not sustainable and were set aside in favour of the assessee.

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