Clandestine removal demands need affirmative evidence; hypothetical production ratios and unverified stock shortages cannot sustain duty or penalty.

Clandestine removal under central excise law must be proved by positive, affirmative evidence and cannot rest on assumed scrap-generation ratios, reconstructed production figures, or the absence of fixed production norms. The Tribunal rejected duty and penalty where the demand was based on a hypothetical 23% scrap ratio, with no corroborative material or actual evidence of clandestine clearance, and noted that recycled scrap within the factory negatived any motive to inflate scrap generation. It also found a minor stock shortage insufficient to sustain duty, held Section 11AB interest inapplicable retrospectively for the relevant period, and set aside the penalty as the substantive demand had failed.

---

---

Issues: (i) Whether the demand of duty and penalty for alleged clandestine manufacture and removal could be sustained on the basis of a hypothetical scrap-generation ratio and absence of fixed production norms; (ii) Whether the confirmed duty on alleged stock shortage and the levy of interest under Section 11AB of the Central Excise Act, 1944 were sustainable.

Issue (i): Whether the demand of duty and penalty for alleged clandestine manufacture and removal could be sustained on the basis of a hypothetical scrap-generation ratio and absence of fixed production norms.

Analysis: The duty demand was founded essentially on an assumed 23% scrap-generation ratio derived from statements of two persons, while the production manager had stated that scrap generation ranged from 22% to 30%. The record contained no positive or tangible evidence of actual clandestine clearance, and no norms had been fixed for the factory under Rule 173E of the Central Excise Rules, 1944. The Tribunal held that clandestine removal, being a serious allegation, must be proved by affirmative evidence and cannot rest merely on arithmetical or hypothetical reconstruction of production. Reliance was placed on the absence of corroborative material and on the fact that the scrap was recycled within the factory, which negatived any motive to inflate scrap generation.

Conclusion: The demand of duty and the penalty based on alleged clandestine removal were not sustainable and were set aside.

Issue (ii): Whether the confirmed duty on alleged stock shortage and the levy of interest under Section 11AB of the Central Excise Act, 1944 were sustainable.

Analysis: The shortage of 300 kgs. was treated as insignificant in the context of production spread over several years and was not shown, by independent evidence, to represent duty-unpaid removals. The Tribunal also held that Section 11AB could not be applied retrospectively for the relevant period. Since the substantive duty demand itself failed, the foundation for penalty also disappeared.

Conclusion: The duty confirmed on shortage and the levy of interest under Section 11AB were not sustainable; the penalty also failed.

Final Conclusion: The appeal succeeded in full, with the impugned order set aside and consequential relief granted to the appellants.

Ratio Decidendi: Allegations of clandestine removal under Central excise law must be supported by positive, affirmative evidence and cannot be sustained on the basis of mere assumptions, reconstructed production figures, or an unverified input-output ratio, especially where no statutory production norms have been fixed.

---