Stock shortage demands need proof of clandestine removal and reliable valuation; unsupported duty and penalty cannot stand.

A central excise demand based on an alleged stock shortage of polished granite slabs could not be sustained where the department failed to prove clandestine removal. The shortage was found during verification, but broken slabs and tiles lying in the factory were not accounted for, the shortage was small against overall production, and no evidence of illicit removal was shown. The duty demand also failed because the valuation of the missing quantity was not reliably established: the assessing authority lacked adequate material on the nature and quality of the goods. As the penalty under Rule 173Q depended entirely on the unsupported duty demand, it too was set aside.

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Issues: (i) Whether the alleged shortage of polished granite slabs was proved to be due to clandestine removal from the factory. (ii) Whether the duty demand and penalty could be sustained when the assessable value of the alleged shortage was not properly established.

Issue (i): The shortage was found during physical verification, but the evidence showed that broken polished slabs and tiles lying in the factory premises were not taken into account. The shortage was small compared with the overall production over the relevant period, and there was no evidence of clandestine removal.

Conclusion: The alleged shortage was not proved to have been clandestinely removed and the finding of the Commissioner on this issue was set aside.

Issue (ii): Duty could be sustained only on a legally supportable valuation of the alleged missing quantity. The Commissioner adopted a valuation without adequate material regarding the nature and quality of the goods, and the penalty was entirely dependent on the duty demand.

Conclusion: The duty quantification was unsustainable and the penalty imposed under Rule 173Q of the Central Excise Rules, 1944 also failed.

Final Conclusion: The order of the Commissioner was set aside and the appeal was allowed with consequential reliefs.

Ratio Decidendi: A demand of central excise duty on alleged stock shortage cannot be sustained unless the department proves clandestine removal and establishes a reliable basis for valuation of the goods; a penalty based on such unsustainable demand must also fall.

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