Confiscation of excess finished goods requires clandestine removal; unexplained shortages can still sustain penalty and Modvat denial.

Confiscation of fully finished excess goods was not justified where there was no allegation of clandestine removal, so confiscation was set aside. The non-accountal of those goods was nevertheless established, and a limited penalty was upheld. Modvat credit on inputs found short was also disallowed because the shortage was not satisfactorily explained at stock verification, and the later claim that the inputs had been used in manufacture was found unconvincing. The appeal succeeded only to the extent of removing confiscation, while the remaining adverse findings were maintained.

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Issues: (i) Whether confiscation of fully finished goods found in excess and the related penalty were sustainable in the absence of any allegation of clandestine removal; (ii) Whether Modvat credit could be disallowed on inputs found short when the assessee claimed that the inputs had been used in manufacture.

Issue (i): Whether confiscation of fully finished goods found in excess and the related penalty were sustainable in the absence of any allegation of clandestine removal?

Analysis: The goods found in excess were in fully finished stage and there was no allegation that they were intended for clandestine removal. On that footing, confiscation was not justified. However, the non-accountal of the goods was established, and some penal consequence was warranted.

Conclusion: Confiscation was set aside, but the finding of non-accountal was sustained and the penalty was upheld to the extent of Rs. 2,000/-.

Issue (ii): Whether Modvat credit could be disallowed on inputs found short when the assessee claimed that the inputs had been used in manufacture?

Analysis: The shortage of inputs was not explained at the time of stock verification, and the later explanation that the materials had been issued for manufacture or were in the pipeline was found unconvincing. In these circumstances, the shortage was treated as not satisfactorily accounted for.

Conclusion: Disallowance of Modvat credit on the inputs found short was sustained.

Final Conclusion: The appeal succeeded only to the limited extent of setting aside confiscation, while the remaining adverse findings were maintained.

Ratio Decidendi: Confiscation of excess finished goods is not warranted in the absence of clandestine removal, but unexplained non-accountal and unsatisfactorily explained shortages can sustain penal action and disallowance of Modvat credit.

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