Shortage of finished goods justified duty demand, while pre-notice payment after detection did not bar a reduced penalty.

Physical verification revealed a shortage of finished goods against statutory records, and the shortage was admitted during investigation and at personal hearing; duty was therefore correctly confirmed. Payment of duty before the show cause notice did not bar penalty because it was made only after departmental detection and was not voluntary. However, the prior deposit and surrounding circumstances justified moderation, so the penalty under Rule 173Q was sustained in principle but reduced substantially.

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Issues: (i) Whether duty was rightly confirmed on account of shortage of finished goods found on physical verification and admitted during investigation; (ii) Whether penalty under Rule 173Q was warranted, and if so, to what extent, when the duty amount had been paid before issuance of the show cause notice.

Issue (i): Whether duty was rightly confirmed on account of shortage of finished goods found on physical verification and admitted during investigation.

Analysis: Physical verification by the Anti-Evasion officers revealed shortage of uncoated semi Kraft paper as compared with the statutory records. The shortage was admitted in the statement of the managing director and was also accepted at the stage of personal hearing. The appellants had already debited the duty and cess relating to the shortage before the show cause notice was issued.

Conclusion: Duty demand was correctly sustained against the appellants.

Issue (ii): Whether penalty under Rule 173Q was warranted, and if so, to what extent, when the duty amount had been paid before issuance of the show cause notice.

Analysis: The payment made by the appellants was not treated as voluntary because it followed detection by the Central Excise officers and the appellants had no reasonable explanation for the shortage. The circumstance that duty had been paid before the show cause notice did not exclude penalty on these facts. At the same time, the prior deposit and overall conduct justified moderation of the penalty.

Conclusion: Penalty was upheld in principle but reduced from Rs. 62,700 to Rs. 30,000.

Final Conclusion: The duty confirmation was maintained, the penalty was sustained with a substantial reduction, and the appeal was disposed of on those terms.

Ratio Decidendi: Payment of duty before a show cause notice does not bar penalty where the payment is made only after detection of shortage by departmental officers and is not voluntary; however, the penalty may be reduced in view of the circumstances.

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