Excise duty on destroyed testing samples rejected where factory records showed bona fide quality-control destruction.

Cigarettes drawn as factory samples for quality control testing and irretrievably destroyed during testing were held not liable to excise duty where the sample register and related accounts were duly maintained and the destruction was properly recorded. The prior Supreme Court principle that testing samples are generally dutiable was distinguished on the basis that duty is not payable on the quantity actually destroyed in the course of bona fide testing when the records support that position. As the Department had earlier verified and authenticated similar records, its failure to continue verification for the relevant period did not justify ignoring the accounts. The demands of duty, interest and penalty were set aside.

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Issues: Whether cigarettes drawn as samples for quality control tests in the factory and destroyed during testing were liable to excise duty, and whether interest and penalty were exigible in the facts of the case.

Analysis: The samples were drawn before completion of manufacture for quality control testing within the factory. The earlier Supreme Court ruling recognised that cigarettes sent to the laboratory for testing are generally dutiable, but also indicated that where the destruction of samples during testing is duly accounted for, duty is not payable on the destroyed quantity. In the present case, the sample register and related records were maintained in the same manner during the relevant period, and the Department had verified and authenticated such records for the preceding period. The non-continuance of departmental verification for the material period could not justify ignoring the maintained accounts. Since the destroyed samples were irretrievably lost in the course of testing and the appellant had acted bona fide, the basis for duty demand on the destroyed quantity, as well as for penalty and interest, was not made out.

Conclusion: The demand of duty on the destroyed samples, together with penalty and interest, was set aside in favour of the assessee.

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