Clandestine removal cannot rest on return discrepancies alone; corroboration, limitation grounds, and fair hearing are essential.

A mismatch between Form 3CD and ER-1 returns, without independent investigation or other corroborative material, was held insufficient to sustain a clandestine manufacture and clearance allegation. In the absence of proved suppression, fraud, wilful misstatement, or intent to evade duty, the extended period of limitation could not be invoked and the related penalty could not survive. The adjudication was also treated as vitiated because the order was passed by a different Commissioner without an effective further opportunity of hearing, amounting to a breach of natural justice. The demand, interest, and penalties were therefore unsustainable.

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Issues: (i) Whether clandestine manufacture and clearance could be sustained merely on the basis of a discrepancy between Form 3CD and ER-1 returns without corroborative evidence; (ii) whether invocation of the extended period of limitation and consequential penalty were sustainable; (iii) whether the adjudication order was vitiated for violation of natural justice.

Issue (i): Whether clandestine manufacture and clearance could be sustained merely on the basis of a discrepancy between Form 3CD and ER-1 returns without corroborative evidence.

Analysis: The allegation of clandestine removal was founded only on a comparison of quantities reflected in the tax audit report and the excise returns. No independent investigation, third-party material, statement-based support, excess raw material consumption, transport evidence, sale proceeds trail, or other tangible corroboration was brought on record. A discrepancy between two statutory records, by itself, was treated as insufficient to discharge the burden resting on the department in a serious allegation of clandestine clearance.

Conclusion: The charge of clandestine manufacture and clearance was not sustainable and the finding went in favour of the assessee.

Issue (ii): Whether invocation of the extended period of limitation and consequential penalty were sustainable.

Analysis: The demand was raised on the basis of records that were already available to the department during the relevant period. In the absence of proved suppression, fraud, wilful misstatement, or intent to evade duty, the extended period could not be invoked. Once the foundational allegation itself failed, the related demand and penalty could not survive on limitation alone.

Conclusion: The extended period of limitation was not invocable and the consequential penalty was unsustainable, in favour of the assessee.

Issue (iii): Whether the adjudication order was vitiated for violation of natural justice.

Analysis: The personal hearing had been concluded before one Commissioner, but the order was later passed by another Commissioner without granting an effective further opportunity. That course was treated as a breach of the right to be heard and a serious procedural infirmity affecting the validity of the adjudication.

Conclusion: The order was vitiated for violation of natural justice, in favour of the assessee.

Final Conclusion: The demand, interest, and penalties could not be sustained, and the appeals succeeded with consequential relief.

Ratio Decidendi: A demand of clandestine removal cannot be sustained merely on a mismatch between statutory returns in the absence of corroborative evidence, and the extended period of limitation cannot be invoked without proof of suppression or intent to evade duty.

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