Shortage of finished goods sustains duty demand, but penalty fails without proof of clandestine removal.

Duty demand on shortage of finished goods was sustained because stock verification was conducted in the presence of the authorised signatory and the Production Manager admitted the shortage without disputing the stock memo. Penalty under Section 11AC of the Central Excise Act, 1944 and allied provisions was set aside because the record contained no evidence of clandestine removal or intent to evade duty. Mere shortage, by itself, was held insufficient to attract the mandatory penal consequences.

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Issues: (i) whether the demand of duty on shortage of finished goods was sustainable; (ii) whether penalty under Section 11AC of the Central Excise Act, 1944 and allied rules was justified in the absence of evidence of clandestine removal.

Issue (i): Whether the demand of duty on shortage of finished goods was sustainable.

Analysis: The stock verification was carried out in the presence of the authorised signatory and the Production Manager admitted the shortage without disputing the stock memo prepared by the Revenue. On those facts, the shortage was accepted as established and the demand did not suffer from infirmity.

Conclusion: The demand of duty was sustained, in favour of the Revenue.

Issue (ii): Whether penalty under Section 11AC of the Central Excise Act, 1944 and allied rules was justified in the absence of evidence of clandestine removal.

Analysis: The record did not contain evidence of clandestine removal. The Tribunal relied on the principle that mere shortage, without proof of intent to evade duty or clandestine clearance, does not automatically attract the mandatory penalty under Section 11AC. In these circumstances, the penalty was not sustainable.

Conclusion: The penalty under Section 11AC and the connected penalty provisions was set aside, in favour of the Assessee.

Final Conclusion: The duty demand was upheld, but the penal consequences were deleted for want of evidence of clandestine removal or other ingredients necessary for penalty.

Ratio Decidendi: Mere shortage of finished goods, without evidence of clandestine removal or intent to evade duty, is insufficient to sustain penalty under Section 11AC of the Central Excise Act, 1944.

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