Mens rea absent in marginal stock shortage dispute, so excise penalty for alleged clandestine removal was set aside.

Penalty under Rule 25 of the CENVAT Credit Rules, 2002 read with Section 11AC of the Central Excise Act was unsustainable where the alleged shortage of inputs was marginal, the goods included an evaporative material, and duty had already been paid before the show cause notice. The Court found no evidence of clandestine removal or intention to evade duty, and held that the requisite mens rea for penalty was absent. On these facts, the penalty was rightly set aside and the finding of no clandestine removal was upheld.

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Issues: Whether penalty equivalent to duty under Rule 25 of the CENVAT Credit Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 was sustainable when the alleged shortage of inputs was marginal and there was no clandestine removal or intention to evade duty.

Analysis: The inputs in question included cyclohaxamine, which was found to have an evaporation tendency, and PVC compound, in respect of which the shortage was only 0.18%. The duty had already been paid even before issuance of the show cause notice. On these facts, the requisite mens rea or intention to evade duty was absent, and the shortage did not establish clandestine removal. In such circumstances, penalty was not exigible.

Conclusion: The penalty under Rule 25 of the CENVAT Credit Rules, 2002 read with Section 11AC of the Central Excise Act, 1944 was rightly set aside and the finding of no clandestine removal was upheld.

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