Factory goods not yet removed cannot be confiscated for procedural lapses, but record-keeping breaches may still attract reduced penalty.

Goods lying within the factory and not yet removed were held not liable to confiscation under Rule 173Q merely for procedural non-compliance, because the confiscatory power could not be extended beyond that scope. At the same time, failure to enter manufactured goods in RG-1 at the proper stage and non-maintenance of the prescribed lot register were treated as statutory breaches warranting penalty. The absence of clandestine removal or duty evasion, coupled with payment of duty and departmental awareness of the practice, justified substantial reduction of the penalty.

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Issues: (i) Whether the confiscation of goods lying within the factory premises was sustainable under Rule 173Q of the Central Excise Rules, 1944. (ii) Whether the penalty imposed for non-entry of manufactured goods in the RG-1 register and for non-maintenance of the prescribed lot register was justified, and if so, to what extent.

Issue (i): Whether the confiscation of goods lying within the factory premises was sustainable under Rule 173Q of the Central Excise Rules, 1944.

Analysis: The goods were found within the factory and had not yet been removed. The relevant statutory scheme required maintenance of RG-1 entries on manufacture, and the goods became manufactured and marketable when cut, packed in cellophane bags or rolls, and ready for marketing, even though they were not packed in boxes. However, the confiscatory power under Rule 173Q could not be extended to goods still within the factory and not yet removed, particularly when the show cause notice did not invoke any wider confiscatory provision.

Conclusion: The confiscation was not sustainable and was set aside in favour of the assessee.

Issue (ii): Whether the penalty imposed for non-entry of manufactured goods in the RG-1 register and for non-maintenance of the prescribed lot register was justified, and if so, to what extent.

Analysis: The entries in RG-1 were made only at the stage of packing in boxes, whereas the statutory requirement was to record manufacture earlier when the goods had already come into existence. Non-maintenance of the prescribed lot register also amounted to breach of a binding departmental direction. At the same time, there was no allegation of clandestine removal or duty evasion, the duty stood paid, and the local officers were aware of the practice and had not objected. Those circumstances were treated as mitigating factors bearing on quantum.

Conclusion: The penalty was held to be justified, but it was reduced from Rs. 5,00,000 to Rs. 50,000 in favour of the assessee.

Final Conclusion: The order was modified by setting aside the confiscation and substantially reducing the penalty, while sustaining the finding of statutory non-compliance.

Ratio Decidendi: Goods lying in the factory and not yet removed cannot be confiscated under Rule 173Q merely for procedural non-compliance, though proven breach of statutory record-keeping requirements may still attract a moderated penalty when there is no clandestine removal or duty evasion.

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