Inventory reconciliation for clandestine removal must separate factory stock from depot and transit stock before demand can stand

A demand for clandestine removal based on inventory comparison requires a correct reconciliation of factory opening stock, production and factory closing stock. Where the department's calculation included depot stock or vehicles in transit without proper segregation, the basis for alleging clandestine removal was found unreliable. The demand and penalty relating to 1308 vehicles were therefore set aside and remanded for de novo adjudication. Separately, the challenge to the demand on 321 vehicles was not pressed, so that part of the adjudication remained undisturbed and the demand was upheld.

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Issues: (i) Whether the demand confirmed in respect of 321 vehicles was sustainable when that part of the appeal was not pressed. (ii) Whether the demand and penalty in respect of 1308 vehicles could be sustained on the basis of inventory and clearance comparison.

Issue (i): Whether the demand confirmed in respect of 321 vehicles was sustainable when that part of the appeal was not pressed.

Analysis: The appellant did not press the challenge to the demand relating to 70 replacement vehicles and 251 vehicles cleared without gate passes. That part of the adjudication therefore remained undisturbed.

Conclusion: The demand in respect of 321 vehicles was upheld against the assessee.

Issue (ii): Whether the demand and penalty in respect of 1308 vehicles could be sustained on the basis of inventory and clearance comparison.

Analysis: The alleged clandestine removals were worked out by comparing derived clearances with RT 12 returns and balance-sheet figures. The Tribunal accepted that the inventory information supplied by the appellant included stock lying in depots and vehicles in transit, and that the proper exercise required taking only the opening stock in the factory, production during the year, and closing stock within the factory. Since the department's calculation did not correctly segregate these categories and the factual position was not rebutted, the basis for treating the difference as clandestine removal was held unreliable.

Conclusion: The demand and penalty relating to 1308 vehicles were set aside and the matter was remanded for de novo adjudication.

Final Conclusion: The assessee succeeded on the major disputed demand relating to 1308 vehicles, but the confirmed demand relating to 321 vehicles was maintained, resulting in a partial success with remand for fresh adjudication on the remaining matter.

Ratio Decidendi: A demand for clandestine removal based on inventory comparison must rest on a correct reconciliation of factory stock, production, and factory closing stock; inclusion of depot or transit stock without proper segregation cannot sustain the allegation.

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