Clandestine removal not proved where SAP shortages alone could not support duty demand, penalty, or interest.

Shortages reflected only in the assessee's SAP inventory could not sustain duty demand, penalty, or interest where the Department did not conduct physical stock verification and did not prove any discrepancy in the statutory RG-1 records. The record showed separate maintenance of production accounts, and the apparent shortages were explained by inventory system errors and internal adjustment entries. In the absence of proof of clandestine removal or wrong entries in the statutory records, the basis for invoking the demand and allied penal provisions failed, and the demand, penalty, and interest were set aside in favour of the assessee.

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Issues: Whether duty demand, penalty, and interest were sustainable on the basis of shortages reflected only in the assessees SAP inventory, in the absence of physical stock verification by the Department or evidence of clandestine removal.

Analysis: The dispute turned on whether variations between the assessees computerised stock figures and physical verification conducted by the assessee itself could justify a duty demand. The record showed that statutory production accounts were maintained separately and that the Department had not established any discrepancy between the RG-1 register and the physical stock. The shortages noticed were attributable to errors in the inventory management system and internal adjustment entries, and there was no evidence that finished goods had been removed without payment of duty. In the absence of proof of clandestine removal or wrong entries in the statutory record, the basis for invoking the demand and allied penal provisions failed.

Conclusion: The demand of duty, penalty, and interest was not sustainable and had to be set aside in favour of the assessee.

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