Chapter X clinker shortage did not prove clandestine removal, but penalty was sustained for differential excise duty short payment.

A shortage of clinker procured under Chapter X Procedure did not, by itself, justify differential central excise duty where Rule 194 required separate storage and accounting but not physical segregation in manufacture, and the assessee maintained that the clinker was used in production with duty paid at a lower rate by mistake; the duty demand was set aside because the differential liability had already been deposited. The penalty was nevertheless sustained, as the short payment was substantial, came to light only on departmental detection, and was not found disproportionate on the facts.

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Issues: (i) Whether the demand of differential central excise duty on the shortage of clinker procured under Chapter X Procedure was sustainable; (ii) Whether the penalty imposed on the appellant was liable to be interfered with.

Issue (i): Whether the demand of differential central excise duty on the shortage of clinker procured under Chapter X Procedure was sustainable.

Analysis: Rule 194 required separate storage and accounting of material received under Chapter X Procedure, but it did not require segregation of such material from other inputs in the manufacturing process. Mere mixing or misuse of the procured clinker did not, by itself, establish that the clinker had been diverted for clandestine removal of cement. The appellant had consistently stated that the procured clinker had been used in manufacture and that duty had been paid at a lower rate by mistake, and the differential duty had already been deposited.

Conclusion: The demand of differential duty was set aside and the issue was decided in favour of the assessee.

Issue (ii): Whether the penalty imposed on the appellant was liable to be interfered with.

Analysis: The differential duty involved was substantial enough to justify penal action, and the short payment came to light only upon departmental detection. On the facts, the penalty was not found to be disproportionate or excessive.

Conclusion: The penalty was upheld and the issue was decided against the assessee.

Final Conclusion: The appeal succeeded only to the extent of setting aside the duty demand, while the penalty was sustained.

Ratio Decidendi: A shortage of duty-free or specially procured input, without more, does not establish clandestine removal where the surrounding facts support inadvertent use in manufacture and the duty dispute is limited to a differential rate liability.

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