Set-off for stock shortages rejected, while Rule 173Q penalty fell because the related demand was time-barred.

Set-off was rejected where shortages in finished goods and excess stock were found in different categories of goods, and no further substantive basis was shown to disturb that finding; the duty demand was therefore sustained. Penalty under Rule 173Q could not survive where the related demand was not sustained on limitation, as the penalty was tied to the same allegation and fell with the time-barred demand; the penalty was accordingly set aside. The result was maintenance of the duty demand with deletion of penalty.

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Issues: (i) Whether the duty demand confirmed on shortages in finished goods was liable to be set off against excess stock found in the factory. (ii) Whether penalty under Rule 173Q could be sustained when the related demand was dropped as time-barred.

Issue (i): Whether the duty demand confirmed on shortages in finished goods was liable to be set off against excess stock found in the factory.

Analysis: The claim for set-off was rejected by the adjudicating authority because the excesses and shortages were found in different categories of goods. No further substantive ground was pressed to disturb that finding.

Conclusion: The duty demand of Rs. 3,17,200 was sustained.

Issue (ii): Whether penalty under Rule 173Q could be sustained when the related demand was dropped as time-barred.

Analysis: The penalty was linked to the taking of Modvat credit on capital goods on the basis of the original invoice. Since the corresponding demand was not sustained on limitation, the governing principle applied was that penalty under Rule 173Q could not survive when the demand itself failed on that ground.

Conclusion: The penalty was set aside.

Final Conclusion: The appeal succeeded only to the extent of deletion of penalty, while the duty demand was maintained.

Ratio Decidendi: Where the demand itself is barred by limitation, penalty under Rule 173Q cannot be imposed on the same allegation.

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