Clandestine removal requires corroborative evidence; stock variation and procedural lapses alone did not justify duty demand or confiscation.

In the absence of corroborative evidence, stock discrepancies and non-filing of D-3 intimations did not by themselves establish clandestine removal or justify confiscation. The duty demand on finished goods and excess stock was set aside because the variation was explained by timing differences in production and register entries, and the Department had not discharged the burden of proof. Confiscation of returned defective goods was also set aside where the assessee's explanation of dealer returns and scrap conversion remained unrebutted. Removal of inputs to an adjacent plot owned by the assessee was treated as a procedural lapse that did not defeat Modvat credit. Penalty was sustained for procedural non-compliance, but reduced to Rs. 50,000.

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Issues: (i) Whether the duty demand and confiscation relating to shortage and excess of finished goods were sustainable in the absence of corroborative evidence of clandestine removal; (ii) Whether confiscation of finished goods claimed to be rejected goods returned by customers was justified; (iii) Whether the duty demand on inputs was sustainable when the goods were kept in an adjacent plot owned by the assessee and the movement was treated as only a procedural lapse; (iv) Whether penalty was warranted and, if so, to what extent.

Issue (i): Whether the duty demand and confiscation relating to shortage and excess of finished goods were sustainable in the absence of corroborative evidence of clandestine removal.

Analysis: The stock variation was explained as arising from timing differences between production, entry in the RGI register, and physical movement of goods. There was no material to disbelieve the explanation, and no corroborative evidence was produced to establish clandestine removal. The burden of proving suppression or unauthorised removal was not discharged by the Department.

Conclusion: The duty demand on finished goods and the confiscation of excess finished stock were set aside in favour of the assessee.

Issue (ii): Whether confiscation of finished goods claimed to be rejected goods returned by customers was justified.

Analysis: The assessee's explanation that defective goods were returned by dealers and subsequently mutilated into scrap was not rebutted. The mere absence of D-3 intimations was held insufficient to establish clandestine removal or justify confiscation in the absence of other supporting evidence.

Conclusion: The confiscation of the finished goods valued at Rs. 98,574/- was set aside in favour of the assessee.

Issue (iii): Whether the duty demand on inputs was sustainable when the goods were kept in an adjacent plot owned by the assessee and the movement was treated as only a procedural lapse.

Analysis: Plot No. 11 was found to belong to the assessee and had been disclosed in earlier applications. The removal of inputs from the registered premises to the adjacent unregistered plot without prior permission was treated as a procedural infraction. Such infraction could not defeat the substantive entitlement to Modvat credit.

Conclusion: The duty demand on shortage of inputs was set aside in favour of the assessee.

Issue (iv): Whether penalty was warranted and, if so, to what extent.

Analysis: Though the substantive duty demands were set aside, the assessee had failed to comply with Central Excise procedural requirements, including D-3 intimations and intimation for removal of inputs to the adjacent plot. Penalty was therefore sustainable, but the facts justified reduction.

Conclusion: Penalty was upheld but reduced to Rs. 50,000/-.

Final Conclusion: The appeal succeeded on the principal duty and confiscation issues, while a reduced penalty survived for procedural non-compliance, resulting in partial relief to the assessee.

Ratio Decidendi: In the absence of corroborative evidence, stock discrepancies and procedural lapses by themselves do not establish clandestine removal or justify denial of substantive Modvat credit, though penalty may still be imposed for procedural non-compliance.

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