Stock shortage alone cannot deny exemption or concessional duty without proof of clandestine removal or diversion.

A mere shortage of stock did not justify denial of exemption where the record showed no evidence of clandestine removal or use of the goods for a non-permitted purpose. On urea, the unexplained deficiency in silo stock, periodically reported and written off, was insufficient to presume non-fertiliser use, so the exemption under Notification No. 181/86-C.E. remained available. On raw naphtha, concessional treatment could not be withdrawn merely because the finished urea was short; absent proof that the input was not intended for manufacture of fertiliser and ammonia or was diverted, the differential duty demand failed.

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Issues: (i) Whether shortage of urea found in stock justified denial of exemption under Notification No. 181/86-C.E. on the ground that the urea was not used as fertiliser. (ii) Whether differential duty on raw naphtha could be demanded by denying the concessional benefit under Notification No. 75/84-C.E. on the footing that the urea manufactured with such input was not shown to have been cleared as fertiliser.

Issue (i): Whether shortage of urea found in stock justified denial of exemption under Notification No. 181/86-C.E. on the ground that the urea was not used as fertiliser.

Analysis: The shortage was found in urea stored in silos over a longer period, and the assessee had explained that loss in loose stock during handling could occur in mass production. The shortages had been periodically reported and written off by the Board of Directors. No material was found showing clandestine removal of urea or its use for any purpose other than fertiliser. In the absence of evidence, a presumption of non-fertiliser use could not be drawn merely from shortage.

Conclusion: The exemption under Notification No. 181/86-C.E. could not be denied on the basis of the stock shortage, and the demand on urea was not sustainable.

Issue (ii): Whether differential duty on raw naphtha could be demanded by denying the concessional benefit under Notification No. 75/84-C.E. on the footing that the urea manufactured with such input was not shown to have been cleared as fertiliser.

Analysis: The concessional rate for raw naphtha depended on its intended use in the manufacture of fertiliser and ammonia. The record contained no evidence that the raw naphtha, when procured, was never intended for that purpose. The mere fact that the finished urea was found short did not establish diversion or misuse of the input. The reasoning was supported by the earlier view that no case for diversion of raw naphtha was made out where it was actually consumed in manufacture.

Conclusion: The concessional benefit on raw naphtha could not be denied, and the differential duty demand was not sustainable.

Final Conclusion: The demand was set aside because shortage of finished goods by itself, without evidence of clandestine removal or diversion from the permitted use, was insufficient to deny the exemption and concessional notifications.

Ratio Decidendi: A mere stock deficiency, without evidence of clandestine removal or diversion to a non-permitted use, does not justify denial of an exemption or concessional duty benefit tied to the intended and permitted use of the goods or input.

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