Clandestine removal and extended limitation failed where yarn shortage was explained by moisture variation and no suppression was proved.

CEGAT, Mumbai held that a duty demand based on alleged yarn shortage could not stand where the department failed to produce positive evidence of clandestine manufacture or removal, and the shortage was plausibly explained by moisture variation and prior stock adjustments. The extended period of limitation was also unavailable because the notice did not establish suppression, fraud, or wilful misstatement, particularly when earlier departmental proceedings had already disclosed the relevant stock and moisture-loss explanation. On both merits and limitation, the demand and penalty were set aside.

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Issues: (i) Whether the alleged shortage of yarn established illicit removal and duty liability, or whether the shortage was explainable as moisture loss and carried-forward stock variation; (ii) Whether the demand was time-barred and the extended period could be invoked in the absence of suppression, fraud, or wilful misstatement.

Issue (i): Whether the alleged shortage of yarn established illicit removal and duty liability, or whether the shortage was explainable as moisture loss and carried-forward stock variation.

Analysis: The dispute turned on whether the quantity shown short in the physical verification represented unaccounted production and clandestine clearance, or merely reflected the nature of viscose yarn and prior stock adjustments. The record contained earlier departmental verification and an order accepting moisture-related variation in the appellant's yarn, while the department did not produce positive material showing actual clandestine manufacture or removal corresponding to the alleged shortage. The technical material relied upon showed that viscose yarn can suffer moisture variation, and the reasoning proceeded on the basis that the stock variation was more plausibly attributable to that phenomenon than to illicit clearance.

Conclusion: The allegation of illicit removal was not established, and the duty demand on the alleged shortage could not be sustained against the assessee.

Issue (ii): Whether the demand was time-barred and the extended period could be invoked in the absence of suppression, fraud, or wilful misstatement.

Analysis: The show cause notice invoked the extended period, but the earlier departmental proceedings had already put the authorities on notice of the appellant's stock position and the moisture-loss explanation. In that background, the ingredients necessary to justify the extended limitation period were not made out, and the notice did not disclose particulars showing fraud, suppression, or wilful misstatement. Once the basis for clandestine removal failed, the ancillary allegation supporting the longer limitation period also could not stand.

Conclusion: The extended period of limitation was not available to the department, and the demand was barred by time.

Final Conclusion: The impugned order was unsustainable on both merits and limitation, so the assessee succeeded and the demand and penalty were set aside.

Ratio Decidendi: A duty demand based on stock shortage cannot be sustained where clandestine removal is not proved by positive evidence and the extended limitation period cannot be invoked without particulars establishing suppression, fraud, or wilful misstatement, especially when the department was already aware of the relevant facts.

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