Circumstantial evidence can prove clandestine removal, while Modvat credit cannot be refused solely because inputs were stored outside the factory.

Circumstantial evidence such as labour pay-book entries, gate-pass discrepancies and the absence of a satisfactory explanation can establish clandestine removal of finished goods, and direct evidence is not indispensable; the duty demand and related penalty were sustained. Modvat credit cannot be denied merely because inputs were stored outside the factory if they were ultimately used in manufacture, and the assessee was allowed to prove such utilisation before the authority below; the denial of credit was therefore set aside to that extent and the matter remitted for fresh decision.

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Issues: (i) Whether the demand of central excise duty on alleged clandestine clearance of finished goods without payment of duty and the penalty under Rule 173Q were justified; (ii) Whether Modvat credit in respect of inputs kept outside the factory could be denied and the goods confiscated.

Issue (i): Whether the demand of central excise duty on alleged clandestine clearance of finished goods without payment of duty and the penalty under Rule 173Q were justified.

Analysis: The labour pay book, gate-pass discrepancies, and absence of any satisfactory explanation supported the inference that the entries related to removals from the factory. The contention that some entries related to an adjacent plot was not established by reliable evidence, and the plea that clandestine removal must be proved by direct evidence was rejected because the surrounding circumstances constituted sufficient proof.

Conclusion: The duty demand on clandestine removal was upheld, and the related confirmation of penalty was sustained.

Issue (ii): Whether Modvat credit in respect of inputs kept outside the factory could be denied and the goods confiscated.

Analysis: The inputs were in fact stored outside the factory, but the order did not disclose a clear basis for confiscation. The Tribunal held that if the inputs were ultimately used in manufacture, credit should not be denied merely because they were stored outside the factory, and the assessee was entitled to establish such utilisation before the authority below.

Conclusion: The denial of credit was set aside to the extent indicated, and the matter was left for fresh orders on proof of utilisation.

Final Conclusion: The appeal succeeded only in part, with the duty demand on clandestine removals maintained and the Modvat credit issue remitted for decision according to law.

Ratio Decidendi: Clandestine removal may be proved by reliable circumstantial evidence, and Modvat credit cannot be denied merely because inputs were stored outside the factory if their use in manufacture is otherwise established.

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