Clandestine removal requires reliable corroboration; semi-finished goods finding defeated duty demand, though record-keeping penalty survived.

Excess stock found in the factory was treated as semi-finished, non-marketable goods rather than fully manufactured excisable goods liable to duty, because the packing, stock position, absence of standard quantities, contemporaneous records, and lack of technical examination supported that conclusion. Alleged clandestine removal was not proved, as the despatch sheets, employee and partner statements, and stray gate passes did not provide reliable corroboration of repeated illicit clearance, and the available small scale exemption had not been exhausted. The duty demand was therefore not sustained, but the separate penalty was upheld for breach of record-keeping requirements.

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Issues: (i) Whether the excess stock found at the factory represented fully manufactured excisable goods liable to duty, or semi-finished goods not yet at the marketable stage; (ii) Whether the evidence on record established clandestine removal of excisable goods without payment of duty, and whether the penalty imposed under the Central Excise Rules was sustainable.

Issue (i): Whether the excess stock found at the factory represented fully manufactured excisable goods liable to duty, or semi-finished goods not yet at the marketable stage.

Analysis: The stock position, manner of packing, absence of standard quantities, and the lack of technical or chemical examination were considered. The contemporaneous records and the nature of the goods showed that the items had not reached the marketable stage. The balance of probabilities favoured the view that the goods were semi-finished and that non-entry in the RG-1 register was attributable to that understanding.

Conclusion: The finding that the excess stock was semi-finished goods was upheld in favour of the assessee.

Issue (ii): Whether the evidence on record established clandestine removal of excisable goods without payment of duty, and whether the penalty imposed under the Central Excise Rules was sustainable.

Analysis: The despatch sheets, the statement of the employee who maintained them, and the statement of the partner were treated as corroborative. The adjudicating authority also examined the availability of small scale exemption under Notification No. 175/86 and found that the available exemption limits had not been exhausted. The stray gate passes found in the files were explained and no further corroboration of repeated clearance was established. The penalty was examined separately in light of the RG-1 requirement for semi-finished goods and the duty of the assessee to maintain proper records.

Conclusion: Clandestine removal was not established against the assessee, but the penalty of Rs. 5,000/- was sustained as legally maintainable.

Final Conclusion: The revenue challenge failed and the order dropping the duty demand was maintained, while the penalty imposed on the partner remained undisturbed.

Ratio Decidendi: A demand for duty on alleged clandestine removal must rest on reliable corroborative evidence, and where the authority records a reasoned finding that the goods were semi-finished and the surrounding evidence does not establish illicit clearance, the appellate forum should not interfere with that factual conclusion; separate penalty may still survive where record-keeping obligations are breached.

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