Clandestine removal requires tangible evidence; stock shortage alone fails, but reliable private records can sustain duty demand.

A charge of clandestine removal cannot be sustained on mere stock shortage or suspicion; it requires tangible supporting evidence, and the shortage-based demand was set aside because the assessee promptly explained the discrepancy and the Department did not rebut that explanation. Goods sent for job work under Rule 57F(2), supported by challans and surrounding records, could not automatically be treated as part of factory stock, so that basis for demand failed. Private log-book entries, where they tallied with statutory records and were supported by surrounding materials, could establish unaccounted manufacture and clearance; the demand on that footing was upheld, and the penalty was reduced.

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Issues: (i) Whether the demand based on alleged shortage found during stock verification could be sustained as clandestine removal; (ii) Whether goods sent for job work under Rule 57F(2) could be treated as part of the assessee's stock; (iii) Whether the demand based on entries in private log books, not reflected in RG-1, established manufacture and clearance without payment of duty.

Issue (i): Whether the demand based on alleged shortage found during stock verification could be sustained as clandestine removal.

Analysis: The shortage was immediately explained by a detailed letter sent on the next working day, stating that the goods were entered in RG-1 at the stage of coming out of moulds and were thereafter shifted for further processes such as fettling, heat treatment and gas cutting. The explanation was supported by a request for fresh verification and by a detailed stock statement. The Department did not verify the explanation at the earliest opportunity, and the record did not contain positive evidence to show clandestine removal. Mere shortage, without more, was insufficient to establish the charge.

Conclusion: The demand based on the alleged shortage was not sustainable and was set aside.

Issue (ii): Whether goods sent for job work under Rule 57F(2) could be treated as part of the assessee's stock.

Analysis: The assessee produced collateral material showing that a part of the goods had been cleared for job work under proper challans in terms of Rule 57F(2). Although such goods were not debited in RG-1 at the time of sending, the surrounding records supported the assessee's explanation and indicated a consistent practice in earlier transactions as well. On that basis, the mere physical absence of the goods from the factory could not, by itself, justify an inference of clandestine removal.

Conclusion: The demand could not be sustained on the footing that the job-work goods formed part of the factory stock, and the assessee succeeded on this issue.

Issue (iii): Whether the demand based on entries in private log books, not reflected in RG-1, established manufacture and clearance without payment of duty.

Analysis: The private log books contained production particulars, quantities and related manufacturing data, and the entries were found to tally with the statutory records wherever the same goods were recorded in both sets of books. The assessee's explanation that the entries were made at an earlier stage was not accepted because the documentary pattern and the statement of the authorised representative showed that the log books reflected actual finished production. No convincing documentary evidence was produced to show that the entries represented unfinished or scrapped goods. The unreconciled entries therefore supported a finding of unaccounted manufacture and clearance.

Conclusion: The demand based on the private log books was correctly confirmed and was upheld.

Final Conclusion: The appeal succeeded only in part: the demand arising from the alleged stock shortage was set aside, while the demand founded on private log-book entries was sustained and the penalty was reduced.

Ratio Decidendi: A charge of clandestine removal cannot be upheld on mere shortage or suspicion and must rest on tangible supporting evidence, but unaccounted production reflected in reliable private records may justify confirmation of duty.

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