CASE STUDY

BRIEF FACTS OF THE CASE:

During the physical verification of the stock conducted by the Anti Evasion team at the premises of the M/s Angel Pipes & Tubes Pvt Ltd. (Appellant), the shortage of finished goods stock was found. Thus, it was alleged that the appellant has evaded Central Excise Duty on the finished goods stock which was found short. SCN alleged that the manager in his statement has accepted the fact of shortage in stock. Further, that he agreed the methodology of calculation of stock were done on 29.09.2014. The appellant gave a detailed reply against the same to rebut the allegations raised by SCN. However, the submissions made in the reply were not considered by the adjudicating authority and the allegations raised by SCN were confirmed in his order and penalty was imposed upon the manager of the Appellant under Rule 26 of the Central Excise Rules 2002. Being aggrieved by the order, appellant and its manager preferred an appeal before Hon’ble Commissioner (Appeals). However, appellate authority upheld the order-in-original in its order-in-appeal. Later, an appeal against the same was preferred by the appellant before Hon’ble Custom, Excise and State Goods Tribunal.
CA Pradeep Jain, Authorised representative of the Appellant appeared for the personal hearing to present the submissions and relevant explanations on behalf of the Appellant.

Key issues covered in the case:

Whether it is valid to raise demand on the basis of shortage found in stock verification conducted on the basis of mere eye estimation basis instead of physical verification?

Submissions by Appellant:

CA. Pradeep Jainsubmitted the following contentions: -

That appellant has never accepted the allegation of shortage of stock. The appellant have filed retraction letter on the very next day. It clearly establishes that the signature of manager was obtained on the Panchnama under threat and coercion.
Thus, confirming huge demand merely on the basis when the Panchnama itself is under suspicion is not at all tenable and deserves to be set aside.
Further argued that no physical stock verification was carried out and simultaneously also submitted that physical verification of such a huge stock could not be possible to be done in mere 10 hours as done by the department and that they manufacture various sizes differentiated on the basis of four parameters such as diameter, thickness, length and shape of the pipes. The department conducted the stock verification in a short span of time which is impossible. Thus, it is clear that the stock taking was done on an eye estimation basis only and actual verification was lacking.
In continuation, that the allegation of shortage cannot be made without carrying out the physical verification of stock on actual basis. The approximate basis cannot be used for alleging shortage of stock.
Further, contended that they have made refutation of Panchnama only and not of the statement tendered by the Shri Daulat Singh, the manager and authorised signatory. They submit that the page no. 5 of the statement dated 24.03.2015 categorically mentions that they are not satisfied with the alleged shortage as the stock of pipes was never weighed and the allegation is being made merely on estimation basis which is not acceptable and the fact is also substantiated by retraction of Panchnama. Therefore, the allegation that Panchnama was retracted but the statement supports their retraction of Panchnama. The appellant further submits that since the Panchnama is the sole basis of the allegation of shortage of goods, its retraction is proper and benefit of case laws cited by them are clearly applicable in the present case.
That it is a settled principle of law that if the statement is retracted then the court is required to examine whether it was obtained by the threat and whether the confession is truthful or not and if the statement is found to be truthful, then only the statement can be relied upon. For this reliance was placed upon K.I. PAVUNNY v. ASSTT. COLLR. (HQ.), C.EX. COLLECTROATE, COCHIN [1997 (90) E.L.T. 241 (S.C.)].
Appellant also contended that in various judicial pronouncements it has been held that shortage found during physical verification of stock on eye estimate basis without actual weighment cannot be the basis for alleging clandestine clearance and weighment cannot be the basis for alleging clandestine clearance and demanding central excise duty.
Further, that the impugned SCN itself states that a Panchnama was drawn on spot, stock of the pipe and tubes of various sizes were undertaken as per their item wise approx. weight and separately shown in Annexure ‘B’ of the Panchnama and the impugned order has held that the stock verification of various sizes of pipes and tubes has been done on the basis of item wise approx. weight, hence, the appellant contention that physical verification of stock was done on eye estimate basis without actual weighment is not tenable as the approximate weight has been considered for various sizes of pipes and tubes. Even the Panchnama does not even mention that how the quantity has been arrived at by the officers. Along with that, no working as to how the quantity was arrived at by the officers and whether the number of pipes counted tallied with the stock register as stated in the order or not.
The appellant submitted that statement recorded during the proceedings cannot be relied upon unless the procedure stipulated in Section 9D of Central Excise Act, 1944 is followed. Reliance was placed on Punjab and Haryana High Court decision in case of G-tech Industries v Union of India [2016(339) E.L.T. 209 (P&H)]. In the instant case, the demand is based upon the statements in respect of which procedure prescribed under Section 9D ibid is not followed and the statements were also retracted. Therefore, extending the benefit of the above cited judgement, the impugned order is liable to be quashed.
The panchnama shows that independent panchas were from Barmer and Jaipur. As per settled law, the pnachas should either be from the same locality or nearby location. If they are from other place, they cannot be said to be independent panchas and the search proceedings witnessed by such panchas is null and void. Reliance is placed on following decisions:-
Commissioner of Central Excise, Kanpur v Bakul Poly Pack Pvt Ltd [2018 (363)E.L.T. 376 (Tri-All)]
Jitendra kumar Ghishulal jain v Collector of Cus(Prev.), Mumbai[1998(103)E.L.T. 591 (Trib)].
With regard to the personal penalty, appellant i.e. manager contended that penalty under Rule 26 of Central Excise Rules 2002 cannot be imposed without proving any malafide intention on his part. The fact that merely holding signing authority or managing the affairs of the company will not attract penal provisions unless the same have been substantiated by valid evidences that there was active involvement in clandestine removal of goods.
Moreover, the company has not accepted the alleged shortage of goods as the stock verification has been done on eye estimation basis only without actual weighment. Therefore, when the allegation of clandestine removal of goods is not corroborated, the imposition of penalty on the appellant is not at all tenable.

Submissions by Department:

·It was argued that the manager and authorised signatory tendered on behalf of Director of the appellant, admitted the stock verification and methodology of calculation of stock as correct.

Further, that he neither lodged complaint to higher authority of department nor to district administrative authority and even no complaint has ever been received from the independent panchas.
That as per Rule 8(1) the duty on the goods removed from the factory or the warehouse during a month shall be paid by the 6^th day of the following month, if the taxpayer fails then an as per Rule 8(3) he shall be liable to pay the outstanding amount along with interest at the rate specified vide notification under Section 11AB on the outstanding amount for the period starting with the first day after the due date till the date of actual payment of the outstanding amount.
From the above paras, it appears that the appellant has cleared finished goods of pipes without payment of Central Excise Duty in a fraudulent manner in contravention of provision of Rule 4 of Central Excise Rules 2002 with intent to evade. Thus, the extended period of limitation under Section 11A is invokable in this case

Judgement & Findings:

Based on the submissions given by legal counsel of both the parties, the Appellate Authority observed the following findings: -

It was held that on the basis of observation of the stock verification report attached to the Panchnama it is clear that the physical stock verification has not been done. It is done merely on eye estimation basis and the same has been recorded by the Hon’ble Commissioner (Appeals) in his order.
Further, held that such bifurcation of each item has been done in Panchnama and that the stock documenting was done only on eye estimation basis. Such eye estimation cannot be taken as valid reason to allege clandestine removal of goods. This view has been taken by this Tribunal in the case of Mahendra Steel Industries and Unique International limited.
Thus, following the aforesaid decisions, it was held that shortage of stock is not sustainable on the basis of eye estimation. Accordingly, denial of CENVAT credit to the appellant is set aside. Further, penalty also cannot be imposed on appellants i.e. Company and its manager.

AUTHOR’s COMMENT:

The above laid judgement reinforces the principle of requirement of proving clandestine removal of goods, stock verification needs to be done physically. Any verification which is done merely on the basis of eye estimation cannot be considered as a valid verification for raising allegations. Department officials conducting verification of stock are required to do proper verification of stock physically and only then they can resort to initiate proceedings against the registered person for the stock which is found missing or short and raise such kind of grave allegations of clandestine removal of goods. Even the charge of clandestine removal is a serious charge and it should be supported by cogent and corroborative evidence.

Various case laws, sections, rules, circulars, notifications referred in the instant case study:

Mahendra Steel Industries v. Commissioner of C.Ex. & S.T., Jaipur-I [2016 (339) E.L.T. (Tri-DEL.)]
Unique International Ltd. v. Commissioner of C.Ex. Chandigarh [2016 (344) E.L.T. 555 (TRI-CHAN.)]
K. Harinath Gupta v. Collector of Central Excise, Hyderabad [1994 (71) ELT 980 (Tribunal)]
Commissioner of C.Ex., Raipur v. Heliwal Polypackers Pvt. Ltd. [2016 (340) ELT 204 (Tri. Del.)]
Section 11A, Section 11AB and Section 11AC of Central Excise Act 1944

Comments

PJ case law/2026-27/10