Whether excesses and shortages found during the physical stock verification amounts to clandestine removal?

PJ/Case Laws/2012-13/1340

Case:- Commissioner OF Central Excise, Chennai Vs M/s Sivalogam Steels Pvt Ltd T Thanigaivel

Citation:- 2012-TIOL-1703-CESTAT-MAD

Brief Facts:-The Commissioner has allowed the appeal by granting partial relief when there was a proved case of clandestine removal of goods made by both the respondents supported by ample evidence to show that the shortage of goods detected at that time of physical verification by investigation was out of result of clandestine removal. Revenue came in appeal before the Tribunal against both the respondents.

Appellant Contentions:-Revenue submitted that the adjudicating authority properly recorded the evidence and appreciated shortage of stock detected on physical verification. Levy of excise duty was justified with penal consequences. Original investigation followed by further follow-up revealed that false invoices were created to cover up removal of goods found to be short during physical verification. Act of respondents became questionable.

The appellate authority should have appreciated the evidence gathered during investigation. But that not being done, Revenue is aggrieved. In short, Revenue intends that adjudication order should be restored.

Respondent Contentions:-The Respondents submits that the appellate authority has rightly passed the order on appreciation of the facts and evidence which is recorded in the appellate orders.

Reasoning of Judgment:-We have considered the submissions on both the sides. The adjudicating authority elaborately stated the facts in issue of his order reflecting his mind how he examined the outcome of the investigation with evidence on record and tested veracity thereof. He has also reflected his mind on the strength and credibility of the evidence came to record. But learned appellate authority simply went by the Entries in the Mahazar and without looking to the preponderance of probability in favour of Revenue and the weighty evidence gathered in the course of investigation proving questionable modus operandi of the respondents reached to an irrational conclusion. With scanty regard to the credible evidence he believed the respondents and discredited investigation result. Even though he upheld shortage of the impugned goods which were cleared to M/s Indian General Hardware proving the oblique motive of the respondents causing prejudice to Revenue, he granted partial relief to them reducing duty liability to the extent indicated at the outset. He created fiction holding that the adjudicating authority adopted PMT to calculate the shortage of stock and granted relief while there was no argument in that regard by respondents before him nor defence was led by them on the valuation aspect since nothing is apparent from the appellate order. When aforesaid observations flow from the first appellate order, grant of partial relief by first appellate authority was unwarranted.

The original authority has neatly recorded that RG I register of the respondents was written upto 09.08.2011 while visit by investigation to the factory of the respondents was done on 11.08.2011. The respondents failed to reconcile the physical quantity found with the book record. But investigating authority properly ascertained the book figure and compared that with the physically found stock. Upon proper reconciliation of production of the day, shortage was determined. Directors were present while inventory was taken. There was an admission by Director about the shortage of the goods in his statement dated 11.08.2001. The statement recorded on the date of investigation i.e., 11.08.2001, being at the very inception and on the spot, that is more reliable which is evident from relevant part of the statement extracted by the learned adjudicating authority of the order for appreciation of basis and reasons of adjudication. On 14.08.2011, there was retraction by the respondent No.2. Merely stating that the statement of 11.08.2001 was not voluntary, retraction was made. But that lost value not being supported by any cogent and corroborative evidence. Therefore, that was rightly rejected by learned Adjudicating Authority. Such aspect remains untouched in first appeals. Learned Adjudicating Authority was of the conclusion that depositions of the respondent-director resulted in admission of shortage of goods detected by investigation. In this order, that authority discarded the retraction made by the respondent-director

most accurately since the respondent admitted partly the allegation of clandestine removal of goods as has been recorded by learned Adjudicating Authority of his order. The statement of Director recorded on 23.08.2001 with regard to issuance of Invoices Nos.0451 - 0475 and Invoice Nos.0501- 0531, proved that certain clearances were made during 12.08.2001 to 18.08.2001 while there was no production from 12.08.2001 to 23.08.2001 as against 38 MTs of stock available as on 11.08.2001 and 14 MTs produced on that day resulting in total stock of 52 MTs. As regards clearance of 593 MTs of impugned goods by the said invoices, he explained that goods were physically dispatched between 12.08.2001 to 18.08.2001 and payment for 593 MTs would reach the respondents. The buyers were M/s. OM Steel Traders, M/s. Ishwarya Lakshmi Steels, M/s.Indian General Hardware- M/s Ayyappan Hardwares etc. He failed to explain the reason why there was variance in between the statements of 11.08.2001 and 23.08.2001 deposed by him. All such aspects were contributory and support conclusion of investigation against respondents and remained unrebutted by the respondents. Investigation has also gathered statement from one Shri T. Ansari, Clerk of M/s. Rizwan Steel of Chennai. On evaluation of such evidence, it came to light that the respondent was involved in the manipulation of records. Even voluntary debiting of duty as has been recorded of the adjudication order clearly proves that preparation of invoices without existence of goods was resorted to mislead investigation when there was really no stock available. Invoices were the instruments to cover up the shortage of stock detected by investigation which were clandestinely removed. When the respondents failed to properly explain its case, learned adjudicating authority in para 19 of his order came to the conclusion that 531.95 Ms of CTD bars which were not in existence during the physical verification of stock on 11.08.2001 resulted in clandestine removal. Hon’ble Madras High Court in the case of M/s Alagappa Cements Pvt. Ltd Vs CEGAT, Chennai - 2010 (260) E.L.T.511 (Mad.) = (2010-TIOL-770-HC-MAD-CX) has held that absence of goods during physical verification in absence of satisfactory explanation on such shortage gives rise to the inference that there was clandestine removal of goods. Keeping in view that said decision and appreciating the cogent evidence available on record against respondent -1, accompanied by issuance of false invoices by the respondents to cover up the shortage detected and absence of the goods detected during investigation as well as the questionable modus operandi followed by them, the first appellate authority needs to redecide the matter.

Similarly, penalty aspect also calls for reconsideration. It is noticeable from the adjudication order that the first respondent had faced penalty under Section 11AC and no penalty was imposed under Rule 25 of the Central Excise Rules, 2001. This aspect needs reconsideration when the respondent prays for consideration of reduction of penalty to the extent of 25% of the duty element. Similarly, the respondents has also faced penalty under Rule 26 of the Central Excise Rules, 2001. Respondent prays that there may be reconsideration on imposition of such penalty since the main respondent prays for lenient consideration as above. Learned first Appellate Authority may therefore reconsider duty, interest and penalty aspects for which both the appeals of Revenue are remanded to his file for passing fresh order granting opportunity of hearing to respondents. Appeals are allowed by way of remand.

Decision:-Appeal allowed by way of remand.

Comment:- This case draws inference that shortages found during the physical stock verification will be deemed as clandestine removal of goods attracting duty liability along with penal consequences.

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PJ/Case Laws/2012-13/1340

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