Mere Stock Shortage Not Proof of Clandestine Removal: CESTAT

The Allahabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that mere shortage of finished goods found during physical verification cannot, by itself, establish clandestine removal, and on this ground set aside a Central Excise demand of over Rs. 1.28 crore along with interest and penalties. The bench of P.K. Choudhary (Judicial Member) and Sanjiv Srivastava (Technical Member) has observed that allegations of evasion must be backed by clear, positive and corroborative evidence, and not based on assumptions or presumptions arising from stock discrepancies alone. The dispute arose after Central Excise officers conducted a physical verification of stock at the factory premises of a sugar manufacturing unit. During the verification, a shortage of sugar was noticed when compared with the statutory records maintained by the assessee. Based solely on this shortage, the department alleged that the goods had been clandestinely removed without payment of duty. A show cause notice was issued proposing recovery of excise duty along with interest and penalties under the Central Excise Act, 1944 and the Central Excise Rules, 2002. The adjudicating authority confirmed the demand, and penalties were also imposed on company officials. Aggrieved, the assessee approached CESTAT challenging the legality of the demand. The assessee argued that the entire demand was founded only on stock variation, without any supporting investigation. No evidence of transportation, buyers, sale proceeds, parallel invoices, or unaccounted cash was produced by the department. In the sugar industry, stock variation can occur due to handling loss, moisture variation, weighment differences and process loss. Clandestine removal is a serious allegation which must be proved by concrete evidence, and not by inference. It was further submitted that the department did not examine production capacity, raw material consumption pattern, electricity usage, or movement of goods, all of which are essential to establish clandestine activity. The department contended that physical stock verification is a reliable method and that once shortage is detected, the burden shifts on the assessee to explain the same. It was argued that the assessee had admitted the shortage and therefore the demand was justified. The Tribunal rejected the department’s approach and held that shortage by itself does not automatically lead to the conclusion of clandestine removal. The Bench observed that no evidence of transportation of the allegedly removed goods was brought on record. There was no identification of purchasers or proof of sale. There was no evidence of flow of consideration or unaccounted cash. No parallel invoices, secret records or statements of buyers were produced. The Tribunal emphasised that clandestine removal is required to be proved through a chain of evidence, such as procurement of raw material, manufacture, storage, transportation, sale and receipt of consideration. The Bench relied on a consistent line of judicial precedents which hold that “Clandestine removal cannot be alleged on the basis of assumptions and presumptions. The burden is on the department to establish the charge with positive, independent and corroborative evidence.” The suspicion, however strong, cannot take the place of proof. In view of the absence of supporting evidence, the CESTAT set aside the entire excise duty demand of Rs. 1.28 crore, quashed the interest liability, and deleted all penalties imposed on the assessee and its officials. Case Details Case Title: M/s Rana Sugar Ltd. Versus Principal Commissioner of Central Goods & Services Tax, Meerut Case No.: Excise Appeal No.70653 of 2019 Date: 06.01.2026 Counsel For Appellant: Vikrant Kackria, Advocate Counsel For Respondent: Santosh Kumar, Authorized Representative Click Here To Read Order Read More: CISF Not Liable to Pay Service Tax on Security Services Provided to Delhi Airport: CESTAT

Mere Stock Shortage Not Proof of Clandestine Removal: CESTAT

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