[Order per : P. Karthikeyan, Member (T)]. - In these appeals, M/s. Ruby Chlorates Pvt. Ltd. and its two functionaries have sought to set aside the order of Commissioner, Trichy. As per the impugned order, on 10-2-93. the premises of M/s. Ruby Chlorates Pvt. Ltd. Musiri were visited by officers of HQ Preventive Unit, Trichy and recovered certain hand-written loose chits. It was observed on a scrutiny of these chits that the assessee had suppressed receipt of raw materials and production and clearance of Potassium Chlorate . The assessee manufactures Potassium Chlorate by electrolysis of Potassium Chloride using. Hydrchloric Acid. Initially, even though it was found that there was short accountal also of other raw materials, investigation was concentrated on the receipt and use of Potassium Chloride ( also referred to in this order as Refined Carnalite or RC). The purchase bills, chemical stock note-book and the chits showed different quantities of refined carnalite received during the period 6-7-92 to 27-10-92. The figures were respectively 104500 Kgs., 120900 Kgs., and 168700 Kgs. The chit which was written by the chemist. Shri G. Gopinathan also indicated a closing stock of 1807 bags (of 50 Kgs each) on 27-10-92. During the period 27-10-92 to 10-2-93, the chemical stock note-book showed receipt of 92.800 MTs of refined carnalite. For the said period hand-written Chit No. 7 showed receipt of 115.950 MTs of refined carnalite. Therefore, it was found that a total of 284.650 MTs of refined carnalite had been received between 6-7-92 and 10-2-93 in the factory.

2. Shri D. Bhaskaran, Managing Director of the assessee Company had deposed that 750 Kgs of RC yielded 1000 Kgs of Potassium Chlorate . Therefore, adjudicating authority found that using 274.65 MTs of RC (284.650 MTs less 10 MTs found as balance in stock on 10-2-93), 366.200 MTs of Potassium Chlorate would have been produced whereas the RG-1 showed production of only 199.900 MTs thereby indicating suppression of production of 166.300 MTs of Potassium Chlorate.

3. As per Chit No. 7 written by Shri Satyanarayana, of the factory, 142.6 MTs of Potassium Chlorate was deposited between 24-7-92 and 3-1-93 in the store room whereas as per EB-4 the quantity deposited was only 27.35 MTs. As regards power consumption, different figures of consumption for producing one ton of Potassium Chlorate were furnished by the Chemist, Shri G. Gopinathan and one Shri Viswanathan, Consultant at the factory. It was yet another figure with reference to production recorded in RG1. These were therefore not relied upon to ascertain clandestine production. The Managing Director of the assessee firm Shri Bhaskaran also gave different figures of power consumption per ton of KC1 03 on different occasions. Shri Bhaskaran also gave a different input-output ratio of 610:1000 subsequently.

4. In reply to the show cause notice the appellant had contended that the show cause notice had failed to provide any corroborative evidence to allege illicit removal and that the charges were made without any evidence. The assessee alleged that the officers omitted to reckon 17.25 MTs of RC available in solution in the factory at the time of their visit. After excluding the closing stock of 10 MTs, they had consumed only 139.750 MTs. They disputed the figures in the show cause notice and stated that they had consumed only 139.75 MTs during the period. They also disputed the 92.8 MTs of RC shown as receipt in the note as it had included 10.65 MTs of other material also. Chit No. 7 was written by the security guard and the assessee did not know why it was written. They claimed that the entire quantity of 104.5 Tons of RC had been received from M/s. Dhanalakshmi Traders, dealers in RC and balance 37.5 MTs were received from other sources for which bills were available in their Head Office at Trichy.

5. In the adjudication proceedings the Commissioner found that at the time of recording of mahazar, the Lab Chemist had not disputed the figures in Chit No. 1 but had stated that Shri Ravichandran, Manager ‘was only aware of it’. Shri Ravichandran had deposed on 14-6-93 that these figures were ‘rough’. As per the order, “The assessee has not disputed the figures in Chit No. 1 for the other materials and in a way have also conceded that 1567 bags of potassium chloride shown as receipt as a possibility”. In the reply the assessee disputed the figures in the chit and also stated that the total stock in hand was only 298 bags in the factory premises and in their match factory at Thottiam. The storage point at Thottiam Match factory had never been discussed at any stage of the proceedings earlier. The assessee disowned Chit No. 7 which showed that 115.95 MTs of RC had been received. They claimed that this chit had not been prepared by Shri Satyanarayana. This chit was bereft of evidentiary value. The Commissioner held that it was immaterial as to who had prepared the chit. Moreover Shri Bhaskaran had admitted that Chit No. 7 contained details of receipt of RC from 8-8-92 to 31-12-93 vide his statement dated 14-6-93. The Commissioner observed that it was difficult to imagine as to how more than 17 MTs would be available in unretrievable solution when there was no production for the previous 10 days. As against the initial ratio of 750 : 1000 the MD revised input-output ratio to 61:100 [Chloride to Chlorate] based on standard formula. The new formula, according to the Commissioner was a manipulated figure as the same applied to pure RC and not in the case of commercial RC. Chit No. 6 indicating deposit of 142.6 MTs Potassium Chlorate as against EB 4 quantity of 27.35 MTs was an additional evidence. The Commissioner felt that the circumstances in which the chits were collected justified accepting them as evidence. The assessee had submitted for the first time after 10 months of issue of show cause notice that M/s. Dhanalakshmi Traders had supplied RC. During cross-examination, Shri T. Vivekanandan, son of the proprietor of M/s. Dhanalakshmi Traders had stated that they had supplied RC to the assessee. There were lot of inconsistencies as regards submissions relating to power consumption and purchase of Potassium Chloride. Based on RG 1 figures of December, 1992 power requirement was 4479 units; according to the factory Consultant it was 6000 units and according to the MD it was 6250 units. Similarly, as per purchase bills, total quantity of RC purchased was 104400 Kgs. whereas as per chemical note-book it was 120900 Kgs. Therefore, the adjudicating authority concluded that either the accounts were incorrect or the assessee had purchased chloride without bills. The assessee claimed that they had purchased 1,42,000 Kgs of RC from M/s. Dhanalakshmi Traders and from parties in Madras which was stored in the factory and also in their Match factory at Thottiam. Finally the Commissioner concluded that in quasi judicial proceedings all that was necessary was to establish what a prudent person would conclude in the circumstances of the case. In the present case, non-maintenance of accounts, manner of accounting, and the belated retraction/defence proved that the assessee had resorted to suppression of receipt of raw materials and production of Potassium Chlorate. Accordingly, he demanded Rs. 9,56,225/- invoking the Section 11A(1) proviso and imposed penalty of Rs. 50,000/- under Rule 173Q on the assessee and Rs. 10,000/- each on Shri D. Bhaskaran, and Shri Ravichadran, Manager for being involved directly in the acts of commission and omission of M/s. Ruby Chlorates. These three appeals are filed by M/s. Ruby Chlorates (P) Ltd., Shri D. Bhaskaran, and Shri Ravichadran against the above order.

6. In the appeal it has been argued that not even a single Kg of Potassium Chlorate had been seized in transit or after receipt by any body as having been removed or cleared without payment of duty. There was no corroborative or material evidence regarding any unauthorised removal or despatch with reference to any conveyance used or having been booked by lorry or railway or for having received any amount towards the sale of such quantity alleged to have been surreptiously removed, let in by the department. There was no inculpatory statement from the assessee or any of his employees regarding any illicit removal of chlorate. There was no evidence of any illicit manufacture or removal of chlorate not accounted for in the statutory account and no case made out of any illicit removal of any consignment.

7. They alleged that the adjudicating authority was biased against the assessee following altercation between the Commissioner and the Managing Director Shri Bhaskaran when he had shouted at the Managing Director Shri Bhaskaran. They had requested for transfer of adjudication to another officer.

8. In the grounds it is claimed that the order of the Commissioner was not legally sustainable in the absence of any evidence. The order was passed in violation of principles of natural justice as the cross-examination of some persons requested for was not allowed. The adjudication of the case by the Commissioner was in violation of natural justice after the uncalled for outburst by him against the MD of the assessee firm and expression of reasonable apprehension of bias by the assessee.

9. During cross-examination, the son of proprietor M/s. Dhanalakshmi Traders contradicted the initial submission by his father that bills were made and handed over for commission without sale of RC. In the proceedings the assessee showed pass book of current account in Canara Bank in the name of the assessee to prove payment of amounts by Cheque for the above purchases of RC. The Chemist’s duties required him to record Potassium Chloride used for day’s production and the analysis of impurities in the raw material. He had nothing to do with the stock of RC. Account of stock of RC in his hand-writing recovered by the officers was bereft of any evidentiary value. Mr Ravichandran who maintained chemical stock note book alone was competent and authorised to make statements regarding receipt, consumption and balance of chemicals.

10. The chemist had not stated that he had prepared the records in consultation with Mr Ravichandran. The observation in the adjudication order that Chit No. 1 had been authenticated by the MD was not correct. The MD had not been allowed to peruse any records before he made a statement on the contents of Chit No. 1. The MD had in his statement dated 14-6-93 deposed that Chit No. 1 had been prepared to arrive at the consumption of electricity and other raw materials to produce a ton of Potassium Chlorate. The department relied on Chit No.6 which was only a recapitulation of the storage security in and out register in the hand writing of security guard Mr Rajendran as he affirmed during cross examination. The officers had not made any verification of the receipt of stock of RC with reference to in and out register maintained by the security guard.

11. Potassium Chlorate was under physical control. There was no prescribed statutory raw material account. Therefore, non-maintenance of any raw material account did not constitute any violation. Basing on Chit No. 7, it was concluded that 115.95 MTs of RC had been received during 27-10-92 to 10-2-93 as against 92.8 MTs in the chemical stock account. The conclusion on this basis that there was short accountal of 23.15 Tons of RC was not reliable as on of the security guards had prepared that Chit on 7-1-93 as seen on the Chit. This position was deposed by Mr. Ravichandran in his statement dated 14-6-93. According to the assessee, as per Chit No. 7, receipts of RC between 27-10-92 and 10-2-93 was 73.95 MTs and not 115.94 MTs. The mistakes/omissions commited by the security guard in the accountal of various raw materials though explained during the proceedings in writing, the Commissioner had ignored them. Therefore, the order was not a speaking order. The adjudicating authority observed that Mr Satyanarayana had deposed that during 24-7-93 to 3-1-93, 142.6 MTs had been deposited in the store room whereas as per the EB4, the quantity deposited was only 27.35 MTs. The Commissioner had found short accounting as corroborated by Shri Satyanarayana referring to Chit No. 6 which contained the above information. The appellants submitted that the chit was not in the hand-writing of Shri Satyanarayana but of Shri. Rajendran, one of the security guards as evidenced by him in the cross-examination. The security guard cannot be in the know of quantities of chlorate deposited in the store room. A comparison of in and out register particulars and its recapitulation in Chit No. 6 would reveal that the security guard had omitted 10000 Kgs appearing in store in and out register against entry Sl. No. 4, dated 29-9-92. Therefore, Chit no. 6 was not reliable. As regards power consumption the officers did not make any effort to conduct any experiment in the factory to arrive at the power requirement for production of one ton of potassium chlorate. As regards Chit No. 1, important evidence the Commissioner relied on in the proceedings, the author of the same had deposed that he did not remember from where he had received the particulars and on what basis he had recorded the details. The input output-ratio and power requirement were given by the MD at the spur of the moment. Department did not investigate or verify these from the actual performance of the factory. The capacity of the plant was 1 to 1.5 Tons and during the period 6-7-92 to 9-2-93 they had worked only on 1871/2 days. Therefore the RG 1 figure of production of 199.9 Tons was a reasonable figure of production. There were errors in the meter reading which showed excess consumption and the same were established with TNEB work sheets. As per their calculation on the basis of actual consumption, 5670 MTs were required for producing one ton of potassium chlorate. If 366.2 Tons is taken as the production, the power consumption would be 3209 units per Ton which was unimaginably low. This alone would disprove the finding of total production and quantity surreptitiously removed.

12. Shri Selvaraju a mahazar witness had deposed that the date below his signature was not put by him. One of the inspectors Shri Arunachalam who visited the factory on 10-2-93 and drafted the mahazar stated that he did not remember when they entered the factory. It was not department’s case that any quantity of raw material, covered by any bills was not entered in accounts. It was not correct that the assessee had not disputed the figures in Chit No. 1 for the other materials and ‘in a way have also conceded that 1567 bags of potassium chloride shown as receipt as a possibility’. This observation of the Commissioner was not correct. The denial and retraction in letter dated 26-6-93 of Shri Satyanarayana were ignored by the adjudicating authority.

13. Shri VP Namasivayam, learned Consultant for the appellants submitted that as no case of suppression of receipt of raw materials or, production or clearance of Potassium Chlorate without payment of duty was established, the proviso to Section 11A(1) of the Act, was not attracted. The following case law were cited to support the appellants’ claim that without cogent and positive evidence of unaccounted clearance, particulars found on some loose sheets could not be made basis for demand of duty :

(1)     Rouchas Watches v. CCE []

(2)     Pilot Industries v. CE []

(3)     Melton India (P) Ltd. v. CCE []

(4)     OPEL Alloys v. CCE []

(5)     Rajasthan Foils Pvt. Ltd. v. CCE []

(6)     Hiltons Tobacco Ltd. v. CCE []

(7)     Premium Packing Pvt. Ltd. v. CCE []

14. Shri B.L. Meena, learned SDR reiterated the reasoning adopted by the Commissioner and reiterated the arguments.

15. We have carefully considered the case records and the submissions of both sides. In any taxcode, tax evasion attracts most stringent penalty and therefore any finding of clandestine removal has to be based on positive and cogent evidence. Cases of clandestine removals are often booked when excisable goods transported without the cover of duty paying documents are intercepted during transport or are found in the premises of buyers who received them without such documents. In such cases, enquiries are conducted with the buyers and the fact of receipt of non-duty paid goods ascertained and evidence collected. Clandestine removal is also established if evidence is obtained for receipt of raw materials that are not accounted in the statutory records of the assessee and/or are evidenced to have been used in production which is not accounted in the assessee’s statutory production records. In the case of clandestine use of raw materials, statements evidencing supplies are obtained from the suppliers of raw materials. In such cases, usually documents such as sale bills and evidence of receipt of sale proceeds of raw materials by the suppliers form necessary corroborative evidence. It is also not unusual that trial production of finished goods is conducted in investigation to determine the input-output ratio with reference to raw materials, and also consumption of power to produce a unit of the finished goods.

16. In the instant case, transactions of clandestine production and removal of Potassium Chlorate are sought to be proved on the basis of certain chits recovered during the search of premises of the assessee’s factory on 10-2-93. Chit No. 1 which contained details of receipt and stock of Potassium Chloride, the main raw material, is the most important evidence relied on for the finding of clandestine production of Potassium Chlorate from 6-7-92 to 27-10-92. As per this chit, from 6-7-92 to 27-10-92, assessee had received 1567 bags (each bag contains 50 Kgs) of RC and consumed 168.700 Tons. Chit No. 7, has been relied on to prove receipt of an additional 115.95 Tons of RC from 27-10-92 to 10-2-93 used for clandestine production. Shri G. Gopinathan who had written Chit No. 1 containing the details basic to the case had stated that the Manager only was aware of the-details of the figures contained in the chit. He also deposed in his statement dated 26-6-93 that he did not know who gave him the closing stock of 1807 bags of RC he had entered in the chit. Basing on the input output ratio (Potassium Chloride to Potassium chlorate) of 750 : 1000 , with the figures of RC received as above as per Chits No. 1 and 7, production of 366.2 Tons of Potassium Chlorate was ascertained and demand made for clandestine clearance of 199.9 Tons by the adjudicating authority..

17. Chit No. 1 had been written by a person who was not authorised to keep record of such information . The Manager, Shri Ravichandran who was supposed to maintain such records had not confirmed these figures. He described them as ‘rough’ figures. Even Shri Gopinathan, author of this chit stated that the details about the contents were known only to Shri Ravichadran. The important Chit No. 6 and Chit No. 7 where taken as written by one Shri Satyanarayana who stated later that he had not written the chits. The security guard Shri Rajendran stated during his cross-examination before the Commissioner that he had maintained them and written the contents. These chits are therefore not reliable evidence. Adjudicating authority has made an observation that who wrote the chit was not immaterial as the MD had not denied that it represented facts. This was in the context of discussing Chit No. 7 as acceptable evidence.

18. As far as the power consumption is concerned, if the Commissioner’s finding of production based on RC received as per chits 1 and 7 is accepted, the consumption of power per ton of Potassium Chlorate works out to 3209 units compared to 4479 units ascertained with reference to RG1 figures for December’ 92 and the power consumed as per Chit No. 4. If the above figure of 4479 units/Ton of Potassium Chlorate is adopted, production of Potassium Chlorate, from July‘ 92 to January‘ 93, for observed power consumption of 12,26,283 units during the period would have been 273.785 Tons as per the impugned order (para 7). Therefore, the Commissioner’s finding to the effect that the assessee produced 366.2 Tons of Potassium Chlorate is questionable. In our view, these chits leading to inconsistent findings are not dependable evidence for a positive finding of surreptitious production and clearance.

19. Moreover Commissioner has ignored the appellant’s claim that it had been charged wrongly for excess power of 51685 units shown as consumed due to the faulty electric meters during the material period. Assessee had established the claim with communication from TNEB which also informed them that they were eligible for refund of Rs. 1,50,154.47 on that account. This claim not only renders the conclusions in the impugned order inaccurate but renders the order a non-speaking one.

20. The assessee was under physical control at the material time. They had argued that the demand was time barred. This plea is valid in view of the observation of the Hon’ble High Court of Madras in Norton Intec Rubbers Pvt. Ltd. v. CCE, Madras reported in (Mad.) to the effect that “when unit was also under physical control, of the excise department, show cause nonce issued on 30-8-93 for the period 89-90 to 92-93 being beyond six-months period, under Section 11A of the Act, this is squarely time barred because the charge of clandestine removal is incongruous in a unit under physical control of the Excise department”. In the present case the officers visited the factory and recovered chits on 10-2-93. Show cause notice was issued on 3-1-94 i.e. beyond the normal period of six months as provided under Section 11A(1) of the Act, at the relevant time. Therefore, the show cause is hit by limitation.

21. It is seen that, apart from potassium chloride, Hydrochloric Acid was the other major chemical used in the manufacture potassium chlorate by the assessee. Several other chemicals also were used. The case of clandestine production and clearance had been attempted to be made out with the figures of use of Potassium Chloride and no effort was made to investigate such use of Hydrochloric Acid or any other raw material. The settled legal position is that when several raw materials are involved, when a case of clandestine production and clearance is built on clandestine use of raw materials, the same should be proven with reference to unaccounted use of all such major raw materials.

22. In a case of clandestine removal the department should produce positive evidence to establish the same. In the absence of corroborative evidence, a finding cannot be based on the contents of loose chits of uncertain authorship. Department has not produced evidence of use of inputs to prove that there was manufacture of unaccounted finished product. No statements have been obtained to show as to from whom raw materials were purchased. No evidence has been obtained for the use of electricity or receipt of sale consideration by the assessee to prove clandestine manufacture and sale. The department had obtained a statement from M/s. Dhanalakshami Traders, dealer in Potassium Chloride to the effect that the assessee herein had obtained from them on payment of commission, bills for having purchased raw material without purchasing any raw material. These bills covered a significant portion of the raw material involved in the unaccounted production determined. This statement on record does not support a conclusion of clandestine production based on the allegation of clandestine procurement and use of raw material. (This initial statement was retracted by the dealer, later).

23. A unit under physical control is visited by the officers of the department regularly and clearance of the goods is effected in their presence. In such a situation, it is not understandable as to how it can be said that that there was clandestine removal of the goods. Clandestine removal in such situation can only be effected with the connivance of the department’s officers. It is not the case of the department that their officers connived with the assessee for removal of the goods clandestinely and any officer was proceeded against. In Kalekhan Mohd Haniff v. CCE, Nagpur, reported in , (Tri.-Mumbai) the Tribunal made the following observation :

“ 4. The Tribunal, in LML Limited v. CCE. - (Tribunal) = 1991 (32) ECR 63 has held that in a case where the factory is under the physical control of the officers of the Department, extended period cannot be invoked on the ground of suppression of facts relating to manufacture and clearance. This is so for the reason that virtually every step of the manufacture and clearance is subject to the control by the officers of the department, who are required to carry out checks of such clearance to the prescribed extent. In that situation, therefore, unless collusion between the officers and the appellant were alleged the extended period will not be available. No such collusion is alleged. The notice issued to the appellant is therefore barred by limitation.”

24. Demand of duty cannot be made simply on assumptions and presumptions. In the case of Hilton Tobaccos Pvt. Ltd. v. CCE, reported in (Tri.-Bang) the Tribunal while dealing with an order of the Revenue in a case of similar set of facts held as under in para 8 of their order :

“We have gone through the records of the case carefully. The Revenue has come to the conclusion that 41,777 kgs. of raw tobacco was unaccounted and the appellant had manufactured cut tobaccos out of it and removed it clandestinely. The inference is based on certain private documents only. There is no corroborative evidence recorded. If such huge quantity of cut tobacco was manufactured during the period from April 1998 to September 1998 when the factory is under physical control and removed, either the officer in charge has connived with the appellants or he closed his eyes to whatever was happening. In either case, the department should have proceeded against the officers. There is absolutely no indication in the investigation regarding any complicity of the officers posted in the appellants’ unit. Moreover, the investigation has not found out at least a few buyers who have received the goods cleared clandestinely. There is no evidence of excessive consumption of electricity. When the officers visited the unit, they had not found out any unaccounted stock of cut tobacco. In the present case, the charges are based purely on a theoretical working out based on the private documents, which are not statutory. The Hon’ble CEGAT, in the case VST Industries Ltd. (cited supra), has held that the charges of clandestine removal cannot be based on assumptions and presumptions. In the Godfrey Philips case, the Tribunal has held that duty is not demandable on assumed productions. In the Sangamitra Cotton Mills case, it was held that in the absence of evidence of use of electricity, receipt of sale consideration to prove the event of manufacture and clearance of goods, clandestine removal cannot be sustained. In the Harinath Gupta case, it was held that the clandestine removal charge is not sustainable as the source of procurement of raw material has not been established, buyers of finished goods had not been contacted and the receipt of sale proceeds has not been proved. This is a case where investigation has miserably failed to get any corroborative evidence to strengthen the Revenue’s case. The adjudicating authority, in his zeal to decide the issue in favour of Revenue, has not displayed a judicious approach and concluded that there has been clandestine removal in the absence of corroborative evidences.”

25. The above ratio squarely applies to the facts of the present case. The impugned order is not a speaking order and its findings are not supported by facts and acceptable evidence or reasoning. In the circumstances the impugned order is set aside and we allow the appeals.

(Pronounced in the open Court on 14-8-2006)