The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Allahabad has held that a shortage of goods found during a departmental inspection cannot, by itself, justify allegations of clandestine removal.
The final outcome came after a split verdict was resolved by a third member, S.S. Garg, who agreed that stock shortages alone cannot be treated as proof of illegal clearances.
Garg underlined that “mere shortage of goods does not lead to the conclusion that the goods have been removed in a clandestine manner,” and held that such allegations cannot be sustained without supporting material.
The matter was initially heard by a coram of Judicial Member P.K. Choudhary and Technical Member Sanjiv Srivastava, who took sharply different views. Choudhary allowed the appeal in full, observing that a mere shortage of stock is not sufficient to establish clandestine removal, a serious allegation that requires positive and corroborative evidence.
Srivastava, however, held that the admitted shortage and the initial payment of duty amounted to an admission of clandestine clearance. This difference of opinion led to a reference to a third member.
The dispute goes back to an inspection on October 24, 2008, at a sugar mill in western Uttar Pradesh. Officers found a shortage of about 50,500 quintals of sugar compared to recorded stock. The company's vice-president accepted that there was a shortage but did not admit to any illegal removal.
No buyers were identified, no transport documents were recovered, and no parallel accounts were found. Despite this, the department raised a demand for excise duty and penalties, denied CENVAT credit of over Rs 1.50 crore on items such as structural steel, welding electrodes, paints, computers, and weighbridges, and also demanded service tax on sugarcane freight under the reverse charge mechanism.
The company argued that shortages can occur for several reasons and, without supporting material, cannot prove clandestine removal. It also relied on later court rulings to defend its CENVAT credit claims. The department, on the other hand, relied mainly on the shortage itself and exclusions under the credit rules.
Agreeing with Choudhary, Garg noted that in an earlier round of the same case, the tribunal had already held that mere shortage is not clandestine removal and that this finding was never challenged by the department.
Reiterating this settled position, he held that shortages detected during inspection cannot, by themselves, justify allegations of illegal clearance. The majority view set aside the excise duty demand, allowed the CENVAT credit, quashed the service tax demand, and dropped all penalties.
Case Title: Rana Sugar Limited vs. Principal Commissioner of Central Goods & Services Tax, Meerut
Citation: 2026 LLBiz CESTAT (ALL) 8
Case Number: Excise Appeal No. 70653 of 2019
For Appellants: Advocate Vikrant Kackria