Modvat credit requires proof of substitution or non-receipt; suspicion alone cannot justify denial of credit.

Modvat credit cannot be denied on a mere suspicion that prime quality granules were substituted with regenerated granules when no samples are drawn, the quantity in the factory matches the quantity on which credit was taken, and no evidence shows removal and replacement from another source. Credit also cannot be denied on an allegation of non-receipt of imported granules where transport documents show movement to the factory and the Revenue produces no proof of non-receipt. The burden to establish substitution or non-receipt remains on the Revenue. On these principles, credit was restored and the connected penalty did not survive.

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Issues: (i) Whether Modvat credit could be denied on the allegation that prime quality granules were replaced with regenerated granules; (ii) Whether Modvat credit could be denied on the allegation that 68.939 MT of imported granules were not received in the factory.

Issue (i): Whether Modvat credit could be denied on the allegation that prime quality granules were replaced with regenerated granules.

Analysis: The allegation rested only on the visiting officers' opinion about the quality of the goods found in the premises. No samples were drawn to establish that the goods were regenerated granules. The quantity found in the factory exactly matched the quantity on which credit had been taken, and there was no evidence that prime quality granules had been removed and substituted from any other source.

Conclusion: The denial of Modvat credit on this allegation was not justified and the issue was decided in favour of the assessee.

Issue (ii): Whether Modvat credit could be denied on the allegation that 68.939 MT of imported granules were not received in the factory.

Analysis: The transport documents showed movement of the goods from Calcutta to the factory. The adjudicating authority incorrectly placed the burden on the assessee to prove receipt, although the allegation of non-receipt had to be established by the Revenue. No evidence was produced to support the charge that the goods were not received.

Conclusion: The denial of Modvat credit on this allegation was not justified and the issue was decided in favour of the assessee.

Final Conclusion: The impugned order was set aside, Modvat credit was restored, and the connected penalty did not survive.

Ratio Decidendi: Where a Revenue allegation of improper credit rests on suspicion without sampling or other supporting evidence, and the basic movement documents show receipt of goods, denial of credit cannot be sustained; the burden remains on the Revenue to prove non-receipt or substitution.

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