Proof of shortage and reprocessing loss is essential before denying Modvat credit or raising a demand.

Modvat credit under Rule 173H cannot be disallowed on an alleged 8% reprocessing loss unless the Revenue proves the loss with reliable material; here, the claim failed because no evidence showed how the loss was derived or that it occurred during reprocessing. An alleged shortage of molasses also could not justify denial of credit or demand, because the supposed discrepancy rested on an uncorroborated internal paper slip and an equivocal statement, without support from statutory records or stock verification. The burden to prove shortage and wrongful disposal was not discharged, so the demand could not stand.

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Issues: (i) whether Modvat credit was liable to be disallowed on account of an alleged 8% loss during reprocessing of duty-paid goods received back under Rule 173H of the Central Excise Rules, 1944; (ii) whether the alleged shortage of molasses was proved so as to justify denial of credit and demand.

Issue (i): whether Modvat credit was liable to be disallowed on account of an alleged 8% loss during reprocessing of duty-paid goods received back under Rule 173H of the Central Excise Rules, 1944.

Analysis: The Revenue did not place any material to show how the alleged 8% processing loss was arrived at. The record did not substantiate the claim that such loss occurred in the course of reprocessing, and the finding of the Commissioner rejecting the demand on this count was supported by the absence of evidence.

Conclusion: The alleged 8% reprocessing loss was not proved, and disallowance of credit on that basis was not justified.

Issue (ii): whether the alleged shortage of molasses was proved so as to justify denial of credit and demand.

Analysis: The alleged shortage rested essentially on a paper slip recovered from the office of a senior officer. The Court found that there was no evidence as to who prepared the document, to whom it was communicated, or whether it accurately reflected the stock position. The paper slip was not corroborated by the statutory records or physical stock verification, and the State Excise stock checks did not reveal any discrepancy. The statement of the officer concerned, admitting that he did not know the reason for the alleged shortage, could not by itself establish shortage. The burden to prove shortage and disposal otherwise than under the prescribed rule was not discharged by the Revenue.

Conclusion: The alleged shortage of molasses was not proved, and the demand founded on that allegation failed.

Final Conclusion: The Revenue's challenge failed on both grounds, and the order dropping the demand was sustained.

Ratio Decidendi: A demand alleging shortage or wrongful disposal cannot rest on an uncorroborated internal paper or an equivocal statement alone; it must be supported by reliable evidence showing the stock discrepancy and the manner of disposal.

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