Modvat credit and extended limitation require proof of non-payment and statutory misconduct, not mere allegations of evasion.

Modvat credit could not be denied merely because the issuing manufacturer was alleged to have evaded duty; in the absence of independent evidence that duty was not paid on the specific invoices relied upon, the credit claim was upheld. The extended limitation period under the Central Excise Rules also failed because the order did not identify any omitted reasonable steps by the assessee, and a bare allegation of inadequate verification was insufficient without fraud, wilful misstatement, collusion, or suppression of facts. On those findings, the demand and penalty were unsustainable.

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Issues: (i) Whether Modvat credit could be denied on the basis of the information that the issuing manufacturer had evaded duty, without evidence that duty had not been paid on the invoices in question. (ii) Whether the extended period under the Central Excise Rules could be invoked on the ground that the assessee had not taken all reasonable steps to verify payment of duty.

Issue (i): Whether Modvat credit could be denied on the basis of the information that the issuing manufacturer had evaded duty, without evidence that duty had not been paid on the invoices in question.

Analysis: The denial of credit rested only on an investigating agency's statement that the invoice-issuing manufacturer had evaded duty through suppression of production and clandestine removal. That material did not establish that no duty had been paid on the gate passes in question. There was no independent evidence to show non-payment of duty on the invoices relied upon by the assessee.

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

Issue (ii): Whether the extended period under the Central Excise Rules could be invoked on the ground that the assessee had not taken all reasonable steps to verify payment of duty.

Analysis: The order invoking the extended period did not identify what reasonable steps the assessee was required to take or how those steps were omitted. A mere alleged failure to take reasonable steps, without fraud, wilful misstatement, collusion, or suppression of facts, was held insufficient to sustain invocation of the extended period.

Conclusion: The extended period could not be invoked and the issue was decided in favour of the assessee.

Final Conclusion: The impugned demand and penalty were unsustainable, and the appeal succeeded with the order below set aside.

Ratio Decidendi: Denial of input credit requires evidence that the duty was not paid on the relevant invoices, and the extended limitation period cannot be invoked absent fraud, wilful misstatement, collusion, or suppression of facts.

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