CENVAT credit cannot be denied when stock shortage is explained by matching goods in adjoining premises and clandestine removal is unproved.

CENVAT credit on packing materials could not be denied where the apparent factory shortage was fully explained by storage of the same quantity in an adjoining premises of the same group concern due to lack of space. The department knew of this arrangement, and the quantity alleged to be short in the factory matched the stock found in the other premises. On these facts, clandestine removal was not proved, and denial of credit merely on an allegation of removal from the factory was unsustainable. The principle applied was that a proved matching stock explanation defeats an allegation of clandestine removal for denying CENVAT credit.

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Issues: Whether CENVAT credit on packing materials could be denied on the allegation of removal from the factory and alleged clandestine removal when the shortage in the factory stock tallied with the quantity kept in the adjoining premises due to shortage of space.

Analysis: The appellants had consistently explained that the packing materials were stored in the adjoining premises owned by the same group concern because of lack of space in the factory. The department was aware of this arrangement, and the quantity said to be short in the factory corresponded with the quantity found in the adjoining premises. On these facts, the charge of clandestine removal was not established. In the absence of proved clandestine removal, denial of CENVAT credit on the packing materials was not justified.

Conclusion: The denial of CENVAT credit was unsustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: Where stock found short in the factory is satisfactorily accounted for by matching quantity in another premises and clandestine removal is not proved, CENVAT credit cannot be denied merely on the basis of alleged removal from the factory.

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