Modvat credit requires actual receipt of inputs; composite mandatory penalty fails for a period partly before Section 11AC.

Modvat credit is available only when inputs are actually received in the factory, so duty-paid invoices alone do not satisfy the statutory condition. On the facts noted, the assessee accepted that the full invoiced quantity had not been received, and the short receipt was not treated as a minor variation; credit on the short-received inputs was therefore denied. A composite mandatory penalty under Rule 57I(4) read with Section 11AC was not sustainable because part of the disputed period preceded the commencement of Section 11AC; the penalty was set aside. Interest under Rule 57I(5) remained recoverable as provided by law.

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Issues: (i) Whether Modvat credit was admissible on inputs which were not actually received in the factory, despite the invoices showing full quantity and duty-paid particulars; (ii) Whether the composite penalty imposed under Rule 57I(4) read with Section 11AC was sustainable for the period involved.

Issue (i): Whether Modvat credit was admissible on inputs which were not actually received in the factory, despite the invoices showing full quantity and duty-paid particulars.

Analysis: Rule 57G permits Modvat credit only on inputs received in the factory, so receipt of goods is the primary statutory condition. The appellant accepted that the full invoiced quantity had not been received. The explanation of evaporation loss, transit loss, or weighbridge variation was found inconsistent with the fact that the supplier reimbursed the short receipt, and the cases relied upon for minor variation were held inapplicable to a substantial short receipt situation. The duty-paid nature of the invoices could not override the statutory requirement of actual receipt of inputs in the factory.

Conclusion: Modvat credit on the short-received inputs was correctly denied, against the assessee.

Issue (ii): Whether the composite penalty imposed under Rule 57I(4) read with Section 11AC was sustainable for the period involved.

Analysis: A part of the period in dispute preceded the coming into force of Section 11AC. In that situation, a mandatory composite penalty under Rule 57I(4) read with Section 11AC was held impermissible. While denial of credit was upheld because the inputs were not received, the penalty could not stand in the form imposed, and interest under Rule 57I(5) remained recoverable.

Conclusion: The composite penalty was not sustainable and was set aside, in favour of the assessee.

Final Conclusion: The denial of Modvat credit was upheld, but the penalty was set aside, with interest remaining recoverable as provided by law.

Ratio Decidendi: Modvat credit is available only on inputs actually received in the factory, and a composite mandatory penalty cannot be imposed under Rule 57I(4) read with Section 11AC for a period partly preceding the commencement of Section 11AC.

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