Cenvat credit on inputs received during exemption period allowed where records were entered after eligibility arose

Duty demand was sustained for shortage of inputs and for rejected inputs found in the factory because the managing partner admitted the shortage and the presence of unusable rejected inputs, voluntarily debited the duty, and never retracted the statement. Cenvat credit on kraft paper was allowed because the inputs were received during the exemption period but entered in RG 23A Part-I only after the assessee crossed the exemption threshold; in the absence of evidence of consumption during the exempt period, credit could not be denied merely because the purchase occurred earlier. The final position was that the demand survived only on the shortage and rejected inputs, while the credit was available on the kraft paper.

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Issues: (i) Whether duty demand was sustainable on shortage of inputs and on rejected inputs found in the factory. (ii) Whether Cenvat credit of Rs. 43,125 was admissible on kraft paper received during the exemption period but entered in the records after crossing the exemption limit.

Issue (i): Whether duty demand was sustainable on shortage of inputs and on rejected inputs found in the factory.

Analysis: The managing partner's statement accepted the shortage of inputs and the presence of rejected inputs that were not fit for use in manufacture, and the corresponding duty amount had been debited voluntarily. The statement was never retracted. On these facts, no ground was found to disturb the demand relating to the short inputs and the rejected inputs found in the factory.

Conclusion: The duty demand on the shortage of inputs and the rejected inputs was upheld, against the assessee.

Issue (ii): Whether Cenvat credit of Rs. 43,125 was admissible on kraft paper received during the exemption period but entered in the records after crossing the exemption limit.

Analysis: The record showed that the kraft paper was received in the unit during the exemption period, but it was entered in RG 23A Part-1 only after the appellant had crossed the exemption threshold under Notification No. 8/2002-C.E. (N.T.) dated 01.03.2002. There was no evidence that the inputs were consumed during the exemption period. Credit could not be denied merely because the inputs were purchased during the exemption period.

Conclusion: The denial of Cenvat credit of Rs. 43,125 was set aside, in favour of the assessee.

Final Conclusion: The demand was sustained only for the shortage and rejected inputs, while the credit relating to kraft paper was allowed.

Ratio Decidendi: Cenvat credit cannot be denied merely because inputs were purchased during an exemption period if the entitlement to credit arises when the assessee becomes eligible and the record does not show consumption during the exempt period.

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