Modvat credit cannot be denied when inputs are received on duty documents, paid by cheque, used in manufacture, and no fraud is shown.

Modvat credit could not be denied merely because the registered dealer's upstream procurement trail was doubtful, where the assessee received inputs under duty-paying documents, paid by cheque, used them in manufacture, and cleared final products on duty payment. The Tribunal found that the dealer's statement and record supported actual supply of M.S. scrap, and no evidence showed any flow back of money or any material disproving receipt of inputs. In the absence of fraud, suppression, or misstatement by the assessee, denial of credit was not justified. Penalty could not be sustained on the same facts.

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Issues: Whether Modvat credit could be denied to the assessee on the ground that the registered dealer's procurement trail was doubtful, even though the assessee received the inputs under duty-paying documents, paid for them by cheque, used them in manufacture, and cleared the finished goods on payment of duty; and whether the penalty sustained in appeal could stand.

Analysis: The assessee established from the record that the duty-paying documents described supply of M.S. scrap, the dealer's statement supported actual supply of the scrap, the payments were made by cheque, and the inputs were consumed in the factory for manufacture of dutiable final products. The alleged arrangement between the registered dealer and its upstream supplier could not, by itself, defeat the assessee's credit when receipt and use of the inputs were shown. In the absence of evidence of any flow back of money or any contrary material disproving receipt of inputs, denial of credit was not justified. Following the earlier Tribunal view, credit could not be disallowed where the assessee was not shown to have committed fraud, suppression, or misstatement in relation to the credit availed.

Conclusion: Modvat credit was allowed to the assessee and the Revenue's challenge to deletion of penalty failed.

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