Cenvat credit shortages justify disallowance, but penalty needs specific allegations of fraud or suppression to survive.

Cenvat credit was held inadmissible for inputs found short in stock records where the assessee failed to furnish a satisfactory reconciliation and could not support a set-off against alleged excesses in other items. Credit under the scheme is confined to inputs actually received and used in, or in relation to, manufacture. By contrast, penalty under Rule 13(2) of the Cenvat Credit Rules, 2002 required specific allegations and proof of fraud, wilful mis-statement, collusion, suppression of facts, or intent to evade duty; in the absence of such ingredients in the notice or findings, penalty was set aside.

---

---

Issues: (i) whether Cenvat credit could be denied on inputs found short in the appellant's stock records; (ii) whether penalty was sustainable under Rule 13(2) of the Cenvat Credit Rules, 2002.

Issue (i): Denial of Cenvat credit was based on shortages noticed in the appellant's own audit report and on the appellant's failure to furnish a satisfactory reconciliation. Credit under the Cenvat scheme is available only in respect of inputs actually received and used in, or in relation to, manufacture in the factory. A claim of set-off against excesses in other items was not supported by any reconciliation statement and was rightly rejected.

Conclusion: The disallowance of Cenvat credit on the inputs found short was sustained and decided against the assessee.

Issue (ii): Penalty under Rule 13(2) required a case of wrongful credit taken or utilised on account of fraud, wilful mis-statement, collusion, suppression of facts, or contravention of law with intent to evade duty. No such allegation was made in the notice, and no such finding was recorded by the lower authorities. In the absence of the statutory ingredients, penalty could not be imposed.

Conclusion: The penalty was unsustainable and was set aside in favour of the assessee.

Final Conclusion: The credit demand was maintained, but the penal consequence was deleted, leaving the appellant successful only in relation to penalty.

Ratio Decidendi: Penalty under Rule 13(2) of the Cenvat Credit Rules, 2002 cannot be imposed unless the statutory ingredients of fraud, wilful mis-statement, collusion, suppression of facts, or intent to evade duty are specifically alleged and established.

---