Duty-free inputs and documentary proof of consumption defeat demand where no contrary enquiry or evidence exists.

Contemporaneous documentary evidence showing receipt, consumption and clearance of finished products from duty-free inputs under Chapter X cannot be rejected as an afterthought without verification or contrary material. Where the assessee produced internal audit reports, challans, technical specifications, model details and sale records to show that the inputs were used in manufacturing diesel engines and water pumps, and no independent enquiry or rebuttal evidence was brought on record, the demand of duty and penalty could not be sustained. The impugned order was set aside and relief was granted to the assessee.

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Issues: Whether the demand of duty and penalty could be sustained on the allegation that inputs received under Chapter X procedure were not used in the manufacture of specified goods, and whether the evidence produced by the assessee showing receipt, consumption, and clearance of finished products had been wrongly disregarded.

Analysis: The assessee produced contemporaneous business records, including internal audit reports, challans, model details, technical specifications, and sale particulars, to show that the inputs received without payment of duty were consumed in the manufacture of diesel engines and water pumps. The matter had earlier been remanded with a direction to consider the entire evidence and make proper inquiries before rejecting it. The adjudicating authority, however, again discarded the evidence merely as an afterthought without verification. No independent material was brought on record to show that the inputs were cleared as such without payment of duty, and no enquiry was made from buyers or other relevant persons to rebut the documentary evidence.

Conclusion: The demand was not sustainable and the assessee succeeded.

Final Conclusion: The impugned order was set aside and the appeal was allowed, resulting in relief to the assessee.

Ratio Decidendi: Where an assessee produces contemporaneous documentary evidence showing lawful consumption of duty-free inputs in the manufacture of specified goods, such evidence cannot be rejected as an afterthought without verification or contrary material, and the demand cannot stand on mere assumption of non-use.

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