Modvat credit requires cogent proof of non-use, and the extended limitation fails without suppression.

Modvat credit may not be denied merely because the inputs are not traceable in the finished product if statutory records, chemical reports, stock registers, purchase documents and returns together support receipt and use in manufacture. The Department must disprove utilisation with cogent evidence of non-use, clandestine removal or use for some other purpose; failure to do so makes denial of credit and related duty demand unsustainable. On limitation, an earlier demand cannot be reopened through the extended period where later notices proceeded on the same allegations and there is no suppression or intent to evade. In such circumstances, the extended limitation is unavailable and the earlier demand is time-barred.

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Issues: (i) Whether the Department had established that the inputs in question were not used in or in relation to the manufacture of the final product, so as to justify denial of Modvat credit and confirmation of duty demand; (ii) Whether the demand relating to the earlier period was barred by limitation and the extended period could be invoked.

Issue (i): Whether the Department had established that the inputs in question were not used in or in relation to the manufacture of the final product, so as to justify denial of Modvat credit and confirmation of duty demand.

Analysis: The primary burden lay on the Department to dislodge the assessee's claim supported by statutory records. The chemical reports, the statement of the laboratory expert, stock registers, purchase documents and regular returns were read together. The materials showed procurement and recorded use of the inputs, while the evidence also indicated that some inputs could lose identity during manufacture. There was no cogent evidence of clandestine removal or use for any other purpose, and mere inability to identify the input in the final product was not enough to deny credit where surrounding evidence supported use in manufacture.

Conclusion: The Department failed to prove non-utilisation of the inputs, and the denial of Modvat credit and confirmation of duty demand were unsustainable.

Issue (ii): Whether the demand relating to the earlier period was barred by limitation and the extended period could be invoked.

Analysis: The later notice covered the same allegations and grounds as the earlier notices, differing only in period. Since the Department had already proceeded on the same basis for the later periods, the pendency of investigation by itself did not justify reopening an earlier period through the extended limitation. In the absence of suppression or other material showing an intent to evade, invocation of the extended period was not justified.

Conclusion: The demand for the earlier period was barred by limitation and the extended period could not be invoked.

Final Conclusion: The duty demand, penalty and related adverse findings were set aside, and the assessee succeeded in the appeals with consequential relief.

Ratio Decidendi: When an assessee's statutory records and surrounding evidence support use of inputs in manufacture, the Department must prove non-utilisation with cogent evidence; where the same allegation has already been raised for later periods and no suppression is shown, the extended period of limitation is unavailable.

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