Modvat credit cannot be denied for dealer irregularities alone when receipt, use of inputs, and bona fide purchase are shown.

Modvat credit could not be denied merely because registered dealers were alleged to have issued spurious or paper invoices, where the duty-paid inputs were shown to have been received in the factory and consumed in manufacture. The assessee had dealt with registered dealers, produced supporting invoices and documents, and paid through account payee cheques; no flow back of funds, collusion, or falsity of the transactions was proved. A lower resale price by the dealers, by itself, was insufficient to establish that the purchases were bogus. On these facts, denial of Modvat credit was not justified and the Revenue's challenge failed.

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Issues: Whether Modvat credit could be denied to the assessee on the ground that the inputs were allegedly covered by spurious or paper invoices issued by registered dealers, and whether the assessee had taken reasonable steps to ensure that the duty-paid goods were actually received and used in manufacture.

Analysis: The receipt of goods in the factory, their consumption in the manufacture of final products, and the duty-paid nature of the inputs were found to be established. The assessee had purchased the material from registered dealers, obtained supporting documents, and placed sample invoices on record. Payment through account payee cheques was not shown to be accompanied by any flow back of money. The circumstance that the goods were sold at a price lower than the dealers' purchase price, by itself, did not establish that the transactions were bogus. In the absence of evidence that the assessee had colluded in any fraud or that the documents were discrepant, Modvat credit could not be denied merely because of alleged irregularities at the dealer's end.

Conclusion: The denial of Modvat credit was not justified. The appeal of the Revenue failed and stood dismissed, in favour of the assessee.

Ratio Decidendi: Where duty-paid inputs are received and consumed, and the purchaser has taken reasonable steps by dealing with registered dealers and relying on regular invoices, credit cannot be denied merely on allegations of wrongdoing at the dealer's end unless collusion or falsity of the transaction is proved.

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