Modvat credit cannot be denied for minor, explainable transit loss in duty-paid inputs without any diversion.

Minor, explainable shortage in molasses transferred between divisions of the same legal entity within the same registered premises did not justify denial of Modvat credit. The record showed no diversion of the invoiced quantity, and the loss was attributable to storage, drayage and handling or transit loss. Because molasses is susceptible to moisture and natural weight variation, small in-factory losses were treated as normal where receipt and use of the goods were established. The order denying credit was set aside, and consequential relief followed.

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Issues: Whether Modvat credit could be denied on minor shortage in molasses transferred between two divisions of the same legal entity within the same registered premises, when there was no finding of diversion and the loss was attributable to storage, drayage and handling/transit loss.

Analysis: The transfer was between divisions of the same factory and the same legal entity, not between different legal entities. The record showed no diversion of the invoiced quantity, and the shortage was minimal. Molasses being a material susceptible to moisture and natural weight variation, small losses within the factory premises were treated as normal and not as a basis to deny credit. The reasoning adopted in the larger bench decision on transit loss supported allowance of credit where the facts showed receipt and use of the goods without diversion.

Conclusion: Denial of credit was not justified and the assessee was entitled to relief.

Final Conclusion: The order denying credit was set aside and the appeal succeeded with consequential relief.

Ratio Decidendi: Minor and explainable loss in quantity of duty-paid inputs transferred within the same legal entity, without any diversion, is not a valid ground to deny credit.

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