Negligible input shortage and no diversion: Modvat/Cenvat credit cannot be denied without proof of wilful suppression.

Negligible loss of duty-paid inputs, explained by moisture drying, minor weighment differences and human or mechanical error, did not justify denial of Modvat/Cenvat credit where the goods had been received in the factory and credit was taken on receipt. Absence of evidence of diversion from the factory or intent to evade duty meant wilful suppression was not established, so the proposed duty, interest and penalty could not be sustained. A practical approach was required in dealing with slight input shortages arising in the course of handling or manufacture, and credit could not be refused merely on that basis.

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Issues: Whether Modvat/Cenvat credit could be disallowed on a negligible shortage of raw material allegedly not received in full in the factory, and whether such shortage justified the allegation of wilful suppression of facts and the levy of duty, interest and penalty.

Analysis: The shortage in the inputs was about 0.05% and was explained as arising from drying of moisture content, minor weighment differences and human or mechanical error. The material had been received by the assessee in the factory and credit had been taken on receipt. There was no evidence that any duty-paid inputs had been diverted from the factory with intent to evade duty. In such matters, a practical approach is required and credit cannot be denied merely because a slight loss occurs in transit or in handling, particularly where the loss is consistent with natural causes and no wilful suppression is established. The principles reflected in the excise rules also support non-denial of credit where input loss arises in relation to manufacture and no culpable diversion is proved.

Conclusion: Modvat/Cenvat credit was not liable to be disallowed, and the allegation of wilful suppression of facts failed; the answer was against the Revenue and in favour of the assessee.

Ratio Decidendi: Negligible loss of duty-paid inputs, when reasonably explained by natural causes and not shown to involve diversion or wilful suppression, does not justify denial of Modvat/Cenvat credit or consequential levy of penalty and interest.

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