Cenvat credit on admitted stock shortages denied, but demand limited to normal period and penalty set aside.

Cenvat credit was not admissible on inputs admitted as short in stock verification and written off in the books, because the missing quantity was not shown to have been used in manufacture; however, the demand had to be re-quantified on the net shortage after setting off excess stock against shortage. The extended period of limitation was not upheld on the facts, and no penalty was leviable, so the demand was confined to the normal period with fresh quantification directed.

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Issues: (i) whether Cenvat credit was reversible on inputs found short on stock verification by dip method and written off in the books of account; (ii) whether the extended period and penalty were attracted.

Issue (i): Whether Cenvat credit was reversible on inputs found short on stock verification by dip method and written off in the books of account.

Analysis: The shortage was admitted by the assessee after adjustment of the stock differences in its books. The inputs so found short were not shown to have gone into manufacture of the final product. On that basis, the credit relating to the net shortage was held to be inadmissible under the Cenvat regime, while the matter required net quantification after setting off excess quantity against shortage.

Conclusion: Cenvat credit was reversible on the net quantity of inputs written off, and the matter had to be re-quantified accordingly.

Issue (ii): Whether the extended period and penalty were attracted.

Analysis: The facts disclosed admission of shortage and write-off in the books, but the circumstances did not justify penal consequences. The demand was sustained only within the normal period of limitation, and the authorities were directed to quantify the duty on the net amount within that period.

Conclusion: The extended period was not upheld and no penalty was leviable.

Final Conclusion: The appeal succeeded only to the limited extent of penalty relief and remand for fresh quantification, while the credit demand on the net shortage within the normal period was sustained.

Ratio Decidendi: Where input shortages are admitted and written off in the books, Cenvat credit is not admissible on the short quantity, but the duty demand must be confined to the normal limitation period and penalty may be denied on the facts.

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