Cenvat credit on damaged inputs requires proof of manufacture use, while suppression can trigger penalty and interest.

Cenvat credit on inputs claimed to have been damaged is inadmissible unless the assessee proves that the inputs were used in manufacture or formed part of work in progress; on the facts noted, the credit had to be reversed. Suppression of the damage and related insurance claim, discovered only on audit, supported penalty under Section 11AC where wrong availment and utilisation of credit with intent to evade duty was recorded. Interest was also payable on the disallowed credit because interest follows reversal of wrongly availed credit and is compensatory in nature.

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Issues: (i) Whether Cenvat credit taken on inputs alleged to have been damaged and not proved to have been used in manufacture was liable to reversal. (ii) Whether the assessee's failure to disclose the damage and insurance claim attracted penalty under Section 11AC of the Central Excise Act, 1944. (iii) Whether interest was payable on the disallowed credit.

Issue (i): Whether Cenvat credit taken on inputs alleged to have been damaged and not proved to have been used in manufacture was liable to reversal.

Analysis: The assessee did not establish by any documentary evidence that the inputs on which credit had been taken were actually used in production or had become work in progress. The factual finding was that the goods were damaged in a stock godown and not in the factory premises, and the claim came to light only during audit. In the absence of proof that the inputs had entered the manufacturing stream, credit on such goods was not admissible.

Conclusion: The credit was rightly disallowed and had to be reversed, in favour of Revenue.

Issue (ii): Whether the assessee's failure to disclose the damage and insurance claim attracted penalty under Section 11AC of the Central Excise Act, 1944.

Analysis: The record showed suppression of material facts, including non-disclosure of the damage and the insurance claim, and the matter surfaced only on audit objection. The authorities recorded a clear finding of wrong availment and utilisation of credit with intent to evade duty. On those findings, the penal provision was attracted, and the appellate deletion of penalty was unsustainable.

Conclusion: Penalty under Section 11AC was attracted and the deletion of penalty was set aside, in favour of Revenue.

Issue (iii): Whether interest was payable on the disallowed credit.

Analysis: Interest on wrongly availed and disallowed credit follows the liability to reverse the credit and is compensatory in nature. Once the credit was held inadmissible, the assessee became liable for interest on the disallowed amount.

Conclusion: Interest was payable, in favour of Revenue.

Final Conclusion: The Revenue succeeded on the substantive issues of ineligible credit, penalty, and interest, and the assessee's challenge did not survive.

Ratio Decidendi: Cenvat credit on inputs cannot be retained unless the assessee proves that the inputs were used in manufacture or formed part of work in progress, and where credit is wrongly taken with suppression of material facts and intent to evade duty, penalty and interest follow.

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