CENVAT credit on dealer invoices failed without duty-paid documents, while penalty was reduced for lack of collusion evidence.

CENVAT credit claimed on invoices issued by registered dealers was disallowed because the dealers had no duty paying documents to show that the inputs had suffered duty, so the demand was sustained against the assessee. On penalty, the absence of evidence of connivance or collusion between the assessee and the dealers justified interference, so the equal penalty was reduced substantially.

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Issues: (i) whether the demand confirming disallowance of credit taken on invoices issued by registered dealers was sustainable when the dealers had no duty paying documents; (ii) whether the equal penalty imposed was warranted.

Issue (i): whether the demand confirming disallowance of credit taken on invoices issued by registered dealers was sustainable when the dealers had no duty paying documents

Analysis: Credit was claimed on the strength of invoices issued by registered dealers, but the dealers themselves had no duty paying documents evidencing payment of duty on the inputs. In the absence of such documents, the appellants failed to establish that the inputs had suffered duty and were eligible for credit. The demand therefore stood on the material on record.

Conclusion: The demand confirming disallowance of credit was upheld, against the assessee.

Issue (ii): whether the equal penalty imposed was warranted

Analysis: Although the credit demand was sustained, there was no evidence showing connivance between the appellants and the dealers. That circumstance justified interference with the quantum of penalty.

Conclusion: The penalty was reduced to Rs. 25,000, partly in favour of the assessee.

Final Conclusion: The demand was sustained, but the penalty was substantially reduced in the absence of evidence of collusion.

Ratio Decidendi: Credit on inputs cannot be sustained merely on invoices of registered dealers when the dealers do not possess duty paying documents evidencing payment of duty, though penalty may be moderated in the absence of proved connivance.

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