Modvat credit cannot be denied for a dealer's procedural lapse when duty-paid goods and valid invoice flow are shown.

Modvat credit could not be denied merely because the first-stage dealer had taken credit on original invoices and then issued invoices to the assessee. The dealer's procedural lapse was met only with penalty, and the credit standing in the dealer's account was not required to be reversed. As the invoices covered movement of duty-paid goods and the duty incidence was shown to have continued through the supply chain, the assessee's credit was not treated as based on an invalid document. Denial of the substantive Modvat benefit was therefore unjustified, and the assessee was entitled to the credit.

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Issues: Whether Modvat credit could be denied to the assessee because the first stage dealer had taken credit on the strength of original invoices and the assessee had received invoices issued by that dealer.

Analysis: The dealer had been proceeded against for not following the prescribed procedure, but the department had only imposed a penalty and had not required reversal of the credit standing in the dealer's account. The invoices issued by the dealer covered the movement of duty-paid goods and reflected the continued pass-through of duty incidence. In these circumstances, the assessee's credit was not treated as having been taken on an invalid document. The procedural lapse, if any, at the dealer's end could not justify denial of the substantive Modvat benefit to the assessee, particularly when the goods were duty paid and the duty incidence had not been shown to have been broken.

Conclusion: The denial of Modvat credit was unjustified and the assessee was entitled to the credit.

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