Cenvat credit denial needs proof of assessee-linked discrepancy or diversion; supplier book shortages alone are insufficient.

Cenvat credit cannot be denied solely because a supplier's books show shortages unless the department establishes a corresponding physical discrepancy, manipulation in the assessee's records, or diversion of inputs. Where the assessee's own records remained untainted, no stock verification showed mismatch, and the supplier corrected an erroneous shortage entry, credit denial beyond the amount already reversed was not sustainable. In the absence of evidence of deliberate wrongdoing, penalties and personal penalties were also set aside, while interest remained payable on the amount admittedly reversed.

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Issues: (i) Whether Cenvat credit could be denied merely on the basis of shortages recorded in the supplier's books of account when no physical stock discrepancy or manipulation in the appellant's records was established; (ii) whether penalty and personal penalties on the employees were sustainable.

Issue (i): Whether Cenvat credit could be denied merely on the basis of shortages recorded in the supplier's books of account when no physical stock discrepancy or manipulation in the appellant's records was established.

Analysis: The credit denial rested only on shortages reflected in the supplier's records. The appellant's own books did not disclose such manipulation, no physical stock verification was conducted, and the supplier had clarified that the earlier shortage entry was erroneous. The appellant had already reversed credit to the extent of the admitted shortage and there was no evidence of diversion of inputs.

Conclusion: The denial of Cenvat credit beyond the amount already reversed was not sustainable; relief was granted to the appellant to that extent.

Issue (ii): Whether penalty and personal penalties on the employees were sustainable.

Analysis: In the absence of evidence of deliberate wrongdoing or established diversion of inputs, the basis for penal consequences did not survive.

Conclusion: The penalty and personal penalties were set aside, while interest remained chargeable on the amount already reversed.

Final Conclusion: The company's appeal succeeded in part, the employees' appeals succeeded, and the substantive credit demand was restricted to the amount admittedly reversed with consequential interest.

Ratio Decidendi: Cenvat credit cannot be denied solely on the basis of an accounting shortage in a third party's records unless the department establishes a corresponding discrepancy, manipulation, or diversion attributable to the assessee.

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