Cenvat credit on damaged or rejected inputs cannot be denied merely because their book value was written off during manufacture.

Credit on duty-paid inputs is admissible where the inputs were issued for manufacture and were rejected, damaged or became scrap during the manufacturing process; subsequent loss does not by itself show that the inputs were cleared as such or that the credit was wrongly taken. A mere write-off of the input value in the books is not conclusive proof of non-use, particularly where records and rejection notes show the items arose and were rejected in the manufacturing area during processing. Denial of credit was therefore not justified, and reversal was not required merely because the inputs were written off after such manufacturing-stage rejection or damage.

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Issues: Whether credit taken on duty-paid inputs can be denied merely because the value of such inputs was written off in the books as material loss, bought-out rejection or scrap, when the inputs had been issued for manufacture and were rejected or damaged during the course of the manufacturing process.

Analysis: Credit on duty-paid inputs is admissible when the inputs are used for the intended manufacturing purpose. If, during the course of manufacture, some inputs get damaged, rejected or become scrap, such subsequent loss does not by itself establish that the inputs were cleared as such or that the credit was wrongly availed. The accounting entry of writing off the value of such inputs, by itself, is not conclusive proof of non-use. On the facts, the records and product non-conformity notes showed that the items were generated and rejected in the manufacturing area during processing, which is consistent with line rejections and scrap arising in manufacture.

Conclusion: Denial of credit was not justified; the credit on the disputed inputs could not be reversed merely because their value was written off after rejection or damage during manufacture.

Ratio Decidendi: Credit on duty-paid inputs cannot be denied solely on the basis of book write-off if the inputs were issued for manufacture and were rejected, damaged or scrapped during the manufacturing process.

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