Cenvat credit on stock shortages turns on proof of clandestine removal; clinker loss denied, penalties and balance demand set aside.

Cenvat credit disputes arising from shortages of clinker and HDPE bags were examined on the basis of physical verification, inventory records and the absence of evidence of clandestine removal. The Tribunal treated clinker as a material prone to handling and manufacturing loss and noted that the opening stock was not physically available and the new management had not maintained proper inventory. Credit was therefore denied for the disputed clinker quantity, but relief was granted for HDPE bags. In the absence of suppression or contumacious conduct, the remaining credit demand and penalties were set aside.

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Issues: Whether the Cenvat credit demand and penalties arising from shortage of clinker and HDPE bags were sustainable in the absence of corroborative evidence of clandestine removal, and whether the assessee was entitled to credit reversal relief in respect of the disputed inputs.

Analysis: The shortage was found on physical verification, but the stock valuation was based largely on eye estimation and the record did not contain any allegation or proof of clandestine clearance. The Tribunal noted the accepted position that clinker is susceptible to handling, transportation and manufacturing loss and that such loss may constitute normal loss. It also noted that the assessee's new management had failed to maintain proper inventory, and that the opening clinker balance was not physically available. On that basis, the Tribunal held that credit could not be retained on the clinker shown as not available, but the reversal relating to HDPE bags was not to be sustained in the same manner. In the absence of contumacious conduct or suppression, the demand beyond the admitted clinker-related adjustment and the penalties could not survive.

Conclusion: The assessee succeeded in part. The balance Cenvat credit demand and all penalties were set aside, while credit on the disputed clinker quantity was denied and relief was granted in respect of HDPE bags.

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