Modvat credit and stock variation claims failed where records supported receipt of goods and discrepancies were only marginal.

Marginal stock discrepancies in finished goods, where the variation was explained as a counting error and no irregularity was found in raw materials, were treated as normal stock-taking variation rather than evidence of suppression or clandestine removal; confiscation, redemption fine and penalty were therefore unsustainable. Modvat credit on inputs could not be denied where purchase invoices, banking records, gate entries, goods receipt documents and transporter confirmations supported receipt, and the contrary reliance on a non-statutory register and unreliable statements lacked required evidentiary safeguards. The denial of credit and related penalties were accordingly set aside.

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Issues: (i) Whether the confiscation, redemption fine and penalty arising from alleged excess and shortage of finished goods were sustainable. (ii) Whether denial of Modvat credit on inputs on the allegation of non-receipt of goods was sustainable.

Issue (i): Whether the confiscation, redemption fine and penalty arising from alleged excess and shortage of finished goods were sustainable.

Analysis: The stock variations in arms chairs, chairs without arm, PCC crates and plastic scrap were marginal. The discrepancy in baby chairs was explained as a counting error caused during hurried verification, especially since semi-finished goods were counted as finished goods and the manufacturing process involved further finishing before entry in RG-I. No discrepancy was found in raw materials. The alleged shortages and excesses were therefore treated as normal stock-taking variation rather than evidence of suppression or clandestine activity.

Conclusion: The confiscation, redemption fine and penalty were not sustainable and were set aside in favour of the assessee.

Issue (ii): Whether denial of Modvat credit on inputs on the allegation of non-receipt of goods was sustainable.

Analysis: The inputs were shown to have been purchased through banking channels and supported by invoices, gate register entries, goods receipt records and transporter confirmations. The reliance on the vahan register and certain statements was rejected because the register was not a statutory record and the statements were held unreliable in the absence of compliance with the mandatory conditions for their use. There was no evidence of diversion of inputs, no proof of alternative procurement, and no finding of cash flow back to the assessee. Minor discrepancies in vehicle particulars and transport records were held insufficient to deny credit.

Conclusion: The denial of Modvat credit and the connected penalties were not sustainable and were set aside in favour of the assessee.

Final Conclusion: The impugned order was wholly set aside and the appeals were allowed with consequential relief.

Ratio Decidendi: Marginal stock discrepancies, unsupported allegations of non-receipt of inputs, and unreliable statements without the required evidentiary safeguards cannot justify confiscation or denial of Modvat credit when the surrounding records and surrounding circumstances support receipt and use of the goods.

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