Modvat credit on dealer invoices cannot be denied where records are maintained and no suppression is shown.

Modvat credit on dealer invoices cannot be denied merely because the supplier chain is suspected, where the buyer maintains statutory records, files returns, and receives goods in the ordinary course from registered dealers. The department cannot insist on impractical verification of the supplier's internal affairs once reasonable steps have been taken and the documents are in order. Extended limitation is not available where the credit documents and returns were already before the department and the facts do not show suppression. A retracted witness statement and an extraneous challenge to the technical or economic viability of the inputs do not sustain the demand.

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Issues: (i) Whether Modvat credit taken on the strength of dealer invoices could be denied on the allegation that the inputs were not actually received and the documents were fraudulent. (ii) Whether the demand was barred by limitation in view of the departmental records and conduct of the assessee. (iii) Whether reliance could be placed on the retracted statement of a witness and on alleged lack of technical or economic viability of the inputs used.

Issue (i): Whether Modvat credit taken on the strength of dealer invoices could be denied on the allegation that the inputs were not actually received and the documents were fraudulent.

Analysis: The assessee had maintained statutory records and filed the relevant returns along with the invoices, and the departmental officers had defaced the duty-paying documents while processing the returns. The finding that the supplier chain was suspect did not, by itself, dislodge the assessee's entitlement where the record showed receipt of inputs and availment of credit in the regular course. The reasoning adopted also treated the buyer as entitled to rely on bona fide purchase from registered dealers without being required to conduct an impractical verification of the suppliers' internal records.

Conclusion: The denial of Modvat credit was not sustainable.

Issue (ii): Whether the demand was barred by limitation in view of the departmental records and conduct of the assessee.

Analysis: The credit documents and monthly returns had been furnished to the department and the duty-paying documents had been defaced by departmental officers at the time of assessment. On those facts, invocation of the extended period was not justified because the department had material access to the transactions during the relevant period. The notice issued long after the relevant period could not be supported as a case of suppression or equivalent misconduct.

Conclusion: The demand was time-barred.

Issue (iii): Whether reliance could be placed on the retracted statement of a witness and on alleged lack of technical or economic viability of the inputs used.

Analysis: The statement relied upon by the department was retracted in cross-examination, which weakened the evidentiary basis of the allegation. The departmental theory that the assessee should have used only inputs considered technically or economically viable was rejected as an extraneous inquiry outside the purchaser's legal burden. The governing principle accepted was that once reasonable steps are taken to verify the supplier and the documents, credit cannot be denied by imposing an impossible burden of further investigation.

Conclusion: The evidentiary basis of the demand failed.

Final Conclusion: The impugned order was set aside and both appeals were allowed with consequential relief in accordance with law.

Ratio Decidendi: Where a buyer of inputs receives goods from registered dealers, maintains statutory records, and takes reasonable steps to verify the transaction, Modvat or Cenvat credit cannot be denied by requiring the buyer to conduct impractical further verification of the supplier's affairs, and the extended limitation cannot be invoked in the absence of suppression despite departmental knowledge of the transactions.

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