CENVAT credit cannot be denied for theoretical stock variances without proof of clandestine removal or unauthorised use.

CENVAT credit could not be denied merely because input stock registers showed marginal theoretical shortages and excesses, where there was no evidence that the goods were never received, clandestinely removed, or otherwise used without duty compliance. The Tribunal treated the discrepancies as accounting and stock-taking variations arising from the scale and complexity of the business, and relied on earlier decisions in the same assessee's matters. Rule 3(5B) of the CENVAT Credit Rules, 2004 was held inapplicable because the case did not involve a write-off of goods actually available in the factory through a book entry. The demand, interest and penalty were therefore unsustainable.

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Issues: Whether CENVAT credit could be denied and recovery confirmed merely on account of theoretical shortages and excesses found in input inventory, in the absence of evidence of clandestine removal or unauthorised use of inputs.

Analysis: The input inventory discrepancies were found to be marginal and attributable to the scale and complexity of the assessee's operations. The record did not show that the inputs were not received in the factory or that they were removed without payment of duty. The Tribunal treated the shortages and excesses as theoretical variations arising from accounting and stock-taking differences, and followed earlier decisions in the assessee's own cases as well as the principle that tax administration must account for normal commercial practice. Rule 3(5B) of the CENVAT Credit Rules, 2004 was held inapplicable because the department's case was not one of write-off of goods actually available in the factory through a book entry.

Conclusion: CENVAT credit could not be disallowed on the basis of theoretical inventory variance, and the demand, interest and penalty were unsustainable.

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