Cenvat credit on capital goods cannot be denied without proof of recipient fraud or non-receipt; extended limitation also fails.

Cenvat credit on capital goods was recognised as admissible where the recipient received duty-paid goods under invoices from a registered supplier, paid through banking channels, and entered and used them in statutory records and its factory. Credit could not be denied merely on allegations that the supplier lacked manufacturing capacity or that invoices were fictitious, absent independent proof that the recipient did not receive the goods or was complicit in fraud. The extended period of limitation was also held unavailable because there was no proved suppression or wilful misstatement by the recipient, making the demand time-barred. The demand, interest and penalties were therefore set aside.

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Issues: (i) Whether Cenvat credit on capital goods could be denied to the recipient on the basis that the supplier was allegedly not capable of manufacturing the goods or that the invoices were fictitious, and (ii) whether the demand was barred by limitation and the extended period could be invoked.

Issue (i): Whether Cenvat credit on capital goods could be denied to the recipient on the basis that the supplier was allegedly not capable of manufacturing the goods or that the invoices were fictitious.

Analysis: The dispute centred on the recipient unit's entitlement to credit on capital goods received under duty-paid invoices from a registered supplier. The record showed payment through banking channels, entries in statutory records, and installation/use of the capital goods in the recipient's factory. The department's evidence largely related to the supplier's manufacturing capability, but no independent evidence was brought to show that the recipient had not received the capital goods or had procured them from another source. The reasoning also accepted that the recipient was not required to undertake impossible verification beyond reasonable diligence, and that credit cannot be denied merely because later enquiries cast doubt on the supplier, when the recipient is not shown to be complicit in any fraud.

Conclusion: Cenvat credit was held to be admissible to the assessee.

Issue (ii): Whether the demand was barred by limitation and the extended period could be invoked.

Analysis: The show cause notice was issued after a substantial part of the disputed period had elapsed, and the department's own awareness regarding the supplier's alleged non-capacity arose much earlier. Since the recipient was found to have received the capital goods and there was no proven suppression or willful misstatement by it, invocation of the extended period was held to be unsustainable. In the absence of a sustainable case on fraud or concealment against the recipient, the demand could not be saved on limitation.

Conclusion: The demand was held to be time-barred.

Final Conclusion: The impugned demand, interest and penalties were set aside, and the assessee's appeal succeeded in full.

Ratio Decidendi: Cenvat credit cannot be denied to a recipient who has received capital goods under duty-paid invoices, made payment through banking channels, and recorded and used the goods in its statutory records, unless the department proves that the recipient was party to fraud or had actually not received the goods; in such circumstances, the extended period of limitation is also unavailable absent proved suppression or willful misstatement by the recipient.

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