Modvat credit cannot be denied on employee statements alone when registered dealer invoices are not proved false.

Modvat credit could not be denied merely on employee statements or an alleged irregularity in the source of scrap where invoices issued by registered dealers were not shown to be false. The Department had found the scrap in the stockyard but failed to verify effectively whether it was non-duty-paid or to produce corroborative evidence that the goods received differed from those covered by the documents. In these circumstances, the evidence was insufficient to sustain disallowance of credit or penalty, and consequential relief followed.

---

---

Issues: Whether Modvat credit could be disallowed and penalty sustained on the basis of employee statements and alleged irregularity in the source of scrap received through registered dealers.

Analysis: The scrap was found available in the stockyard when the central excise officers visited the premises, but no effective verification was undertaken to ascertain whether the scrap was non-duty-paid or to test the veracity of the documents. The appellant had taken credit on invoices issued by registered dealers, and the invoices were not shown to be bogus. The only incriminating material was the statements of employees, which by themselves were held insufficient to prove that the goods covered by the invoices were not actually received. The Board's circular on verification of duty-paying documents and the practical difficulty in tracing the exact source of scrap in a market where scrap changes hands repeatedly also supported the appellant's case.

Conclusion: The disallowance of Modvat credit and the penalty were not sustainable.

Final Conclusion: The appeal succeeded and the appellant was held entitled to consequential relief in accordance with law.

Ratio Decidendi: Modvat credit cannot be denied merely on employee statements or suspected source irregularity when duty-paying invoices of registered dealers are not shown to be false and the Department fails to produce corroborative evidence that the goods actually received differed from those covered by the documents.

---