CENVAT credit denial failed where statutory records and documentary evidence outweighed uncorroborated third-party statements and loose papers.

Denial of CENVAT credit based on alleged non-receipt and diversion of duty-paid inputs was unsustainable where the assessee's statutory records, stock and purchase registers, and production evidence supported receipt and use of the inputs, while the department relied mainly on uncorroborated third-party statements and loose papers. The evidentiary basis was further weakened because cross-examination of several witnesses was not allowed. In the absence of independent proof of diversion, cash flow-back, or substitute procurement, the credit demand could not be upheld, and the connected penalty action also failed.

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Issues: Whether the denial of CENVAT credit on the allegation that duty-paid inputs were not actually received and were diverted to other buyers was sustainable on the basis of third-party statements, transport records and loose papers; and whether the penalty proposals following the credit demand could survive.

Analysis: The demand was founded mainly on statements of brokers, transporters, vehicle owners, ship-breakers and loose papers recovered from connected premises. The record showed that the appellant had maintained statutory records, recorded the inputs in stock and purchase registers, used them in manufacture, and cleared the final product on payment of duty. The statements relied upon were not supported by independent, cogent or direct evidence showing non-receipt of goods, diversion to re-rollers, return of cash, or procurement of substitute material. Cross-examination was not allowed in respect of several witnesses, rendering the evidentiary basis infirm in the adjudication. The alleged diversion and cash flow-back remained unproved and the loose papers, without corroboration, were insufficient to displace the documentary evidence produced by the appellant.

Conclusion: The denial of CENVAT credit was not sustainable and the penalty action based on the same allegation could not stand.

Final Conclusion: The impugned order was set aside and the assessee obtained full relief.

Ratio Decidendi: A demand for reversal of CENVAT credit cannot be sustained merely on uncorroborated third-party statements or loose papers when the assessee's statutory records and documentary evidence support receipt and use of inputs, and the departmental witnesses have not been effectively tested by cross-examination.

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