CENVAT credit recovery on written-off inputs rejected where no evidence of physical removal; demand set aside.

Demand for recovery of CENVAT credit alleged as written off inputs is analysed on the basis that mere accounting diminution or write-down for tax or accounting purposes does not establish that inputs were physically removed or rendered unusable; absence of evidence of physical removal defeats invocation of an extended limitation for recovery. Consequently, an order seeking reversal of credit on that basis cannot be sustained and is liable to be set aside, applying the principle that evidentiary proof of removal, not mere bookkeeping adjustments, is essential for credit reversal and extended period invocation.

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Issues: (i) Whether reduction in value of inputs/work-in-progress by making a provision in the financial books (book write-down) amounts to writing off of inputs/capital goods so as to attract reversal of Cenvat credit under Rule 3(5B) of the Cenvat Credit Rules, 2004 and related demand, interest and penalty.

Analysis: The Court examined whether the accounting provision reducing inventory value constituted a physical write-off of inputs or capital goods on which Cenvat credit had been availed and whether the extended period of limitation could be invoked. The Tribunal relied on prior decisions holding that a book entry or write-down made for accounting or income-tax purposes, without evidence of removal or physical unavailability of inputs, does not amount to writing off for the purposes of Rule 3(5B). The admitted factual position that no physical verification showed removal of inputs and that the write-down was made to normalise inflated financial figures were considered. The Tribunal noted authorities where reduction in book value, absent evidence of physical depletion or utilization of credit, did not require reversal of credit and where demands and penalties were set aside. The Tribunal also addressed the contention on extended limitation, observing that invocation for extended period requires specific allegations of fraud/collusion or suppression, which were not substantiated on record.

Conclusion: The impugned order confirming demand, interest and penalty under Rule 3(5B) read with Rule 14 and Sections 11A(4) and 11A(5) is set aside. The reduction in inventory value by way of accounting provision, without evidence of physical write-off or removal of inputs, does not compel reversal of Cenvat credit; appeal is allowed with consequential relief as per law (in favour of the assessee).

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