Modvat Credit on GP Sheets denied only with concrete proof of diversion; disclosed records also defeated extended limitation.

Modvat credit on GP sheets could not be denied on a mere allegation of clandestine diversion where the Revenue relied only on the fact of purchase and the general industry practice of using HR/CR sheets for OE parts, without concrete evidence of diversion, identified buyers, or proof of alternative procurement. The denial of credit therefore failed. The extended period of limitation was also unavailable because the credit was recorded in statutory records, invoices were filed with the department, and returns were regularly submitted and assessed, showing departmental knowledge of the material facts. The demand was accordingly held barred by limitation, and consequential relief followed.

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Issues: (i) Whether Modvat credit on GP sheets could be denied on the allegation that the inputs were not used in the manufacture of the final products and were clandestinely diverted. (ii) Whether the demand could be sustained by invoking the extended period of limitation.

Issue (i): Whether Modvat credit on GP sheets could be denied on the allegation that the inputs were not used in the manufacture of the final products and were clandestinely diverted.

Analysis: The dispute arose out of the same investigation that had already been examined in earlier connected matters. The evidentiary basis relied upon by the Revenue only showed that GP sheets were purchased and that, in the ordinary course, OE parts are generally manufactured from HR/CR sheets. That circumstance by itself was insufficient to establish that the appellants had not used GP sheets or that the goods had been cleared clandestinely. The Revenue did not produce concrete evidence identifying buyers of the alleged diverted GP sheets or proving procurement of HR/CR sheets from another source. In the absence of such proof, the allegation remained unsubstantiated and the denial of credit could not stand.

Conclusion: The denial of Modvat credit was not justified and the issue is decided in favour of the assessee.

Issue (ii): Whether the demand could be sustained by invoking the extended period of limitation.

Analysis: The credit was reflected in statutory records, invoices were filed with the department, and the relevant returns were regularly submitted and assessed. The material facts were therefore within the knowledge of the department. In such circumstances, suppression or misstatement with intent to evade duty was not established, and the extended period could not be invoked.

Conclusion: The demand was barred by limitation and the issue is decided in favour of the assessee.

Final Conclusion: The impugned orders were set aside and the three appeals were allowed with consequential relief as permissible in law.

Ratio Decidendi: A demand based on alleged clandestine diversion of inputs cannot be sustained without concrete evidence of such diversion, and the extended period of limitation is unavailable where the relevant transactions were disclosed in statutory records and were within departmental knowledge.

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