MODVAT/CENVAT credit demands need cogent evidence, and limitation and penalty must follow the law in force during the relevant period.

MODVAT/CENVAT credit denial cannot rest solely on discrepancies between balance-sheet figures, RG-23A records and later stock verification unless the Revenue produces cogent evidence of non-receipt, non-consumption or clandestine removal of inputs; on that basis, the credit demand was found unsustainable. Extended limitation is unavailable where records were maintained, returns were filed regularly, and there was no factual foundation for suppression or intent to evade duty; accordingly, the longer period could not be invoked. Proceedings and penalty must also be founded on the law in force during the relevant period, so notice and penalty under inapplicable later CENVAT Credit Rules were held legally unsustainable.

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Issues: (i) whether reversal of MODVAT/CENVAT credit could be sustained merely on the basis of discrepancies between balance-sheet figures, RG-23A records and stock verification without cogent evidence of non-receipt, non-consumption or clandestine removal of inputs; (ii) whether the extended period of limitation could be invoked in the absence of suppression or intent to evade duty; and (iii) whether proceedings and penalty could be sustained under inapplicable CENVAT Credit Rules for a period governed by the erstwhile Central Excise regime.

Issue (i): whether reversal of MODVAT/CENVAT credit could be sustained merely on the basis of discrepancies between balance-sheet figures, RG-23A records and stock verification without cogent evidence of non-receipt, non-consumption or clandestine removal of inputs

Analysis: The demand was founded on alleged shortages and discrepancies in the appellant's records and later stock verification. The prior remand had required reconciliation of figures and insisted that the Revenue establish its allegation with cogent evidence, because balance-sheet figures by themselves were not treated as conclusive proof for denying credit. In the remand proceedings, the adjudication order did not effectively reconcile the discrepancies as directed and did not produce concrete evidence that the inputs were not received, not consumed in manufacture, or clandestinely removed. The use of later physical verification to support alleged shortages for earlier years was also found impermissible.

Conclusion: The credit demand was not sustainable on merits and was set aside in favour of the assessee.

Issue (ii): whether the extended period of limitation could be invoked in the absence of suppression or intent to evade duty

Analysis: The Tribunal found that the relevant entries had been made in the records before the investigation, the returns had been filed regularly, and the department had opportunities through audit and scrutiny to notice the records. In these circumstances, the finding of intentional suppression with intent to evade duty was not supported by the record. Without factual foundation for suppression, the proviso enabling extended limitation could not be pressed into service.

Conclusion: Invocation of the extended period was unjustified and failed in favour of the assessee.

Issue (iii): whether proceedings and penalty could be sustained under inapplicable CENVAT Credit Rules for a period governed by the erstwhile Central Excise regime

Analysis: The appellants had availed MODVAT credit during the relevant period, yet the show cause notice and the order invoked later CENVAT Credit Rules and penalty provisions not in force for the relevant period. The Tribunal held that the Revenue had to proceed under the legal provisions applicable at the time of the alleged contravention and could not penalize the assessee under inapplicable rules merely because the language of later and earlier provisions was similar. The objection was treated as a pure legal issue capable of being raised at any stage.

Conclusion: The proceedings were without jurisdiction to the extent they rested on inapplicable provisions, and the penalty could not be sustained in favour of the assessee.

Final Conclusion: The impugned order was unsustainable on merits, limitation and legal grounds, resulting in allowance of both appeals and relief to the appellants.

Ratio Decidendi: A demand to deny credit cannot be sustained merely on discrepancies in books or later stock verification without cogent evidence of non-receipt, non-consumption or clandestine removal, and proceedings must be founded on the law applicable during the relevant period; in the absence of suppression, the extended limitation period cannot be invoked.

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