Modvat credit is limited to actual inputs received; shortage non-disclosure can extend limitation, but penalty may still fail.

Under the Modvat scheme, credit on inputs is confined to the actual quantity received in the factory and used in manufacture when the assessee weighs the goods on receipt and finds a shortage against the duty-paying documents. The text states that the demand was therefore sustained. On limitation, non-disclosure of the shortage from the weighment sheets supported invocation of the extended period because the department lacked corresponding knowledge. The penalty, however, was held unwarranted on the facts and set aside, despite the confirmed demand.

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Issues: (i) Whether Modvat credit, where the inputs were weighed on receipt, was to be restricted to the lesser quantity actually received and used in the factory rather than the quantity shown in the duty-paying documents; (ii) Whether the demand was barred by limitation and whether penalty was sustainable.

Issue (i): Whether Modvat credit, where the inputs were weighed on receipt, was to be restricted to the lesser quantity actually received and used in the factory rather than the quantity shown in the duty-paying documents.

Analysis: Rule 57G refers to inputs received in the factory, and Rule 57A(4) allows credit on inputs used in the manufacture of the final product. Read together, the scheme permits credit only on the actual quantity received and used. Where the assessee chooses to weigh the goods and finds that the quantity received is less than that shown in the documents, the credit available is confined to the lesser quantity.

Conclusion: The credit was rightly restricted to the actual quantity received and used, and the demand was sustained.

Issue (ii): Whether the demand was barred by limitation and whether penalty was sustainable.

Analysis: Since the assessee knew of the shortage from the weighment sheets and the department had no corresponding knowledge, suppression could be alleged and the extended period was not barred. However, the assessee had voluntarily deposited the wrongly availed credit, and the circumstances did not justify penal action.

Conclusion: The limitation objection failed, but the penalty was not justified and was set aside.

Final Conclusion: The demand was confirmed, while the penalty was remitted, resulting in a partial success for both sides.

Ratio Decidendi: Under the Modvat scheme, where the assessee weighs the inputs on receipt, credit is restricted to the actual quantity received and used, and non-disclosure of the shortage may justify the extended period, though penalty may still be unwarranted on the facts.

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