Modvat credit denial fails where alleged sub-standard inputs are not proved by concrete evidence and finished goods meet specifications.

Denial of Modvat credit cannot rest on suspicion or conjecture where the department fails to produce cogent evidence that inputs were below the prescribed thickness. No inferior stock was found in the factory, the invoices did not by themselves establish non-conforming inputs, and the finished goods were manufactured to specification, inspected, and accepted. On those facts, the allegation of irregular credit was not proved, so the duty demand and penalties were unsustainable and were set aside in favour of the assessee.

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Issues: Whether the denial of Modvat credit and the consequential duty demand and penalties were sustainable on the allegation that the appellants had used inputs of sub-standard thickness and had availed credit irregularly.

Analysis: The demand rested on an inference that the inputs used for manufacture of the goods supplied to the Department of Telecommunication were not of the prescribed thickness. However, no physical stock of such inferior inputs was found in the factory, the invoices not mentioning thickness did not by itself establish that the inputs were below the prescribed standard, and the finished goods had been supplied in accordance with the Department's specifications and accepted after inspection. The test reports also matched the specifications. In the absence of cogent and concrete evidence, the allegation of irregular availment of credit could not be sustained, and findings based on suspicion or conjecture could not replace legal proof.

Conclusion: The denial of Modvat credit, the duty demand, and the penalties were unsustainable and were set aside in favour of the assessee.

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