2004 (6) TMI 155 - AT - Central Excise

Cenvat/Modvat on inputs - huge and complex accounting problem - discrepancies in accounting and physical verification - Demand of duty on merely based on the shortages detected during physical tallying - HELD THAT - The appellants have a huge and complex accounting problem. It is beyond manual tally. The appellants have put in place sophisticated computer based accounting systems to ensure accuracy and efficiency. The evidence on record does not indicate any diversion of inputs in contravention of rules relating to utilisation of inputs. The demand is merely based on the shortages detected during physical tallying, that too without taking into account the excesses noticed. Since there is no evidence, that the excesses are not the result of clandestine receipt of inputs, the same view is required to be taken in regard to shortages also, that the shortages are not the result of any clandestine or unauthorised utilisation of the inputs. The shortages thrown up also do not account for much. The appellants' Management as well as its auditor have accepted the differences between the physical stocks and the procurement as normal and something to be put up with. It is a very small (0.24%) fraction of the inputs received. It is well settled that Tax Authorities also should go by the normal commercial and professional practice. If the shortages are within the tolerance limits fixed by an efficient Management and certified to as within the norms by qualified accounting professionals, it would be unreasonable and unfair for Tax authorities to take a different view. In these circumstances, we are of the view that there is no evidence to sustain a finding that this is a case of irregular or incorrect taking or utilisation of credit. In such a situation, no demand can be raised under Rule 57-I. The demand is accordingly, set aside and appeal is allowed with consequential relief to the appellant. Amounts already deposited by the appellant, on account of this dispute, shall be returned to it.

Summary

Issues Involved:
The disallowance of Modvat credit under Rule 57-I of the Central Excise Rules, 1944 due to discrepancies in accounting and physical verification.

Details of the Judgment:

Issue 1: Disallowance of Modvat Credit
Under the impugned order, the Commissioner of Central Excise disallowed Modvat credit of over Rs. 7.2 crores under Rule 57-I. The appellant, a manufacturer of automobiles, claimed the credit for inputs used in production. A large accounting variation involving shortages and excesses worth crores was observed during physical stock verification. The appellant argued that these discrepancies were due to accounting errors and did not indicate wrong availment or utilization of credit. The appellant's auditors certified the reasonableness of the accounting procedures. The appellant contended that the discrepancies were within commercial norms and should not lead to credit disallowance.

Issue 2: Appellant's Submission
The appellant explained the complexity of accounting for numerous inputs received from suppliers and the challenges in reconciling the stock variations. They highlighted the impracticality of daily reconciliation due to the high volume of transactions. The appellant's method involved computerized tracking of inputs received and consumed in production. They argued that errors could occur due to various reasons and that discrepancies were inevitable in a large organization. The appellant emphasized that no evidence of diversion or misutilization existed, warranting credit disallowance.

Issue 3: Revenue's Contention
The Revenue contended that the appellant failed to fully account for the disposal of inputs as required by Rule 57-I, justifying the credit denial. They emphasized that the duty demand was based on unaccounted quantities despite reconciliation efforts. The Revenue pointed out that other auto companies managed their accounting effectively without similar disputes.

Judgment
After considering both sides' submissions, the Tribunal found that the appellant's accounting discrepancies did not indicate incorrect credit utilization. The Tribunal accepted the appellant's detailed accounting system and the challenges in reconciling stock variations. The presence of unaccounted excess inputs supported the existence of errors in accounting/physical verification. The Tribunal concluded that the shortages detected did not prove unauthorized utilization of inputs. As the shortages were within tolerance limits and certified as normal by accounting professionals, the demand under Rule 57-I was unjustified. The Tribunal set aside the demand, allowing the appeal and ordering the return of deposited amounts to the appellant.