Facts of the Case

The Revenue filed a batch of connected appeals under Section 35G of the Central Excise Act, 1944 against the order dated 18 January 2022 passed by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad.

The dispute arose from searches conducted on 1 December 2007 and 9 May 2008 at various premises connected with three manufacturers, namely M/s Raghunath International Ltd., M/s Seema Enterprises and M/s Shankar Enterprises, engaged in the manufacture of “Sir” Brand Gutkha and Pan Masala.

During the searches, the Central Excise authorities allegedly seized or detained incriminating documents, unaccounted raw material and finished goods. Searches were also carried out at premises connected with transporters, dealers and railway stations, where consignments of “Sir” Brand Gutkha and Pan Masala allegedly cleared clandestinely were stated to have been found.

Statements of several persons were recorded during investigation, including employees, transport personnel, dealers, railway booking agents, buyers and authorised representatives of the manufacturers. The Revenue relied particularly upon statements attributed to Shri Sushil Gupta, clerk of M/s Shankar Enterprises, and Shri Rajesh Agarwal, Manager and Authorised Signatory associated with the manufacturing concerns.

Show cause notices dated 28 May 2008 and 7 November 2008 were issued proposing confiscation of finished goods, raw materials and vehicles, along with imposition of penalties. The Adjudicating Authority ultimately confirmed demands of duty, interest and penalties on the basis of the alleged clandestine manufacture and removal of Gutkha/Pan Masala without invoices and without payment of excise duty.

The CESTAT, however, set aside the demands and penalties after examining the evidentiary material. It found that the case was mainly founded upon third-party records, particularly transporters’ records, and statements of various persons which had either been retracted or had failed to withstand cross-examination.

Aggrieved by the CESTAT order, the Revenue approached the Allahabad High Court under Section 35G of the Central Excise Act, 1944.

Issues Involved

The principal issues before the High Court were:

  1. Whether a retracted confessional statement requires corroboration by independent evidence before it can sustain a demand alleging clandestine removal.
  2. Whether duty demand based on third-party documents, supported by statements recorded during investigation, was legally sustainable.
  3. Whether the CESTAT was justified in rejecting or giving reduced evidentiary weight to statements of witnesses and concerned persons.
  4. Whether the CESTAT was justified in setting aside or reducing duty demand, redemption fine, confiscation and penalties.
  5. Whether statements recorded by departmental officers under Section 14 of the Central Excise Act, 1944 could by themselves establish statutory violations.
  6. Whether the findings of the CESTAT disclosed any substantial question of law warranting interference under Section 35G of the Central Excise Act, 1944.

Revenue/Appellant’s Arguments

The Revenue contended that the searches conducted at the premises of the manufacturers and other connected locations had resulted in recovery of incriminating documents, unaccounted raw materials and finished goods.

It was argued that consignments of “Sir” Brand Gutkha and Pan Masala were recovered from transporters and railway stations and that these recoveries corroborated the statements recorded during investigation.

The Revenue relied upon the statement of Shri Sushil Gupta, clerk of M/s Shankar Enterprises, who was stated to have admitted dispatch of Gutkha/Pan Masala without bills through railway transport on different dates.

The Revenue further contended that Shri Rajesh Agarwal, Manager and Authorised Signatory, had agreed with the statement of Shri Sushil Gupta and had disclosed the alleged modus operandi relating to management of raw materials and clandestine removal of manufactured goods.

According to the Revenue, the Adjudicating Authority was legally entitled to rely upon statements recorded under Section 14 of the Central Excise Act. It was argued that retraction by other persons did not destroy the evidentiary value of the material collected during investigation.

The Revenue submitted that the CESTAT had erred in holding that retracted statements required independent corroboration and had wrongly ignored the statements, third-party documents and other evidence allegedly establishing clandestine clearance.

The Revenue also relied upon decisions including:

  • Commissioner of Central Excise, Mumbai vs Kalvert Foods India Pvt. Ltd.
  • Lawn Textile Mills Pvt. Ltd. vs CESTAT, Chennai
  • N.R. Sponge Pvt. Ltd. vs Commissioner of Central Excise, Raipur
  • Principal Commissioner of CGST & Central Excise, Raipur vs G.P. Ispat Pvt. Ltd.

The Revenue sought restoration of the findings of the Adjudicating Authority.

Respondents/Assessees’ Arguments

The respondents contended that the CESTAT had examined the entire evidentiary record and correctly found that duties and penalties had been imposed mainly on the basis of third-party records and statements of persons connected with transporters, manufacturers, dealers, purchasers, railway booking agents and alleged buyers or resellers.

The manufacturers maintained that they sold goods ex-factory at ex-factory prices and that transportation after delivery was arranged by the buyers themselves.

It was specifically argued that the manufacturers were neither consignors nor consignees in the third-party transporters’ records, including railway records relied upon by the Department.

The respondents further submitted that almost all persons whose statements were relied upon had either retracted their earlier statements or their statements had failed to withstand cross-examination during adjudication proceedings.

It was contended that serious anomalies existed in the allegations of clandestine transportation through railways and that a substantial portion of railway records had itself been found unreliable.

The respondents argued that statements allegedly obtained under threat, coercion, pressure or duress could not be treated as reliable substantive evidence, particularly in the absence of independent documentary corroboration.

The respondents relied upon the cross-examination of Shri Rajesh Agarwal dated 7 February 2017, wherein he stated, inter alia, that:

  • finished goods were sold at the factory gate at ex-factory prices;
  • the manufacturers did not arrange transportation;
  • no incriminating documents or unexplained cash were found despite repeated visits by investigating officers;
  • his earlier statements were involuntary and recorded under pressure and as dictated by officers;
  • he denied clandestine removal by the manufacturers;
  • buyers arranged transportation independently; and
  • statements were allegedly recorded under coercive circumstances.

The respondents relied upon M/s Jindal Drugs Pvt. Ltd. and another vs Union of India and another, 2016 SCC OnLine P&H 4780, concerning the statutory safeguards under Section 9D of the Central Excise Act.

It was argued that Section 9D requires proper examination of the maker of a statement and satisfaction of the Adjudicating Authority before such statement is admitted and relied upon in evidence in accordance with law.

The respondents also relied heavily upon Continental Cement Company vs Union of India, 2014 (309) E.L.T. 411 (All.), to contend that clandestine removal is a serious charge which must be established through sufficient, tangible and clinching evidence and cannot be sustained merely on presumptions and assumptions.

Court’s Findings and Order

The Allahabad High Court examined the rival submissions, the findings of the Adjudicating Authority and the conclusions recorded by the CESTAT.

The Court noted that there was no dispute regarding the factual finding recorded by the CESTAT that the persons whose statements were relied upon, including the Authorised Signatory of the manufacturers, had retracted their statements during cross-examination before the Adjudicating Authority and had alleged that their earlier statements were recorded under duress.

The High Court specifically considered the cross-examination of Shri Rajesh Agarwal dated 7 February 2017. The Court observed that he had explained the circumstances in which his statement under Section 14 was recorded and alleged that he had been surrounded by officers at the DGCEI office in Delhi late at night and that the statement had been dictated by officers.

In view of this material, the High Court found that the Adjudicating Authority’s conclusion treating Shri Rajesh Agarwal’s earlier statements as voluntary and as confirmation of active involvement in tax evasion suffered from apparent perversity.

The Court clarified that the controversy was not merely about the formal admissibility of statements recorded under Section 14. Rather, the real issue concerned the weight and reliability of such evidence after the makers of the statements had been examined and had retracted or contradicted the earlier versions.

The High Court reaffirmed that clandestine removal is a serious charge and that the Revenue must discharge its burden through clinching evidence.

The Court found that the Revenue could not demonstrate the existence of independent incriminating material recovered from the premises of the three manufacturers which could establish clandestine removal apart from the statements recorded during investigation.

The Court further observed that no incriminating material such as discrepancies in accounting of raw materials or finished goods was shown before it to substantiate the Revenue’s allegation through cogent evidence.

The High Court also noted the CESTAT’s finding that the manufacturers were neither consignors nor consignees in the alleged third-party transportation records. Their consistent stand was that goods were sold ex-factory and buyers independently arranged transportation after taking delivery.

The Court held that the CESTAT’s findings could not be regarded as suffering from an error of law where the relied-upon persons had retracted their statements or where the veracity of such statements had failed the test of cross-examination.

The High Court concluded that no question of law, much less any substantial question of law, arose for consideration under Section 35G of the Central Excise Act, 1944.

Accordingly, all the connected Revenue appeals were dismissed as devoid of merit.

Important Clarification

The judgment makes an important distinction between the admissibility of a statement recorded under Section 14 of the Central Excise Act and the evidentiary weight or reliability to be assigned to such a statement.

The High Court clarified that the central issue was not simply whether statements recorded by Central Excise officers were legally admissible. The crucial question was whether those statements could reliably sustain a serious allegation of clandestine removal when:

  • the makers subsequently retracted them;
  • coercion, pressure or duress was alleged;
  • the statements did not withstand cross-examination;
  • third-party records lacked adequate independent corroboration; and
  • no sufficient incriminating documentary material directly connecting the manufacturers with clandestine removals was established.

The judgment therefore reinforces that a serious charge of clandestine manufacture and removal cannot be sustained merely through assumptions, presumptions, retracted statements or uncorroborated third-party records.

Sections Involved

Section 14 of the Central Excise Act, 1944

This provision concerns the power of Central Excise officers to summon persons to give evidence and produce documents during inquiry. In the present case, the evidentiary value of statements recorded during investigation under Section 14 was a central issue.

Section 9D of the Central Excise Act, 1944

This provision governs the circumstances and procedure concerning relevance and use of statements made and signed before a Central Excise officer. The respondents relied upon Section 9D to emphasise procedural safeguards before investigative statements are relied upon as evidence.

Section 35G of the Central Excise Act, 1944

This provision governs appeals to the High Court on substantial questions of law. The High Court held that the Revenue’s challenge did not raise any substantial question of law warranting interference with the CESTAT’s findings.

Link to Download the Order

https://mytaxexpert.co.in/uploads/1783400828_1063compressed.pdf

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