Part III Interplay of Criminal Code and Taxation Statutes and availability of Criminal law safeguards to fiscal statutes like Custom, Central Excise and GST cases

Interplay of Criminal Code and Taxation Statutes and availability of Criminal law safeguards to fiscal statutes like Custom, Central Excise and GST cases

Part III…Continue….

III.  Availability of legal safeguards on lines of criminal laws against reliance on statements recorded under Indirect tax statutes

3.  The recent judgments rendered by the various Constitutional Courts and Benches of Hon’ble CESTAT across India establishes that Section 138B of Customs Act and Section 9D of the Central Excise Act mandates that statements made under section 108 of Customs Act or section 14 of Central Excise Act can only be considered relevant if the person making the statement is examined as a witness before the adjudicating authority, and the authority forms an opinion to admit the statement in evidence. The Courts have emphasized that Section 138B of Customs Act and Section 9D are mandatory and substantive provisions. The statements recorded during the investigation cannot be relied upon unless the procedure under Section 138B/Section 9D is followed, as established in precedents set by Constitutional Courts. It has been repeatedly held that no tax liabilities can be fastened based on statements where such statement has not been examined and made relevant. Only relevant statement can be used to prove facts by adjudicating authority.

3.1. In a previous article, attempt was made to make citizens aware about the statutory provisions in respect of admissibility and relevancy of statements recorded before Customs and Central Excise Officers. Attempt was made to make citizenry aware about concepts like “Facts”, Evidence; Admissibility of Evidence/Statement/Fact; Relevancy of evidences/statement/fact; Proving a fact etc. In absence of specific definition of these words in Customs Act, Courts/adjudicating authorities exercising quasi judicial powers, have been constrained to refer to Evidence Act/BNSS. What can be gleaned from the statutory provisions and law laid down by Apex Court is that a statement made under S.108/S.14, while admissible, does not automatically translate into their being relevant to the proceedings unless they satisfy the statutory stipulations laid down to consider them relevant. This is because there is a difference between relevancy and admissibility according to the general principles of evidence law. The adjudicating authority exercising is required to examine whether the statement is voluntary; in other words, whether it was not obtained by threat, duress or promise. If the adjudicating authority is satisfied from the evidence that it was voluntary, then it is required to examine whether the statement is true. If the adjudicating authority on examination of the evidence finds that the retracted confession is true, that part of the inculpatory portion could be relied upon to fasten tax liabilities and penalties. An attempt has been to encapsulate the available jurisprudence on the subject matter.

3.2. As repeatedly concluded by higher judicial forums, the adjudication proceedings contemplated under the act when read with Section 138B/9D necessarily mandates the Section 108/14 statement to be admitted in evidence either under Section 138B/9D (1) (a) or under Section 138B/9D (1)(b), by establishing the evidentiary prerequisites elaborated supra and at the bare minimum by examining the witnesses, other than in the scenarios elaborated under Section 138B/9D (1) (a), by an examination in chief by the adjudicating authority as it is only after such examination in chief, that the adjudicating authority can arrive at a decision whether or not to declare the witness appearing before it as a hostile witness or not and then to decide in the facts and circumstances whether to rely on the earlier statement or not, as more elaborately elucidated supra. It is also the mandate of law to answer the test of fairness and reasonableness and to avoid any semblance of arbitrariness, that while invoking Section 138B/9D of the Act, the concerned adjudicating authority is to form an opinion on the basis of material on record that a particular ground, as stipulated in the said Section, exists and is established; such an opinion has to be supported with reasons; and before arriving at this opinion, the authority would give opportunity to the affected party to make submissions on the available material on the basis of which the authority intends to arrive at the said opinion.

3.3. Courts have held in innumerous cases that the adjudicating authorities are repeatedly violating statutory provisions enshrined in Section 9D (2)/Section 138B by not giving an opportunity to the affected party to make submissions post intimation of his intent to rely on such materials duly stating the reasons why he intends to arrive at the said opinion. Revenue suffers since the adjudicating authorities grossly err in placing reliance on the statements recorded under Section 14/108 without following the mandate of Section 9D/Section 138B of the CEA1944/CA1962. The reliance placed by the adjudicating authority on all these untested statements to fasten tax liability cannot withstand judicial scrutiny as held in numerous decisions of Constitutional Courts.

III.   Availability of legal safeguards on lines of criminal laws against reliance on digital evidences resumed through the proceedings under Indirect tax statutes

4.  The most recent judgement of the Honourable Supreme Court case, after analysing all the relevant previous judgements, has reiterated beyond the pale of any doubt that certificate under Section 65-B (4) [pari materia with Section 138C/36B(4)], is a condition precedent to the admissibility of evidence by way of electronic record and affirming the law as laid down in Anvar P.V. In Anvar P.V. (supra), it was held as under: “The evidence relating to electronic record, as noted hereinbefore, being a special provision, the general law on secondary evidence under Section 63 read with Section 65 of the Evidence Act shall yield to the same. Generalia specialibus non derogant, special law will always prevail over the general law…. Sections 63 and 65 have no application in the case of secondary evidence by way of electronic record; the same is wholly governed by Sections 65-A and 65-B. *** An electronic record by way of secondary evidence shall not be admitted in evidence unless the requirements under Section 65-B are satisfied. Thus, in the case of CD, VCD, chip, etc., the same shall be accompanied by the certificate in terms of Section 65-B obtained at the time of taking the document, without which, the secondary evidence pertaining to that electronic record, is inadmissible.” A two-Judge Bench in a referral order reported in Arjun Panditrao Khotkar Versus Kailash Kushanrao Gorantyal and Ors. - 2019 (7) TMI 2058 - Supreme Court referred the following question to a larger bench. The reference came to be answered in the judgment reported in by a three-Judge bench in Arjun Panditrao Khotkar Versus Kailash Kushanrao Gorantyal And Ors. - 2020 (7) TMI 740 - Supreme Court (LB). The relevant portions of which are as under:-

“ 52. We may hasten to add that Section 65-B does not speak of the stage at which such certificate must be furnished to the Court. In Anvar P.V. [Anvar P.V Versus P.K. Basheer and others - 2014 (9) TMI 1007 - Supreme Court], this Court did observe that such certificate must accompany the electronic record when the same is produced in evidence. We may only add that this is so in cases where such certificate could be procured by the person seeking to rely upon an electronic record. However, in cases where either a defective certificate is given, or in cases where such certificate has been demanded and is not given by the person concerned, the Judge conducting the trial must summon the person/persons referred to in Section 65-B(4) of the Evidence Act, and require that such certificate be given by such person/persons. This, the trial Judge ought to do when the electronic record is produced in evidence before him without the requisite certificate in the circumstances aforementioned. This is, of course, subject to discretion being exercised in civil cases in accordance with law, and in accordance with the requirements of justice on the facts of each case. When it comes to criminal trials, it is important to keep in mind the general principle that the accused must be supplied all documents that the prosecution seeks to rely upon before commencement of the trial, under the relevant sections of the Cr.PC.***

61. We may reiterate, therefore, that the certificate required under Section 65B(4) is a condition precedent to the admissibility of evidence by way of electronic record, as correctly held in Anvar P.V. [Anvar P.V Versus P.K. Basheer and others - 2014 (9) TMI 1007 - Supreme Court]. Oral evidence in the place of such certificate cannot possibly suffice as Section 65-B(4) is a mandatory requirement of the law. Indeed, the hallowed principle in Taylor v. Taylor [Taylor v. Taylor, (1875) LR 1 Ch D 426], which has been followed in a number of the judgments of this Court, can also be applied. Section 65-B(4) of the Evidence Act clearly states that secondary evidence is admissible only if led in the manner stated and not otherwise. To hold otherwise would render Section 65-B(4) otiose.The reference is thus answered by stating that Anvar P.V. [Anvar P.V Versus P.K. Basheer and others - 2014 (9) TMI 1007 - Supreme Court], as clarified by us hereinabove, is the law declared by this Court on Section 65-B of the Evidence Act.”

4.1.   This larger bench judgment of Apex Court has put the matter beyond controversy and has been followed in innumerous decisions of High Courts, ITATs, CESTAT etc. In view of the above, there is no manner of doubt that certificate under Section 65-B(4) is a condition precedent to the admissibility of evidence by way of electronic record and further it is clear that the Court has also held Anvar P.V. (supra) to be the correct position of law. Arguments on lines that Section 65 B Certificate is required only for prosecution proceedings and not for adjudication proceedings have been rejected by Constitutional Courts. Arguments on lines that Section 65 B Certificate is required only for criminal proceedings and not for adjudication proceedings instituted under taxation statutes have been rejected by Constitutional Courts. The issue of compliance of Section 138C Certificate in adjudication proceedings is no longer res integra. The legislature and Constitutional Courts have ensured that the adequate procedural safeguards on lines of criminal laws are available to tax payers.

IV.  Standard of Proof required in taxation statutes- Preponderance of probabilities vs Beyond reasonable doubt vs QUALIFIED Preponderance of probabilities

5.   In M/s. UNIWORTH TEXTILES LTD. Versus COMMISSIONER OF CENTRAL EXCISE. RAIPUR - 2013 (1) TMI 616 - Supreme Court, while considering the ingredients required to invoke the extended period of limitation, the Supreme Court observed that it is a cardinal postulate of law that the burden of proving any form of mala fide lies on the shoulders of the one alleging it. The Apex Court referred to its decision in U.O.I. & Ors. Versus Ashok Kumar & Ors. - 2005 (10) TMI 536 - Supreme Court wherein it was held that “it cannot be overlooked that burden of establishing mala fides is very heavy on the person who alleges it. The allegations of mala fides are often more easily made than proved, and the very seriousness of such allegations demand proof of a high order of credibility.” Courts have held that while the general standards of proof for civil cases are the preponderance of probability and the standards for criminal cases are beyond reasonable doubt, these standards have also been eschewed in favour of “clear and convincing evidence” when the allegations are of more serious nature and also attract heavy financial consequences. Courts have repeatedly held that the three steps in sequence involved in applying the principles of evidence law, would be to at first find out whether the fact, the evidence in respect of which it is sought to be adduced to prove it, is relevant, and the next step would be to see whether the evidence that is being sought to be adduced to prove such a relevant fact is admissible and lastly whether the fact or facts so proved are sufficient to determine the issue. Sufficiency is completely determined only by adjudicating authority and is thus the adjudicating authority’s evaluation of the extent of the bearing the proven facts have in the matter as per the standards of evidence called for in the adjudication process, which in matters of taxation statutes would call for “clear and convincing evidence”.

5.1.  The issue of standard of proof that is required when it comes to matters of taxation disputes like import/export frauds, classification disputes, clandestine removal, use of forged documents etc. The ‘standard of proof’ denotes the level of conviction or the ‘decisional threshold’ that enables the court to decide whether the party who shoulders the burden of proof has discharged the same. In customs, excise and GST matters, where the assessee can be visited with financial penal consequences, Courts have always tried to apply a qualified preponderance of probabilities standard. They have attempted to draw a fine line by saying that the burden on the revenue is not as high as that of a criminal trial given that it is a Fiscal statute (and the customs/excise officers being not police officers). However, they have also stated that in such matters involving financial penal consequences, especially penalty using Section 28*4, 114A,114AA cannot be imposed on a mere suspicion without adequate proof and positive evidence must be established of the person’s intent to commit fraud or wilful suppression or misstatement of facts etc., with intent to evade payment of duty. The Supreme Court in UNION OF INDIA Versus M/s. CHATURBHAI M. PATEL & CO. - 1975 (12) TMI 176 - Supreme Court. has held that: “It is well settled that fraud like any other charge of a criminal offence whether made in civil or criminal proceedings, must be established beyond reasonable doubt.” Needless to say, a precise enumeration of all situations in which one could hold with activity that there have been clandestine manufacture and clearances or EXIM fraud, would not be possible. As held by this Tribunal and Superior Courts, it would depend on the facts of each case.

5.2. In this regard, the decision of the Honourable Supreme Court in Heinz India Pvt. Ltd. and Another Versus State of UP. and Others - 2012 (3) TMI 396 - Supreme Court is apposite as it also specifies the standard of proof required to rebut a statutory presumption in a Fiscal Statute. In the said Heinz Case, while considering Sections 17 and 32 of Uttar Pradesh Krishi Utpadan Mandi Adhiniyam, 1964, and the rebuttal presumption in Section 17 of the Adhiniyam supra, the Apex Court held as under:

“39. Mr. Chandra, however, laid considerable emphasis on the words 'tending to show that the real fact is not as presumed', to argue that the test applied by this Court in rebuttable presumptions had been the test of 'preponderance of probability'. We do not think so. It is well settled that a decision is an authority for the point it decides. It is equally well-settled that the text of the decision cannot be read as if it were a statute. That apart the expression used by this Court is 'evidence fairly and reasonably tending to show', which signifies that it is not just any evidence, howsoever shaky and nebulous that would satisfy the test of preponderance of probability to rebut the statutory presumption but evidence that can by proper and judicial application of mind be said to be fairly and reasonably showing that the real fact is not as presumed. In other words the evidence required to rebut a statutory presumption ought to be clear and convincing, no matter the degree of proof may not be as high as proving the fact to the contrary beyond a reasonable doubt. The heightened standard of proof required to rebut a presumption raised under the statute at hand is in our view applicable for two distinct reasons. The first and foremost is that the presumption is raised in relation to a fiscal statute.***”

5.3.  It is important that investigation must produce evidence that can by proper and judicial application of mind be said to be fairly and reasonably showing that the real fact is not as presumed. Inadmissible evidences and irrelevant evidences don’t qualify as clear and convincing evidence. Untested statements and inadmissible documents don’t meet the test of qualified preponderance of probabilities standard as made applicable to taxation statutes where allegations are serious, liberty is at stake, financial consequences are very heavy in addition to potential Criminal liabilities. Evidences presented by revenue should meet judicial standard as held by Apex Court in catena of decisions.

Conclusions

6.  Since tax laws are basically civil laws, they should create civil liabilities and only in exceptional cases they should create additional criminal liabilities. Criminal liabilities should not be created in routine.  Tax payers must be dealt with self respect. They should not be treated like criminals, because taxpayers contribute to nation building and cross subsidize the services to poor and deprived classes. Business cannot be run with constant threat of criminal case. Irrespective of the care taken, there are bound to be mistakes attracting civil tax liabilities. Now this civil tax liability should not be coupled with criminal liability. It is true that criminal liability is prescribed only for intentional tax evasion, but whether the tax evasion is intentional or not will be decided only in long drawn litigation. Tax authorities are very fond of alleging intentional tax evasion in every case of short levy. It must be noted that majority of demands made by CBIC gets dropped on the ground of limitation alone. Officers conveniently issue invoke extended period to issue time barred Notices, even on classification or interpretation disputes. Resultant alleged wilful suppression creates potential criminal liabilities. This criminal part of tax statute is major source of corruption and is abused left and right. In almost every tax investigation by agencies, the threat of arrest and criminal prosecution is used. Unwarranted litigations needs to avoided for local industries to grow in this competitive world.

6.1.  Apex Court decisions have mandated procedural safeguards like recording 'reasons to believe,' informing arrestees of grounds, and adherence to guidelines to prevent misuse. The recent Apex Court judgment allows anticipatory bail under certain conditions on lines of CrPC and prohibits coercive tax collection before adjudication, ensuring arrests are justified and aligned with constitutional rights. Anticipatory bail under Sections 438 and 439 CrPC applies when there is a reasonable apprehension of arrest, even without an FIR, as per Gurbaksh Singh Sibbia and Sushila Aggarwal (Para 70). Contrary GST-specific decisions were overruled. Apex Court has noted that Section 41-D of the Code is applicable for offences under the Customs Act. Reference can also be made to Section 50A of the Code, which states that every police officer or other person making an arrest under the Code shall forthwith give information regarding such arrest and place where the arrested person is being held to any of his friends, relatives, or other person as may be disclosed or nominated by the arrested person for the purpose of giving such information. The arrested person must be informed of this right - the details of compliance with this mandate must be entered into the diary maintained by customs officer. It is the duty of the Magistrate, when an arrested person is produced, to satisfy himself that the requirements of Section 50A(2) and (3) have been complied with. Thus, these stipulations will apply in cases of arrests made by the customs officers. Section 5, the savings clause, clarifies that the Cr PC shall not affect any special or local law, or any special jurisdiction or power conferred, or any special procedure prescribed, unless there is a specific provision to the contrary. Thus, the provisions of the Code would be applicable to the extent that there is no contrary provision in the special act or any special provision excluding the jurisdiction and applicability of the Code.

7. Conscious silence in statute and repeated non adherence to statutory safeguards by revenue officials has resulted in judiciary interpreting special statutes and making procedural safeguards on lines of criminal laws, available to proceedings under tax statutes also.It must be noted that the basic concepts like “Facts”, Evidence; Admissibility of Evidence/Statement/Fact; Relevancy of evidences/statement/fact; Proving a fact, Cross Examination etc have not been consciously explained by legislature in the taxation statute. Legislature has deliberately prescribed for procedural safeguards in statute itself. Non compliances of statutory safeguards provided in special statues has resulted in Judiciary stepping in and ensuring certain procedural safeguards available in Criminal laws are also made applicable to Fiscal statutes, which are primarily Civil in nature.