Cross-examination and Rule 26 limits shape clandestine removal disputes, with demand and penalties remanded or set aside.

Denial of cross-examination of witnesses whose statements formed the basis of a clandestine removal case undermined the evidentiary value of those statements, so the duty demand and related transporter penalty were set aside and remanded for fresh adjudication. Consequential confiscation of currency and gutka pouches, being dependent on the disputed demand, was also set aside for reconsideration on remand. The document further notes that confiscation and penalty for seized supari were unjustified where no Rule 25 contravention was established, and that Rule 26 penalty could not be imposed for alleged fabrication of documents to explain cash because such conduct did not involve dealing with excisable goods liable to confiscation.

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Issues: (i) whether the duty demand and penalty against the assessee, and the connected penalty on the transporter, were sustainable in the absence of cross-examination of relied upon witnesses; (ii) whether the confiscation of seized currency and seized gutka pouches, and the related penalty, could survive when they were linked to the disputed duty demand; (iii) whether supari seized from the job-worker's premises was liable to confiscation and whether penalty could be imposed for non-accountal; and (iv) whether penalty under Rule 26 could be imposed on the job-worker and on the company and its directors said to have fabricated documents for explaining the seized cash.

Issue (i): whether the duty demand and penalty against the assessee, and the connected penalty on the transporter, were sustainable in the absence of cross-examination of relied upon witnesses.

Analysis: The demand rested substantially on statements of transporters, dealers, a job-worker and the chemical examiner, together with inferences from raw-material consumption and transport records. Since the assessee had specifically sought cross-examination of the witnesses whose statements were relied upon, denial of that opportunity affected the evidentiary value of those statements. Reliance was placed on the settled principle that, where statements are used to fasten liability, their probative worth must be tested through cross-examination unless the procedure under the applicable evidentiary provision is properly satisfied. The finding of clandestine removal therefore could not be sustained on the existing record.

Conclusion: The duty demand and penalty against the assessee were set aside and the matter was remanded for de novo adjudication. The connected penalty on the transporter was also set aside and remanded.

Issue (ii): whether the confiscation of seized currency and seized gutka pouches, and the related penalty, could survive when they were linked to the disputed duty demand.

Analysis: The confiscation of the currency and the seized gutka pouches was predicated on the allegation that they represented clandestine clearances and unaccounted goods. Since the foundational finding on the duty evasion dispute was not sustained and required fresh adjudication, these consequential measures could not independently stand on the existing record. The Tribunal, however, preserved the position that, if the demand were ultimately upheld on remand, confiscation could be reconsidered along with the redemption consequences contemplated by the statute.

Conclusion: The confiscation of currency and of the seized gutka pouches, and the related penalty, were set aside and remanded for fresh adjudication.

Issue (iii): whether supari seized from the job-worker's premises was liable to confiscation and whether penalty could be imposed for non-accountal.

Analysis: Rule 25 required contravention in relation to excisable goods, but the record showed that the seized supari was a non-cenvatable input and the rules invoked did not require the maintenance of a raw-material account in the manner alleged. There was therefore no established contravention of the Central Excise Rules in respect of the raw supari or processed supari seized from the job-worker's premises. On the separate penalty issue, mere non-accountal of supari did not satisfy the ingredients of Rule 26 as it then stood, because there was no allegation that the job-worker dealt with excisable goods liable to confiscation with the requisite knowledge or belief.

Conclusion: Confiscation of the supari was not justified, and the penalties on the assessee and on the job-worker were set aside.

Issue (iv): whether penalty under Rule 26 could be imposed on the job-worker and on the company and its directors said to have fabricated documents for explaining the seized cash.

Analysis: Rule 26, in its then form, applied to persons concerned with acquiring, transporting, keeping, concealing, selling, purchasing or otherwise dealing with excisable goods known to be liable for confiscation. The allegations against the job-worker and against the company and its directors were not of such dealing with excisable goods, but of preparing false documents to explain the source of money. That conduct, even if assumed, fell outside the scope of Rule 26 as applicable during the material period.

Conclusion: Penalty under Rule 26 on the job-worker and on the company and its directors was set aside.

Final Conclusion: The impugned order did not survive in its entirety and the matter was sent back for fresh adjudication on the principal duty-demand issue, while the penalties and confiscation orders lacking an independent legal foundation were set aside.

Ratio Decidendi: Where the revenue's case for clandestine removal depends materially on witness statements and related documentary inferences, denial of requested cross-examination vitiates the foundation of the demand; and Rule 26 penalty can be imposed only for dealings with excisable goods liable to confiscation, not for a mere allegation of fabricating documents to explain cash.

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