Duty demand cannot rest on facts outside the show cause notice or statements used without section 9D cross-examination safeguards.

A duty demand based on alleged stentering could not be sustained where adjudication relied on additional finishing processes and chapter classifications not specifically pleaded in the show cause notice and not supported by the record. Statements used by the revenue were also excluded because the deponents were not examined and cross-examination was denied in breach of section 9D; once excluded, the remaining evidence did not establish processing in the assessee's premises. As the duty demand failed, the consequential penalties on the assessee and its director also fell away. The impugned order was set aside with consequential relief.

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Issues: (i) Whether duty demand could be sustained when the adjudication relied on alleged processes and facts not specifically pleaded in the show cause notice. (ii) Whether the statements relied upon by the revenue could be acted upon without examining the deponents and allowing cross-examination in terms of section 9D. (iii) Whether the penalties imposed on the assessee and its director could survive once the duty demand failed.

Issue (i): Whether duty demand could be sustained when the adjudication relied on alleged processes and facts not specifically pleaded in the show cause notice.

Analysis: The demand was founded on the allegation that stentering was carried out on fabrics received from another concern. The adjudication, however, was sustained by reference to additional finishing processes and to fabrics falling under chapters 54 and 55, although these were not part of the show cause notice and were not supported by specific evidence in the record. A demand cannot be upheld on a factual basis that is outside the notice or unsupported by evidence for the very transactions alleged. On the material before it, the alleged duty liability against the assessee was not established.

Conclusion: The duty demand was not sustainable against the assessee.

Issue (ii): Whether the statements relied upon by the revenue could be acted upon without examining the deponents and allowing cross-examination in terms of section 9D.

Analysis: The revenue case depended substantially on recorded statements of several persons and on delivery slips said to have been recovered during search. The deponents were not examined as witnesses, and cross-examination was not afforded despite the earlier direction to follow the statutory procedure. Mere reliance on the fact that the statements were not retracted does not dispense with the requirement of section 9D. Once those statements are excluded, the remaining material was insufficient to prove that the alleged stentering took place in the assessee's premises or that the disputed quantity was processed there.

Conclusion: The statements could not be relied upon and the evidentiary foundation of the demand failed.

Issue (iii): Whether the penalties imposed on the assessee and its director could survive once the duty demand failed.

Analysis: The penalties were consequential to the duty demand and rested on the same factual and evidentiary basis. Since the duty demand itself was held unsustainable, the foundation for the penalties also disappeared.

Conclusion: The penalties were also liable to be set aside.

Final Conclusion: The impugned order was set aside and the appeals succeeded with consequential relief to the assessee and the co-appellant.

Ratio Decidendi: A duty demand cannot be sustained on facts not alleged in the show cause notice, and statements relied upon by the revenue are inadmissible unless the statutory procedure for examination and cross-examination is followed under section 9D.

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