2024 (2) TMI 433 - AT - Central Excise

Former Directors' Appeals Granted; Lack of Evidence Voids Penalties for Alleged Goods Removal Post-Resignation.

The Tribunal allowed the appeals of the former directors of M/s. Vijaya Sponge & Ispat Pvt. Ltd., setting aside the penalties of Rs.10.00 Lakhs each ... Levy of penalty u/r 26 of the Central Excise Rules, 2002 - clandestine removal - allegation based on certain printouts and private records seized from the premises of the company for the period 01.04.2006 to 07.06.2007 - No corroborative evidences - HELD THAT:- It is a fact that investigation has been done after resigning of the Directors from the company. No corroborative evidence has been produced by Revenue showing that the appellants were actively involved in the clandestine removal of the goods and without specifically assigning the reasons that the appellants were involved in the clandestine removal of the goods, penalty cannot be imposed, as held by this Tribunal in the case of COMMISSIONER OF C. EX., MEERUT VERSUS RAKESH SINGHAL [2006 (6) TMI 407 - CESTAT, NEW DELHI]. Thus, penalty under Rule 26 cannot be imposed on the appellants. Accordingly, the impugned order qua imposing Rs.10.00 Lakhs each on both the appellants is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalties under Rule 26 of the Central Excise Rules, 2002 can be imposed on former directors of a company for alleged clandestine removal of excisable goods where no direct evidence of their involvement or mens rea is found. 2. Whether mere status as a past director, or the fact that the directors were in office during the period alleged, suffices to attract penalty under Rule 26 absent corroborative evidence or specific findings of participation in the clandestine activity. 3. Whether failure of the alleged offender to appear during investigation (after having resigned) precludes relief against imposition of penalty when the record contains no independent or corroborative evidence linking them to the clandestine removal. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of imposing penalty under Rule 26 on former directors without evidence of active involvement. Legal framework: Rule 26 prescribes penalty liability for any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any manner deals with excisable goods which he knows or has reason to believe are liable for confiscation. Precedent Treatment: The Tribunal has consistently required specific evidence of personal culpability or mens rea before imposing penalty on directors; mere office-holding or overall in-charge status has been treated as insufficient in prior decisions relied upon by the parties (earlier Tribunal rulings applying the requirement of specific finding as to the director's conduct and knowledge). Interpretation and reasoning: The Court examined the material and found the investigation was conducted after the appellants had resigned as directors. The record before the adjudicating authority contained no corroborative evidence or specific allegations establishing that the appellants personally transported, removed, concealed, dealt with the goods, or entertained a belief that the goods were liable for confiscation. The Court emphasized that Rule 26's language targets persons who are in fact 'in any way concerned' with the proscribed acts and requires evidence to demonstrate such concern or knowledge. Absent particulars of conduct or mens rea, imposition of penalty would amount to penalizing mere association by title rather than culpable conduct. Ratio vs. Obiter: Ratio - Penalty under Rule 26 cannot be imposed on an individual merely by virtue of having been a director during the period of alleged irregularity where there is no evidence of personal involvement or knowledge; specific findings as to conduct and mens rea are necessary. Obiter - Observations about the timing of resignation and its evidentiary effect are ancillary but consistent with the ratio. Conclusions: The Court held that imposition of penalty under Rule 26 on the appellants was not sustainable in the absence of evidence of active involvement or knowledge that the goods were liable for confiscation; the penalties were set aside. Issue 2: Sufficiency of proof based on status and inferences from company records seized post-resignation. Legal framework: Liability under Rule 26 requires more than inference from corporate records; proof must link the individual to the prohibited acts or establish that the individual had reason to believe in the confiscatability of the goods. Precedent Treatment: The Tribunal's earlier findings (as relied upon by both parties) indicate that allegations based solely on documents seized at the company premises do not automatically extend liability to officers unless specific involvement or culpable knowledge is demonstrated. Interpretation and reasoning: The adjudication relied chiefly on printouts and private records seized from the company premises covering the impugned period. The Court found no independent corroboration tying those records to actions of the appellants personally. The appellants' geographic separation from the factory and their resignation prior to the investigation further weakened the inference that mere presence on the company's board equated to active participation in clandestine removals. The Court underscored that penal provisions should not be invoked on inferences that do not rise to proof of personal culpability. Ratio vs. Obiter: Ratio - Evidence consisting solely of company documents seized after the fact is insufficient to fasten Rule 26 liability on former directors without specific linking evidence; such status-based imposition is impermissible. Obiter - Comments on geographic location and day-to-day management are explanatory factors, not standalone legal prerequisites. Conclusions: The penalty based on seized records and the appellants' former directorship was held to be inadequate; the Court thus annulled the penalties insofar as they were predicated on status and uncorroborated records. Issue 3: Effect of non-cooperation (non-appearance) with investigation on liability for penalty. Legal framework: While non-cooperation or non-appearance can be a factor in adjudication, Rule 26 liability still requires substantive proof of being 'concerned in' the proscribed acts; mere non-appearance does not substitute for evidence of active involvement. Precedent Treatment: The Tribunal's jurisprudence recognizes that failure to appear may adversely affect a party's defensive posture but does not automatically establish mens rea or participation in clandestine removals. Interpretation and reasoning: The Revenue relied in part on the appellants' failure to join the investigation despite summons. The Court noted this conduct could be relevant but observed that it could not replace the statutory requirement for particularized evidence of involvement. The absence of corroborative material linking appellants to the clandestine acts meant non-cooperation alone could not sustain imposition of the substantial penalties under Rule 26. Ratio vs. Obiter: Ratio - Non-appearance or non-cooperation does not, by itself, fulfill the evidentiary threshold required by Rule 26 to impose penalty in the absence of substantive corroboration. Obiter - The Court's remarks on the general relevance of cooperation are illustrative and not determinative. Conclusions: The Court rejected the submission that non-cooperation justified penalties where no other evidence established culpability; penalties were therefore set aside despite the appellants' non-participation in the investigation. Cross-reference and Overall Conclusion All issues interrelate to the central principle that Rule 26 targets persons who are demonstrably 'in any way concerned' with proscribed dealings in excisable goods and that imposition of penalty requires specific evidence of active involvement or knowledge. The Court applied earlier Tribunal reasoning to conclude that penalties levied solely on the basis of former directorship, uncorroborated company records seized post-resignation, and non-appearance during investigation are insufficient to sustain Rule 26 penalties; accordingly, the penalties were annulled.