No excise duty for alleged clandestine removal when based only on loose sheets and uncrossed Section 9D statements

CESTAT Ahmedabad allowed the appeal, setting aside the demand of duty, interest and penalties for alleged clandestine removal. The Tribunal held that loose sheets and private records, without corroborative evidence of procurement of raw materials, manufacture, transport, buyer identity, or receipt of unaccounted consideration, cannot substantiate clandestine clearance. It further held that statements of directors were inadmissible as evidence due to non-compliance with mandatory cross-examination requirements under S.9D of the Central Excise Act, 1944, and the buyers' statements did not support the Revenue's case. Absence of enquiry into production capacity, power consumption, manpower and transporters reinforced the finding that there was no positive, tangible evidence of evasion.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether a charge of clandestine manufacture and removal of excisable goods can be sustained solely on the basis of loose sheets/loose papers and statements of company directors and buyers, without compliance with Section 9D of the Central Excise Act, 1944 and without any independent corroborative evidence.

1.2 Whether statements of directors and buyers, in the absence of meaningful cross-examination and in the face of equivocal depositions during cross-examination, can be relied upon as substantive evidence to confirm a demand of duty and impose penalties.

1.3 Whether, in the absence of evidence of procurement of extra raw materials, actual production, transportation, identification of buyers, and flow-back of consideration, excise duty demand, interest and penalties based on alleged clandestine removals are legally sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Sufficiency of loose sheets and statements to prove clandestine manufacture and removal

Interpretation and reasoning

2.1 The Tribunal noted that the entire case of clandestine removal rested on: (a) loose sheets/loose papers recovered from the factory; (b) statements of two directors referring to those loose papers; and (c) statements of three alleged buyers. No other documentary or physical evidence of clandestine manufacture or removal was brought on record.

2.2 The Tribunal held that loose papers by themselves, without corroboration from independent sources, do not establish clandestine removal. It relied on the principle, reaffirmed in several cited precedents, that private records or internal documents (diaries, note-books, loose sheets, pen drive data, excel sheets, etc.) cannot, by themselves, constitute proof of clandestine production and clearance unless supported by positive and tangible corroborative evidence.

2.3 The Tribunal found that there was no investigation or proof regarding: (i) procurement of excess or unaccounted raw materials; (ii) actual clandestine production beyond recorded quantities; (iii) transportation of alleged clandestine clearances (no transporters or transport documents were brought on record); (iv) identification of specific buyers with corroborated receipt of unaccounted goods; and (v) receipt of unaccounted sale proceeds or flow-back of funds in cash or otherwise.

2.4 The Tribunal emphasized that settled law on clandestine manufacture requires clear, cogent and tangible evidence, including but not limited to: excess raw materials, instances of actual unaccounted removals, discovery of goods outside the factory, identified buyers and their payments, actual transport evidence, and links between seized private records and manufacturing/clearance operations. Mere inferences from private records, without such corroboration, are insufficient.

Conclusions

2.5 Loose sheets/loose papers recovered from the factory, without independent corroborative evidence of production, transport, buyers, payments or raw material procurement, are insufficient to establish clandestine manufacture and removal. The demand of duty cannot be sustained solely on such basis.

Issue 2 - Admissibility and evidentiary value of statements under Section 9D and effect of absence of cross-examination

Legal framework

2.6 The Tribunal reproduced and examined Section 9D of the Central Excise Act, 1944, which governs the relevancy of statements made before Central Excise officers. Under Section 9D(1), a statement can be used for proving the truth of its contents only when: (a) the maker of the statement falls within the specified exceptional categories (dead, cannot be found, incapable, kept out of the way, or presence cannot be obtained without unreasonable delay/expense); or (b) the maker is examined as a witness and the adjudicating authority, having regard to the circumstances, considers it just to admit the statement in evidence.

2.7 Section 9D(2) extends these requirements to adjudication proceedings under the Act.

Interpretation and reasoning

2.8 The Tribunal held that compliance with Section 9D is mandatory. Before relying on statements recorded during investigation as evidence against an assessee, the adjudicating authority must examine the makers as witnesses and afford an opportunity of cross-examination, unless the exceptional circumstances in Section 9D(1)(a) are established.

2.9 In the present case, the adjudicating authority relied on the statements of the two directors without subjecting them to cross-examination. There was no finding that any of the conditions in Section 9D(1)(a) were satisfied. Consequently, the Tribunal held that the mandatory requirements of Section 9D were violated.

2.10 The Tribunal referred to and followed judicial precedents holding that: (a) statements of witnesses who are not produced for cross-examination lose their evidentiary value and cannot be used against the assessee; and (b) denial or improper refusal of cross-examination, when such statements are relied upon, amounts to violation of principles of natural justice and renders such statements unreliable as substantive evidence.

2.11 As regards the three buyers, the Tribunal noted that in cross-examination they did not confirm clandestine purchases or cash payments. Their depositions were equivocal, and they specifically stated that they had no proof of clandestine purchases or cash payments and, due to lapse of time, could not remember such details. The Tribunal held that these statements, being inconsistent and uncorroborated, were not reliable and could not form the sole basis for confirming clandestine removal.

Conclusions

2.12 The statements of the two directors, recorded under Section 14 but not tested by cross-examination in compliance with Section 9D, cannot be treated as admissible and reliable evidence. Reliance placed on such statements by the adjudicating authority was legally unsustainable.

2.13 The statements of the three buyers, weakened and diluted during cross-examination and unsupported by any independent corroboration, could not form a safe or sufficient basis to prove clandestine clearances.

2.14 In the absence of legally admissible and reliable statements under Section 9D, the adjudication order founded substantially on such statements could not be sustained.

Issue 3 - Absence of corroborative evidence of clandestine manufacture/removal and sustainability of demand, interest and penalties

Interpretation and reasoning

3.1 Having excluded the directors' statements as inadmissible and the buyers' statements as unreliable, and having found loose sheets insufficient by themselves, the Tribunal examined whether any other corroborative evidence existed to support the charge of clandestine removal.

3.2 The Tribunal found that the investigation did not establish:

(a) procurement of any additional or unaccounted raw materials for manufacturing the alleged clandestine clearances;

(b) actual production of alleged excess quantities (no analysis of production capacity, power consumption, manpower, or other production indicators was conducted);

(c) identification of specific transporters, transport documents, or movements of alleged clandestine consignments;

(d) identification of specific buyers with corroborated receipt of unbilled goods; or

(e) evidence of receipt of sale consideration in cash or other unaccounted form corresponding to the alleged clandestine removals.

3.3 The Tribunal applied the settled legal tests for proving clandestine manufacture and clearance, as elaborated in earlier decisions and reiterated that demands cannot be upheld on mere assumptions, presumptions, note-books/loose records or uncorroborated statements. Positive, tangible and corroborated evidence of all essential links - inputs, manufacture, clearance, buyers, and consideration - is required.

3.4 As none of these elements was established, the Tribunal held that the charge of clandestine removal was not proved on facts.

Conclusions

3.5 In the absence of cogent, corroborated and tangible evidence regarding clandestine production and removal, the demand of central excise duty on alleged clandestine clearances, along with interest, was held to be unsustainable.

3.6 Since the foundational facts for clandestine removal were not established, imposition of penalties on the assessee and co-noticees was also held to be unwarranted and liable to be set aside.

Overall Disposition

4.1 The Tribunal set aside the impugned order confirming duty demand, interest and penalties, holding that the allegation of clandestine removal was not established in law or on facts, and allowed the appeals with consequential relief.

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