Unlabelled biris in RG 12A register not liable for seizure, contractor's retracted statement lacks evidentiary value

CESTAT Kolkata allowed the appeal in a case involving alleged clandestine manufacture and clearance of biris. The appellant was accused of maintaining unlabelled biris and clandestine clearance based on tobacco purchase bills, ITRs, and contractor statements. The tribunal held that unlabelled biris accounted in RG 12A register were not liable for seizure, and no duty was payable on unlabelled biris up to 20 lakh sticks. The contractor's retracted statement lacked evidentiary value without corroboration. The tribunal found insufficient evidence to establish clandestine manufacture or clearance, noting that mere possession of unlabelled biris cannot conclude clandestine intent. The demand for central excise duty, interest, and penalty was set aside due to lack of substantive evidence.

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Issues Presented and Considered

The core legal questions considered in the judgment include:

(1) Whether the unlabelled biris found during the search, particularly those accounted for in the appellant's RG 12A stock register, are liable to confiscation and duty demand under the Central Excise Act and Rules.

(2) Whether the appellant's failure to maintain Daily Stock Accounts (DSA) and reliance on RG 12A register complies with the record-keeping requirements under Rule 10 of the Central Excise Rules, 2002.

(3) Whether the demand for central excise duty on the basis of alleged clandestine manufacture and clearance of biris, supported by statements, documents, and recovered materials, is sustainable in the absence of cogent and tangible evidence.

(4) The evidentiary value of statements retracted by the contractor and the reliability of third-party documents relied upon by the Revenue.

(5) Whether the penalty, interest, and redemption fine imposed under the Central Excise Act and Rules are justified in light of the findings on duty demand and confiscation.

Issue-wise Detailed Analysis

Issue 1: Liability of Unlabelled Biris Accounted in RG 12A to Confiscation and Duty Demand

The relevant legal framework includes Section 11A(2), 11AB, and 11AC of the Central Excise Act, 1944, and Rule 25 of the Central Excise Rules, 2002. Rule 25(1)(b) provides for confiscation of excisable goods not accounted for by a producer or manufacturer.

The Court observed that the unlabelled biris up to 20 lakh sticks are not dutiable and that the appellant had accounted for 1,67,000 unlabelled biris in the RG 12A register. The seized goods included both labelled and unlabelled biris, some found at the factory premises and some at the residential premises.

The Court noted that the appellant had subsequently labelled and cleared the unlabelled biris on payment of duty, duly entering them in the RG 12A register and filing monthly returns. Therefore, the demand of duty and confiscation on these accounted biris was held to be unsustainable.

The Court distinguished between unaccounted excisable goods liable for confiscation and those properly recorded and duty-paid, emphasizing that unlabelled biris not required to be recorded under Rule 10 are not liable to confiscation. This interpretation aligns with the statutory scheme and the appellant's compliance with record-keeping.

Issue 2: Compliance with Record-Keeping Requirements under Rule 10

Rule 10 mandates maintenance of records containing particulars of goods produced, manufactured, removed, and duty paid. The appellant maintained RG 12A register, which though not mandatory, contained detailed particulars as required.

The appellant's explanation that the Munim responsible for entering accounts visits only once a week was accepted as a plausible reason for delay in recording certain purchases and manufacture of labelled biris. The Court found no violation of Rule 10 warranting adverse inference.

The Court held that the unlabelled biris, not dutiable up to 20 lakh sticks, need not be recorded in RG 12A or DSA, and thus non-entry of such biris does not attract confiscation under Rule 25(1)(b).

Issue 3: Sustainability of Duty Demand Based on Alleged Clandestine Manufacture and Clearance

The appellant challenged the demand of Rs. 24,07,445/- on the basis of alleged clandestine removal, relying on the absence of tangible evidence.

The Court referred extensively to precedents emphasizing that clandestine manufacture and clearance is a serious quasi-criminal charge requiring cogent and tangible evidence such as:

• Raw materials in excess of statutory records;
• Actual removal of unaccounted finished goods;
• Discovery of such goods outside factory premises;
• Sale to identified parties and receipt of sale proceeds;
• Excessive use of electricity;
• Statements of buyers and proof of transportation;
• Documentary links to factory activities.

The Court found that the Revenue's case relied mainly on nine sale bills of tobacco, Income Tax Returns (ITRs), three cash memos, statements, diaries, and loose sheets. However, no attempt was made to establish the quantity of probable manufacture or identify buyers, transporters, or receipt of sale proceeds for the alleged clandestine removal.

The statement of the contractor, initially implicating the appellant, was retracted via affidavit, diminishing its evidentiary value without corroboration. The Court also noted the absence of evidence linking the tobacco purchases to clandestine manufacture of labelled biris.

The Court relied on authoritative decisions holding that suspicion or inference cannot replace proof and that mere discrepancies in production or records do not establish clandestine removal.

Issue 4: Evidentiary Value of Statements and Third-Party Documents

The Court scrutinized the statements of the contractor and others, noting contradictions and retractions. It emphasized that partial reliance on statements without considering them in entirety is improper.

The Court also held that third-party documents lacking confirmation of authorship and direct linkage to the appellant are not reliable evidence to establish clandestine supply or manufacture.

Precedents were cited to support the principle that retracted statements require independent corroboration to be admissible as evidence.

Issue 5: Justification for Penalty, Interest, and Redemption Fine

Since the Court set aside the demand of duty and confiscation, the consequential penalty under Section 11AC and interest under Section 11AB were also held to be unsustainable.

The redemption fine imposed under Rule 25 was set aside along with the confiscation order, as the confiscation itself was invalidated.

Significant Holdings

"We hold that the 1,67,000 unlabelled biris which were accounted for in RG 12A are not liable for seizure."

"Having unlabelled biris in the factory or residence cannot give rise to the conclusion that they have been kept for clandestine clearance."

"Clandestine removal is a serious charge which needs to be established with cogent and tangible evidence."

"The retracted statement has no evidentiary value without any further corroboration."

"In the absence of any corroborative evidence for manufacture and clandestine removal, the allegation of clandestine clearance is not sustainable."

"Since the demand of duty is not sustained, the question of demanding interest and imposing penalty does not arise."

The Court conclusively set aside the confiscation of goods, the demand of central excise duty, interest, and penalty, allowing the appeal with consequential relief.

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