Customs authorities failed to prove gold bars were smuggled without foreign markings or proper evidence

CESTAT Allahabad held that customs authorities failed to establish reasonable belief for seizure of 3499.750gm gold bars allegedly smuggled from Myanmar. The tribunal found that retracted statements were insufficient evidence to prove smuggled nature of goods. Without foreign markings and seized from city location, Section 123 burden of proof provisions were not attracted. Appellants successfully discharged burden through bank transaction records and GST documentation, which revenue failed to verify. Proceedings violated natural justice principles by not providing DRI investigation report to appellants. Confiscation and penalty orders set aside, appeal allowed.

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The core legal questions considered in this case are:

(i) Whether the Department had a reasonable belief to seize 3499.750 grams of alleged foreign origin gold from the possession of the appellants;

(ii) Whether the evidence on record establishes that the seized gold bars were smuggled into India from Myanmar without legal documents;

(iii) Whether the appellants discharged the burden of proof under Section 123 of the Customs Act, 1962;

(iv) Whether failure to follow the procedure prescribed under Section 138B of the Customs Act, including denial of opportunity to cross-examine witnesses, vitiated the proceedings;

(v) Whether the retracted statements of the appellants can be relied upon to establish liability for confiscation and penalty under Sections 111 and 112(b) of the Customs Act, 1962.

Issue-wise Detailed Analysis:

(i) Reasonable belief for seizure under Section 110 of Customs Act, 1962

The legal framework mandates that before seizure under Section 110, the proper officer must have a reasonable belief that the goods are liable for confiscation. This belief must be based on definite material or information, not mere suspicion or speculation. The jurisprudence, including authoritative precedents, requires that the reasonable belief exist at the time of seizure and be capable of rational explanation. The Supreme Court and various High Courts have emphasized that the officer's belief must be that of an honest and reasonable person, grounded on reasonable grounds.

In this case, the seized gold did not bear any foreign markings, and the purity was tested at 98.52% and 96.73%, which are not conclusive of foreign origin. The seizure occurred on a highway, outside any specified customs area under Section 11H. The only evidence presented to establish reasonable belief were the initial statements of the appellants, which were subsequently retracted, and call data records indicating communication among the accused. However, these communications did not demonstrate any contact with foreign entities or across the border, nor did they specify smuggling details.

The Court found that the Department failed to disclose the nature of the intelligence or information upon which the seizure was based, violating the requirement that the gist of information be communicated to the accused. The Court relied on a detailed review of precedents, including a landmark decision of the Delhi High Court, which held that mere unaccounted goods or lack of documentation does not automatically establish smuggling or reasonable belief thereof. The Court concluded that the Department's claim of reasonable belief was a presumption unsupported by corroborative evidence and thus not established.

(ii) Proof of smuggling and foreign origin of gold

Sections 111(b) and 111(d) of the Customs Act apply to goods imported in contravention of law, including smuggled goods. The burden is on the Department to prove that the goods are of foreign origin and were smuggled into India without payment of duty or in violation of restrictions.

The appellants claimed that the gold was of Indian origin, legally purchased from domestic suppliers, supported by tax invoices and GST returns (GSTR-1 and GSTR-2A). The Department contended that these invoices were fabricated and backdated, based on statements from the shop owners and an undisclosed investigation report not shared with the appellants, violating principles of natural justice.

The Court noted that the Department failed to provide the investigation report or allow cross-examination of witnesses whose statements were relied upon. The call data records and travel tickets, while indicating communication among accused persons, did not establish smuggling or foreign origin. The seized silver and cash were not proven to be proceeds of smuggled goods.

Therefore, the Department did not discharge its burden to prove smuggling or foreign origin beyond the retracted statements of the appellants, which were general and lacked critical details of smuggling operations.

(iii) Burden of proof under Section 123 of Customs Act

Section 123 shifts the burden of proof to the person from whose possession the goods were seized to prove that the goods are not smuggled, but only if the Department establishes reasonable belief under Section 110. The Court reiterated that if reasonable belief is not established, Section 123 cannot be invoked, and the Department must prove smuggling itself.

Assuming Section 123 applied, the appellants submitted bank statements showing payments to suppliers after the date of interception, GST returns filed by sellers, and claimed lawful procurement. The Department argued these transactions were fabricated post-seizure. However, the Department did not verify or corroborate these claims with evidence, and did not provide the appellants an opportunity to challenge the investigation findings.

The Court found that the appellants discharged their burden under Section 123, and the Department failed to rebut it conclusively. The presumption under Section 123 is not absolute and can be rebutted by credible evidence, which the appellants provided.

(iv) Non-compliance with Section 138B and violation of principles of natural justice

Section 138B mandates that statements recorded under Section 108 of the Customs Act can be relied upon only if the person making the statement is examined and cross-examined during adjudication. The appellants argued that the Department relied solely on the statements of co-accused persons (Abhishek Kumar and Ritesh Kumar) recorded under coercion, without examining or allowing cross-examination.

The Court reviewed precedents emphasizing the necessity of cross-examination to ensure fairness and reliability of statements recorded under investigation. It held that failure to follow Section 138B and denial of cross-examination vitiated the proceedings and rendered the statements inadmissible as substantive evidence.

The Court further noted that the statements of co-accused cannot be used as substantive evidence against others without corroboration, especially when not subjected to cross-examination.

(v) Reliance on retracted statements of appellants

The initial statements of the appellants admitted smuggling but were retracted shortly after. The Court held that retraction does not automatically render statements involuntary or inadmissible but must be tested for voluntariness and truthfulness. However, in this case, the statements were general, lacked specific details of smuggling, and were not supported by other evidence.

Moreover, the failure to comply with Section 138B and allow cross-examination further weakened the reliability of these statements. The Court found that reliance solely on these retracted statements to establish smuggling and confiscation liability was unsustainable.

Significant Holdings:

"The reasonable belief contemplated in Section 110 of Customs Act, 1962, should exist to the satisfaction of the officers and any authority at least to an extent wherein the same does not take the colour of assumptions and presumptions."

"In the absence of any evidence other than the statements of Shri Abhishek Kumar & Shri Ritesh Kumar, which were later retracted, the officers of DRI could not establish that there are sufficient grounds to establish that the 'reasonable belief' as contemplated in Section 110 of the Customs, Act, existed in the case."

"The statements of the co-accused cannot by itself be taken as a substantive piece of evidence against another co-accused and can at best be used or utilized in order to lend assurance to the Court. In the absence of any substantive evidence, it would be inappropriate to base the conviction of the appellant purely on the statements of co-accused."

"Failure to comply with the procedure laid down under Section 138B of the Customs Act, 1962, and denial of opportunity to cross-examine witnesses vitiates the proceedings and renders the statements inadmissible as substantive evidence."

"The burden under Section 123 is not absolute and once discharged by the person from whom goods are seized, the Revenue must rebut it with cogent evidence. Mere reliance on investigation reports not supplied to the accused violates principles of natural justice."

Final determinations:

The Department failed to establish reasonable belief under Section 110 at the time of seizure; hence, Section 123 was not attracted.

The evidence on record did not prove that the seized gold was smuggled or of foreign origin.

The appellants discharged their burden of proof under Section 123 by producing credible documents and evidence of lawful purchase.

Non-compliance with Section 138B and denial of cross-examination violated principles of natural justice and vitiated the proceedings.

Reliance on retracted statements without corroboration was improper.

Accordingly, confiscation and penalty orders were set aside, and appeals were allowed.

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