Non-compliance with Section 138B makes key statement inadmissible; valid invoices satisfy burden under Section 123

The CESTAT held that non-compliance with mandatory procedure under Section 138B of the Customs Act rendered the key statement inadmissible. Without this statement, there was no evidence to prove the gold was smuggled or of foreign origin. The appellant produced valid invoices and seller confirmations, satisfying the burden of proof under Section 123. Consequently, the confiscation and penalty under Section 112(b) were unwarranted. The impugned order was set aside and the appeal allowed.

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1. ISSUES PRESENTED and CONSIDERED

• Whether the statement recorded under Section 108 of the Customs Act, 1962 from a co-noticee can be relied upon without compliance with the mandatory procedure under Section 138B of the Act.
• Whether the statement of the co-noticee was voluntary and not retracted, thus admissible as substantive evidence.
• Whether the burden under Section 123 of the Customs Act, 1962 to prove smuggling or foreign origin of the seized gold was discharged by the Revenue.
• Whether the seized gold bars were smuggled from abroad, specifically from Bangladesh, based on the evidence on record.
• Whether the penalty under Section 112(b) of the Customs Act, 1962 can be imposed on the Appellant in absence of proof of smuggling.
• Whether the statements of the sellers denying sale of the seized gold bars to the Appellant's firm are admissible and reliable evidence.
• Whether the procedural safeguards, including cross-examination rights and evidentiary requirements, were complied with in admitting statements recorded during investigation.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Admissibility and Reliance on Statement Recorded under Section 108 of the Customs Act without Compliance of Section 138B

- Legal Framework: Section 138B of the Customs Act, 1962 mandates a specific procedure for admitting statements recorded before a gazetted customs officer during inquiry or investigation. The statement can be admitted if the maker is unavailable or after examination as a witness before the adjudicating authority who forms an opinion to admit it in the interest of justice.

- Precedents: The Punjab & Haryana High Court's interpretation of the analogous Section 9D of the Central Excise Act (pari materia to Section 138B) emphasizes the mandatory nature of the procedure, including examination of the maker as witness and recording of reasons before admitting such statements. The Delhi High Court has held identical provisions under Section 138B require objective formation of opinion and opportunity to the accused for submissions before admitting such statements.

- Court's Reasoning: The Tribunal held that non-compliance with Section 138B cannot be excused merely because the Appellant did not seek cross-examination. It is the adjudicating authority's duty to follow the statutory procedure before relying on such statements. The failure to comply renders the statement inadmissible and not relevant evidence.

- Conclusion: The statement of the co-noticee recorded under Section 108 is eschewed from consideration for want of compliance with Section 138B, negating the Revenue's primary evidentiary basis.

Issue 2: Voluntariness and Retraction of the Co-noticee's Statement

- Legal Framework: Statements made under custody or coercion are suspect; reliability is a key criterion. Retraction of statements affects their evidentiary value.

- Court's Reasoning: The co-noticee's bail application contained pleadings contradicting and retracting his earlier statement, indicating lack of voluntariness and reliability. The statement was based on hearsay, i.e., information told by others rather than personal knowledge.

- Precedents: The Delhi High Court has held that once a maker resiles from a statement, it is unsafe to rely on it without corroboration.

- Conclusion: The statement is not voluntary or reliable and cannot be treated as substantive evidence.

Issue 3: Burden of Proof under Section 123 of the Customs Act and Evidence of Smuggling or Foreign Origin

- Legal Framework: Section 123 places the initial onus on the Revenue to prove that goods are smuggled or of foreign origin, especially in town seizures (not at airports/seaports/land customs stations).

- Court's Reasoning: Apart from the inadmissible statement of the co-noticee, no credible evidence was produced to establish foreign origin or smuggling. The Appellant produced purchase invoices and sellers confirmed transactions, discharging his burden.

- Conclusion: The Revenue failed to discharge its burden under Section 123; the seized gold cannot be presumed smuggled.

Issue 4: Admissibility and Reliability of Statements of Sellers Denying Sale of Seized Gold Bars

- Court's Reasoning: Statements of sellers denying sale were not recorded following the procedure under Section 138B and were not admissible. Showing photographs without panchnama further diminished evidentiary value.

- Conclusion: These statements cannot be relied upon against the Appellant.

Issue 5: Significance of Markings and Purity of Gold Bars

- Facts: The seized gold bars bore MMTC-PAMP markings with 99.5% purity. MMTC is a government PSU dealing in gold of such purity.

- Court's Reasoning: No enquiry was made with MMTC to verify authenticity. Under the Gold Control Act, 99.5% purity gold was considered Indian origin, while 99.9% purity indicated smuggled gold.

- Conclusion: Absence of investigation with MMTC and the purity level negates presumption of smuggling.

Issue 6: Imposition of Penalty under Section 112(b) of the Customs Act

- Court's Reasoning: Penalty can only be imposed if smuggling or illegal importation is proved. Since the Revenue failed to establish smuggling, penalty cannot be sustained.

- Conclusion: Penalty imposed on the Appellant is set aside.

Issue 7: Procedural Safeguards and Rights of Cross-examination

- Legal Framework: Section 138B and analogous provisions require the maker of statements to be examined as witness, and the affected party to be given opportunity for cross-examination before admitting statements as evidence.

- Court's Reasoning: The authorities below failed to comply with this mandatory procedure, and the right to cross-examination cannot be waived or ignored by the adjudicating authority's inaction.

- Conclusion: Non-compliance vitiates reliance on such statements.

Overall Conclusion: The Tribunal held that the Revenue's case is based on inadmissible, unreliable, and hearsay evidence without proper procedural compliance. The Appellant discharged the burden of proving lawful possession. Consequently, confiscation and penalty orders are set aside, and seized gold is ordered to be released to the Appellant.

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