2025 (9) TMI 1635 - AT - Central Excise

Central excise demand set aside for unverified stock/weighment, unidentified notebooks, missing Section 36B and Section 9D, rule 26 penalty quashed

CESTAT KOLKATA - AT set aside the central excise demand arising from alleged shortages and clandestine removals, holding stock-taking/weighment evidence ... Clandestine removal - mismatch between statutory invoices and the entries allegedly found in two writing pads recovered at the time of search - shortages found in finished goods during stock taking - clearances of raw materials as such without reversal of the credit availed - interest and penalty - Imposition of penalty u/r 26 of the Central excise Rules, 2002 on appellant's director. Demand of central excise duty on account of shortages in finished goods - HELD THAT:- It is observed that the physical stock taking and weighment details are not relied upon in this proceedings. The appellant questioned the method of stock taking and contended that physical stock taking was not done. In this regard, it is observed that when the document related to physical stock taking has not been relied upon, then it is incumbent upon the adjudicating authority/appellate authority to call for the relevant records of physical stock taking and weighment, and verify the factual position and record his findings on the issue of shortages, which has not been done in this case. It is also observed that more than 39077 kgs of Aluminium Circle have been weighed within a short span of few hours, which was a physical impossibility - there are merit in the contentions of the appellant regarding the actual weighment of the stock. Also, it is observed that the investigation has not brought in any evidence to conclude that to whom the shortages found were clandestinely cleared. Accordingly, the demand of central excise duty cannot be confirmed on the basis of the stock verification, when the shortages alleged are not supported by any evidence. Demand of Central Excise Duty confirmed in the impugned order on account of alleged clandestine removal on the ground of mismatch of statutory invoices and the entries allegedly found in two writing pads recovered at the time of search - HELD THAT:- It is observed that the appellant has questioned the admissibility and reliability of details appearing in the hand-written note pads as the investigation has not identified the author of the entries made there in. In this regard, the submission of the appellant is agreed that merely because certain private records relating to manufacture or clearance of goods had been recovered during search proceeding, clandestine manufacture and clearance of finished goods without payment of duty cannot be presumed automatically. No duty can be demanded on matching of some entries in private records with statutory records/Book of Accounts, without any corroborative evidence to substantiate the allegations. Further, it is observed that the documents retrieved from the private records are admissible evidences only when the mandatory procedure prescribed in Section 36B is followed - the data resumed from the private records alone cannot be relied upon to demand duty, without any corroborating evidence. The Appellant contended that Statements recorded during the course of investigation cannot be relevant without testing the same under Section 9D. The provisions of Section 9D of the Act is mandatory and unless the prescriptions of Section 9D are complied, the testimony of witness cannot be treated as relevant piece of material as mandated under Section 9D - the statements recorded in this case has lost its evidentiary value by not following the provisions of Section 9D. Hence, such statement cannot be relevant piece of evidence to confirm the duty demand. This view has been supported by the decisions of various High Courts and Tribunals. In the present case, it is observed that there is no other evidence other than the statements available on record to establish clandestine clearance or any attempted clandestine clearance. It is also found that no discrepancy could be detected as regards consumption of inputs or excess electricity vis-à-vis statutory records, for utilization in clandestine manufacture. There is neither any seizure of offending goods sought to be cleared nor any seizure of conveyance carrying purported offending goods. There is no evidence by way of any statement from any identified buyers of the clandestinely cleared goods or evidence establishing flow-back of funds of undisclosed sale proceeds. It is also observed that there was no follow-up investigation conducted at the end of the Company’s regular transporters or buyers. It is a well settled law that the charge of clandestine removal being quasi-criminal in nature, must be is proved with tangible evidences, which are conspicuously absent in the instant case. Also there is no evidence of clandestine clearance of raw materials on which CENVAT Credit has been availed by the appellant and hence the demand of reversal of CENVAT Credit is also not sustainable. Accordingly, the demands of central excise duty confirmed in the impugned order is not sustainable. Interest and penalty - HELD THAT:- As the demand of central excise duty is not sustained, the question of demanding interest or imposing penalty does not arise and hence the same is set aside. Imposition of penalty u/r 26 of the Central excise Rules, 2002 on appellant's director - HELD THAT:- It is observed that penalty has been imposed on him under Rule 26 of the Central excise Rules, 2002 for his alleged role in the offence of clandestine clearance. As the offence of clandestine clearance is not sustained, the penalty imposed on the appellant Shri Proshant Agarwal, is not sustainable and hence the same is set aside. Appeal disposed off. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether demands of Central Excise duty based on alleged clandestine removal can be sustained on the basis of private records (hand-written note pads, weighment slips, challans) recovered during search when the authors of those records are unidentified and procedural safeguards under Section 36B(4)/Section 65B(2) Evidence Act were not followed. 2. Whether statements recorded during investigation are admissible and relevant in adjudication proceedings where the statutory procedure under Section 9D of the Central Excise Act (and its pari materia provisions) was not complied with. 3. Whether demands founded on alleged shortages ascertained during on-site stock taking/weighment can be sustained when physical stock/weighment records were not relied upon, apparent inconsistencies exist in panchnama/stock reports, and no follow-up verification was conducted. 4. Whether reversal of CENVAT credit and penalties (including under Rule 26) can be sustained where the foundational allegations of clandestine removals and shortages are not established by corroborative evidence. 5. Whether amounts paid and appropriated by Revenue during investigation are refundable where the confirmed duty demands are set aside, subject to verification of unjust enrichment. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Reliance on private records recovered during search without compliance with Section 36B/Section 65B(2) Evidence Act Legal framework: Admissibility of electronic or device-retrieved material is governed by Section 36B of the Central Excise Act read with Section 65B(2) of the Indian Evidence Act (parimateria). Private records recovered during search are evidentiary only if the mandatory certification/procedural requirements are satisfied. Precedent treatment: The Tribunal followed the Hon'ble Apex Court's holding (Anvar P.V. v. P.K. Basheer) and authorities cited by the appellant that documents/data from private devices are admissible only after compliance with statutory formalities; the Tribunal also relied on decisions disallowing reliance on mere matching of private entries with statutory records. Interpretation and reasoning: The Court observed that the statutory procedure prescribed by Section 36B was not followed in the present case and the authors of the handwritten entries were neither identified nor examined. Mere recovery of private records does not permit an automatic presumption of clandestine removals. Matching entries in suspect private records with statutory invoices, without procedural compliance and corroboration, cannot form the basis of a demand. Ratio vs. Obiter: Ratio - Private records recovered during search cannot be relied upon to sustain duty demands unless the conditions of Section 36B/Section 65B(2) are complied with and corroborative evidence exists. This is a binding adjudicatory holding for the facts of the case. Obiter - References to ancillary authorities exemplifying the principle. Conclusion: Demands premised on entries in the seized writing pads and similar private records are unsustainable absent compliance with statutory certification requirements and corroborative evidence; accordingly the related duty demand was set aside. Issue 2: Admissibility and relevance of statements recorded during investigation without compliance with Section 9D Legal framework: Section 9D of the Central Excise Act prescribes circumstances under which statements recorded by gazetted officers during investigation become relevant in adjudication: either clause (a) circumstances exist, or clause (b) procedure (examination before adjudicating authority and formation of opinion) must be followed. Equivalent safeguards under Customs provisions were noted. Precedent treatment: The Tribunal applied a line of High Court and Tribunal decisions (including Ambika International, Jindal Drugs, Hi Tech Abrasives, Surya Wires, DroliaElectrosteel) holding Section 9D's procedural requirements to be mandatory; failure to comply renders investigation statements inadmissible as evidence in adjudication. Interpretation and reasoning: The Court found on record non-compliance with Section 9D; witnesses whose statements were relied upon were not examined before the adjudicating authority and no opinion admitting the statements into evidence was recorded. The legislative rationale - to neutralize possible coercion and to protect fairness by permitting cross-examination only after admission - was emphasized. Consequently, the statements lost evidentiary value. Ratio vs. Obiter: Ratio - Statements recorded during investigation are inadmissible in adjudication where Section 9D procedure is not followed; reliance on such statements is impermissible. This forms a central, dispositive legal principle of the decision. Obiter - Elaborations on policy rationale drawn from cited judgments. Conclusion: All demands premised substantially or exclusively on investigation statements are invalidated for want of compliance with Section 9D and related authorities; such statements cannot sustain duty/penalty findings. Issue 3: Reliance on stock-taking/weighment and determination of shortages where panchnama/stock records are inconsistent or not verified Legal framework: Allegations of shortages or clandestine clearances based on on-site stock verification require reliable, contemporaneous stock/weighment records and adherence to correct panchnama search/seizure procedures (Sections 12F, 18 and relevant CrPC provisions). Arbitrary or inconsistent stock reports are inadequate to found a duty demand. Precedent treatment: Tribunal considered authorities rejecting stock-taking evidence where panchnama was defective, where weighment details were implausible, or where authorities failed to call for and verify original weighment records. The appellant's authorities (Scan Sponge Iron, Jai Balaji) were accepted to the extent they support requiring verification of physical stock records. Interpretation and reasoning: The Court noted inconsistencies in the panchnama (timing discrepancies), absence of detailed statements of stock/weighment records, and physical impossibility of weighing large quantities in the recorded time. Further, the adjudicating/appellate authorities did not call for original weighment records or conduct follow-up verification (transporters, buyers, production contractors). There was no evidence identifying recipients of alleged clandestine removals. Given these lacunae, shortages ascertained on the day of search could not be a sound basis for confirming duty. Ratio vs. Obiter: Ratio - Stock-taking/weighment based demands are unsustainable where the documentary record of stock verification is inconsistent, implausible, or unverified and no corroborative investigation is conducted to identify alleged recipients. Obiter - Observations on best practice for authorities to call for weighment records and conduct follow-up inquiries. Conclusion: Demands founded on alleged shortages during stock taking are not sustainable in the absence of reliable stock/weighment records and corroborative investigation; corresponding duty demands were set aside. Issue 4: Reversal of CENVAT credit and imposition of penalties where foundational clandestine removal allegation fails Legal framework: Reversal of CENVAT credit is warranted where inputs on which credit is availed are removed as such without requisite reversal; penalties under Central Excise Rules are predicated on established offences such as clandestine removal. Precedent treatment: The Tribunal applied the general principle that ancillary penalties and credit reversals cannot survive if the primary factual basis (clandestine removal/shortages) is not proven by admissible and corroborative evidence. Interpretation and reasoning: Since clandestine removal and shortages were not established (see Issues 1-3) and there was no evidence of clearance of inputs without reversal, the reversal of CENVAT and penalties (including Rule 26 imposition on an individual) lacked sustenance. Penalties are consequential upon proven contravention; absent foundational proof, penal consequences must be vacated. Ratio vs. Obiter: Ratio - Reversal of CENVAT credit and imposition of penalties cannot be sustained where the primary allegations on which they rest are not proved by admissible evidence. Obiter - Noneational comments on interplay between proof and consequential penalties. Conclusion: Reversal of CENVAT credit and penalties confirmed in the impugned order are set aside for want of foundational proof of clandestine removals. Issue 5: Refund of amounts appropriated by Revenue during investigation subject to unjust enrichment verification Legal framework: Appropriated sums paid during investigations may be refundable where confirmed demands are set aside; however, refund is subject to statutory concept of unjust enrichment requiring verification before refund. Precedent treatment: The Tribunal followed established practice of directing refund of appropriated amounts when demands are vacated, while reserving Revenue's right to examine and rule on unjust enrichment. Interpretation and reasoning: Given the Tribunal's setting aside of duty demands, interest and penalties, amounts appropriated by the adjudicating authority are liable to be refunded. However, the issue of unjust enrichment must be examined by the revenue authority before effecting refund. Ratio vs. Obiter: Ratio - Refund of appropriated payments follows when confirmed demands are quashed, subject to proper verification of unjust enrichment. Obiter - Procedural expectation that Revenue will complete unjust enrichment check before refund. Conclusion: The amount appropriated by Revenue during investigation is ordered refundable, subject to verification of unjust enrichment; overall appeal disposed on these terms with duty, interest and penalties set aside.