2025 (11) TMI 1095 - AT - Central Excise

Personal penalty under Rule 26 quashed for employee due to lack of evidence under Rule 26(2)

Shri Venkat R. Chari Versus C.C.E. & S.T. – Daman

CESTAT AHMEDABAD (AT) set aside the personal penalty imposed under Rule 26 on an employee of a merchant exporter firm, holding that adjudicating authority ... Levy of personal penalty u/r 26 of the Central Excise Rules, 2004 on appellant, employee of a Merchant Exporter Firm - illegal receipt of rebate - HELD THAT:- This court finds that the matter is no more res-integra and has been decided by the Division Bench of this court in SHRI VIJAY KUMAR SHARMA VERSUS COMMISSIONER OF C.E. -KUTCH (GANDHIDHAM) AND SHRI VINOD KASHYAP VERSUS COMMISSIONER OF C.E. -KUTCH (GANDHIDHAM) [2025 (7) TMI 1707 - CESTAT AHMEDABAD] wherein it was held that 'The Learned Adjudicating Authority has not elaborated as to how the present appellants fall under the criteria of Rule 26(2) for imposing penalty. Even, the statements of Shri Vijay Kumar Sharma and Shri Vinod Kashyap do not bring out their role in issuance of invoices or abetting in issuance of invoices/documents to facilitate the user of such invoices/documents to get ineligible benefits. Therefore, agreeing with the contention, both the appeals are allowed and the penalty imposed on the appellants are set aside.' Therefore the analysis in the aforesaid decision of Vijay Kumar Sharma will equally apply to the old and the amended Rule 26. Further this court also finds that the proposition analysis in the Vijay K. Sharma is also fortified by the decision of Nicholas D’Souza Garage Vs CCE Thane [2006 (3) TMI 734 - CESTAT MUMBAI] in which relevant para 15 also lays down same proposition. Also to uphold malicious intent on the part of an employee, some pecuniary benefit is required to be exhibited beyond his salary or salary should be shown beyond his work qualifications. Further testimonial evidence cannot be relied upon if relied during cross examination - The corroboration vindicating the employee-appellants involvement with knowledge of malfeasance was specifically required in this case. This court following the aforesaid decisions is inclined to provide relief in the instant case as there is no confiscation of goods has taken place and therefore, Rule 26 would not have been applied. Penalty on the present appellant is set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under Rule 26 of the Central Excise Rules can be imposed where (a) no proposal for confiscation of goods was made in the show cause notice and (b) no confiscation was ordered. 2. Whether Rule 26 is attractable in cases where Revenue's case is based on paper transactions alleging non-existence of goods (i.e., no physical goods liable to confiscation). 3. What are the essential ingredients that must be found and recorded for imposing personal penalty under Rule 26 on an individual (including employees/office-bearers)? 4. Whether an employee (managerial or signatory) can be subjected to personal penalty under Rule 26 absent proof of personal gain, control, or active participation with knowledge or reason to believe goods were liable to confiscation. 5. Degree and nature of evidence/corroboration required to sustain imposition of Rule 26 penalty where testimonial statements are retracted or witnesses examined for co-noticees are cross-examined through common representation. ISSUE-WISE DETAILED ANALYSIS - Applicability of Rule 26 where no confiscation proposed/ordered Legal framework: Rule 26(1) prescribes penalty for any person who deals with excisable goods which he knows or has reason to believe are liable to confiscation; Rule 26(2) penalises issuing excise duty invoices without delivery or abetting documents that enable ineligible benefits. Precedent treatment: The Court relied on prior tribunal decisions holding that Rule 26(1) is not attracted where show cause notice does not propose confiscation and where there are no goods liable to confiscation; analogous treatment of erstwhile provisions was noted. Interpretation and reasoning: The Court held that where Revenue's case is predicated on the non-existence of goods (paper transactions), there are no tangible goods which can be the subject of confiscation; therefore the statutory premise of Rule 26(1) is absent. The show cause notice must propose confiscation for Rule 26(1) to be properly invoked and adjudicating authority must record findings about goods liable to confiscation. Ratio vs. Obiter: Ratio - Rule 26(1) cannot be invoked where no confiscation is proposed and where the case involves non-existent goods; Obiter - observations on Rule 26(2) scope where not specifically pleaded. Conclusions: Penalty under Rule 26(1) was not sustainable in the absence of any proposal or order of confiscation and where the Revenue's own case involved alleged paper transactions without goods liable to confiscation; relief granted on this ground. ISSUE-WISE DETAILED ANALYSIS - Rule 26 in paper-transaction/export rebate cases Legal framework: Rule 26(2) addresses issuance of excise invoices without delivery or abetting documents that lead to ineligible CENVAT/rebate benefits; this is a separate limb from Rule 26(1)'s goods-based offence. Precedent treatment: The Court treated earlier decisions as holding that where transactions are only on paper and no goods exist, Rule 26(1) (and its predecessor) cannot be invoked; courts have required specific pleading and findings under Rule 26(2) if reliance is on document issuance or abetment. Interpretation and reasoning: The adjudicating authority must specify how an individual meets the criteria of Rule 26(2) - e.g., issued invoice/abetment or created documents used to obtain ineligible benefit. Mere managerial position or general allegations are inadequate unless linked to issuing or abetting such documents. Ratio vs. Obiter: Ratio - Distinction drawn between the two limbs of Rule 26; Rule 26(2) requires particularised findings about issuance/abetment of documents; Obiter - emphasis that Rule 26(2) typically targets individuals directly responsible for document creation/use. Conclusions: In absence of explicit findings demonstrating that the appellant issued or abetted creation of invoices/documents, Rule 26(2) could not sustain the penalty; the Court did not need to decide all aspects of Rule 26(2) because relief was granted under Rule 26(1) deficiency. ISSUE-WISE DETAILED ANALYSIS - Essential ingredients and requirement of specific findings for Rule 26 Legal framework: For Rule 26(1) the adjudicating authority must find (i) the person dealt with excisable goods (acquired possession, transported, removed, deposited, kept, concealed, sold, purchased or otherwise dealt with), (ii) such goods were liable to confiscation, and (iii) the person knew or had reason to believe the goods were liable to confiscation. Precedent treatment: The Court reiterated established doctrine that these three ingredients must be alleged and specifically found; mere assertion that investigation 'brought out' a role is insufficient without explicit findings addressing each ingredient as to the individual. Interpretation and reasoning: The Court examined the impugned order and found no recording of specific findings on how the appellant dealt with goods, how such goods were liable to confiscation, and what knowledge or reason to believe existed. Rejection of defence must be supported by reasons addressing documentary and testimonial evidence relied upon by the noticee. Ratio vs. Obiter: Ratio - Mandatory requirement of recording specific findings on each statutory ingredient of Rule 26 before imposing personal penalty; Obiter - comments on what form such findings should take (linkage to documents/acts). Conclusions: Absence of recorded findings on the three essential ingredients rendered the imposition of penalty unsustainable. ISSUE-WISE DETAILED ANALYSIS - Liability of employee/manager absent personal gain or control Legal framework: Rule 26 contemplates liability of any person dealing with goods/documents; however, jurisprudence construes penal liability on employees/office-bearers where evidence shows active participation, control, mandate, or personal gain. Precedent treatment: The Court relied on authorities holding that an employee who acted only in official capacity without personal benefit and lacking control/decision-making is not to be penalised; prior decisions require demonstration of personal complicity beyond mere designation as signatory/manager. Interpretation and reasoning: The adjudicating authority's conclusion that the appellant was a 'key person' was weighed against detailed witness testimony and departmental officer statements that supported bona fides of transactions and showed the appellant's limited role. The Court emphasised that pecuniary benefit (beyond salary) or demonstrable control/mandate is necessary to infer malafide participation. Ratio vs. Obiter: Ratio - Employee/managerial status alone does not attract Rule 26 penalty; finding of personal involvement, control, or benefit is required; Obiter - the nature of acceptable corroboration to show complicity. Conclusions: On the record, the appellant was shown to have been an employee without evidence of personal gain, control, or knowledge of goods being liable to confiscation; thus personal penalty was unjustified. ISSUE-WISE DETAILED ANALYSIS - Evidentiary sufficiency, retracted statements and cross-examination issues Legal framework: Where the department relies on statements by third parties which are retracted or where cross-examination is conducted under common representation, independent corroboration is necessary to sustain adverse findings. Precedent treatment: The Court applied the principle that retracted statements require independent corroboration; cross-examination conducted without proper procedural safeguards or by common counsel diminishes evidentiary weight. Interpretation and reasoning: The Court noted procedural infirmities (long delay, lack of advance questionnaire, cross-examination by same advocate for co-noticees) and accepted that many witnesses either disclaimed knowledge of the appellant or attributed transactions to the proprietor/family members. Departmental officer affidavits and verification reports further weakened the case that transactions were fictitious. The adjudicating authority's dismissal of such evidence without reasoned analysis was held to violate principles of fair adjudication. Ratio vs. Obiter: Ratio - Where testimonial evidence is retracted or compromised by procedural defects, adjudicating authorities must seek independent corroboration before imposing penalty; Obiter - procedural best practices for cross-examination in long-lapsed matters. Conclusions: The evidence on record did not provide the requisite corroboration to sustain the adjudicator's adverse findings against the appellant; weight assigned by the adjudicator was inadequately reasoned. OVERALL CONCLUSION The Court concluded that Rule 26(1) was improperly invoked because no confiscation was proposed or ordered and the Revenue's case involved alleged paper transactions; further, the adjudicating authority failed to record specific findings on the statutory ingredients of Rule 26 and ignored significant exculpatory documentary and testimonial evidence. In view of these legal and factual deficiencies, the penalty imposed under Rule 26 was set aside.