Excise demands quashed as clandestine removal not proved; uncorroborated statements and Section 9D violations sink revenue case

CESTAT Ahmedabad set aside the excise demands and penalties against the appellant tile and sanitaryware manufacturers, holding that the allegation of clandestine manufacture and removal was not proved. The Tribunal found the investigation to be slipshod and based almost entirely on uncorroborated third-party statements of shroffs, brokers and buyers, without supporting evidence such as excess stock, raw material consumption, transport documents, cash seizure or buyer-side discrepancies. Non-compliance with Section 9D regarding examination and cross-examination of witnesses further weakened the evidentiary value of the statements. Applying the standard of preponderance of probability, CESTAT held that mere suspicion and presumptions cannot substitute cogent, credible evidence, and therefore the charge of clandestine removal failed. All demands and connected penalties were quashed and the appeals were allowed.

---

---

Issues: (i) Whether the department proved clandestine removal of excisable goods by the appellants on the basis of seized bank statements, third-party diaries and statements of shroffs/ middlemen; (ii) Whether statements recorded under Section 14 (investigation) and third-party private records could be admitted and acted upon without compliance with Section 9D (examination/admissibility) and whether penalties/valuation based on such material were sustainable.

Issue (i): Whether clandestine removal was proved so as to sustain demands of central excise duty, interest and penalties against the appellants.

Analysis: The evidence consisted principally of bank-statement printouts, handwritten abbreviations, private diaries/worksheets seized from shroffs/brokers and oral statements of third parties; searches and statements of manufacturers/ directors were limited and in many matters absent or exculpatory; no independent documentary proof of excess production, excess raw-material procurement, transport documents, excess electricity/consumption or unaccounted stocks was produced; the link between deposits in shroff accounts and receipt of cash by manufacturers was not consistently established by contemporaneous, authenticated source documents; several investigatory lacunae and failure to decode or authenticate handwritten abbreviations undermined probative force of the documentary trail; case law requires clandestine removal to be proved by cogent, corroborative material and not by conjecture or mere testimonial inferences.

Conclusion: On the available record clandestine removal was not proved by the Revenue and demands/penalties premised on that charge could not be sustained in the absence of strong, corroborative evidence in favour of Revenue.

Issue (ii): Whether statements recorded during investigation and third-party private records could be relied upon without complying with Section 9D (i.e., examination of the maker before the adjudicating authority and admission in evidence) and whether penalties and valuation based on such material were valid.

Analysis: Many relied-upon statements of shroffs/brokers and some directors were not examined in chief by the adjudicating authority nor offered for cross-examination as required by Section 9D(1)(b) where clause (a) does not apply; several director statements were retracted or were exculpatory; third-party diaries/worksheets were unsigned/unauthenticated and their authorship and provenance were not established; authorities and precedent require statute-prescribed procedure for admitting investigation statements because of risk of coercion and to protect fairness; absence of adherence to Section 9D diminished the evidential value of those statements and consequently undermined reliance on the private records decoded only by those unexamined witnesses; valuation issues under Section 4A/Rule 4 were not reached once clandestine removal reliance failed.

Conclusion: Statements and third-party loose records could not supply the necessary, admissible evidentiary foundation in the absence of Section 9D compliance and authentication; penalties and valuation founded on such material were therefore unsustainable.

Final Conclusion: The departmental case on clandestine removal and attendant demands, interest and penalties failed for want of reliable, corroborative and admissible evidence; consequential relief was granted and the appeals were allowed.

Ratio Decidendi: Where allegations of clandestine removal rest primarily on unauthenticated third-party records and investigation statements recorded under Section 14, those statements and records must be admitted in evidence in accordance with Section 9D before they can form the basis for fiscal demands and penalties; absent such admissibility and independent corroboration (e.g., evidence of excess production, raw-material procurement, transport/receipt documents or authenticated financial linkage), demands for excise duty and penalty cannot be sustained on conjecture or uncorroborated testimonial inferences.

---