Appeals allowed as ex-parte excise demand quashed for natural justice breach and unproven clandestine removals under Rule 26

CESTAT Kolkata allowed the appeals, setting aside the ex-parte Order-in-Original on grounds of violation of principles of natural justice and absence of corroborative evidence of clandestine manufacture and clearance. The Tribunal held that non-supply of relied-upon documents, despite repeated requests, deprived the assessee of an effective opportunity to contest the show cause notice, rendering the adjudication unsustainable. It further found that the demand of duty was based solely on private records without verification of manufacture, transport, customers, or flow of consideration. Consequently, the duty demand, interest, and penalties on the assessee, its director, and supervisor under Rule 26 were quashed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1. Whether failure to supply seized and relied-upon documents before passing the adjudication order, and deciding the matter ex parte, violated principles of natural justice and rendered the order unsustainable.

1.2. Whether central excise duty demand for alleged clandestine manufacture and clearance could be sustained when based solely on private "rough estimate" note books without corroborative evidence, and the consequent effect on eligibility to SSI exemption under Notification No. 8/2003-CE.

1.3. Whether duty demand and confiscation in respect of finished goods found in stock at the time of search were sustainable when the total value of clearances including such goods remained within the SSI exemption limit.

1.4. Whether imposition of interest and penalty on the manufacturer under Sections 11AB, 11AC of the Central Excise Act, 1944 read with Rule 25 of the Central Excise Rules, 2002 could survive when the substantive duty demands were set aside.

1.5. Whether penalties imposed on the Director and Supervisor under Rule 26 of the Central Excise Rules, 2002 were sustainable in the absence of evidence establishing their involvement in any offence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Non-supply of relied-upon documents and violation of natural justice

Legal framework (as discussed):

2.1. The Tribunal considered the general principles of natural justice, particularly the requirement of furnishing relied-upon material to an affected party and affording adequate opportunity to rebut allegations and adduce evidence.

Interpretation and reasoning:

2.2. The appellants repeatedly requested, by multiple letters, supply of all seized and relied-upon documents referred to in the show cause notice.

2.3. From the record, the Tribunal found no evidence that such documents were ever supplied before the adjudicating authority proceeded to decide the matter ex parte.

2.4. The Tribunal held that, without access to the relied-upon documents, the appellants were effectively denied an opportunity to make "effective submissions" and to defend against the allegations, amounting to a breach of natural justice.

2.5. Relying on the principle that orders passed in violation of natural justice are void and not curable, the Tribunal held that an ex parte order passed without supplying the relied-upon documents is not sustainable in law.

Conclusions:

2.6. The impugned order, having been passed ex parte without supplying relied-upon documents, was held to be vitiated for violation of principles of natural justice. The Tribunal, however, proceeded to examine and decide the matter on merits as well.

Issue 2 - Sustainability of demand for clandestine clearances and effect on SSI exemption

Legal framework (as discussed):

2.7. The demand was raised under Section 11A of the Central Excise Act, 1944, on the ground that by suppressing production/clearances the assessee allegedly crossed the exemption threshold under Notification No. 8/2003-CE (SSI exemption).

2.8. The Tribunal discussed the settled legal position that clandestine clearance is a serious allegation requiring cogent, corroborative evidence and that duty cannot be demanded on mere assumptions, presumptions or preponderance of probabilities.

Interpretation and reasoning:

2.9. The department computed total clearances for the relevant financial year by adding: (a) recorded clearances of about Rs. 1,18,14,462/-, and (b) an additional value of Rs. 85,95,500/- derived solely from eight "Books containing Rough Estimates" seized from the premises.

2.10. The Tribunal noted that there was no investigation to establish that the quantities and values reflected in these rough estimate books corresponded to actual manufacture and clearance of excisable goods.

2.11. No verification was done at the alleged buyers'/receivers' end; no statements or confirmations from such buyers were produced.

2.12. No transporters were identified; no evidence of transportation of alleged unaccounted goods was brought on record.

2.13. There was no evidence of purchase of excess raw material, no proof of excess consumption of electricity, and no evidence of receipt of sale proceeds (cash or otherwise) relating to alleged clandestine removals.

2.14. The adjudicating authority had treated the private rough estimate books as if they were records of actual clearances without any corroborative material, contrary to the settled requirement that private/internal documents cannot, by themselves, form the sole basis of a clandestine removal demand.

2.15. Based on judicial precedents cited and extracted, the Tribunal reiterated that, in cases of alleged clandestine manufacture and removal, the Revenue must adduce tangible evidence such as excess raw material, proof of actual removal, statements of buyers, transport details, flow-back of funds, or other concrete corroboration. Such evidence was found to be wholly absent.

Conclusions:

2.16. The inclusion of Rs. 85,95,500/- based solely on rough estimate books to compute the total value of clearances was held to be legally unsustainable.

2.17. Consequently, the total clearance value of Rs. 2,04,09,926/- adopted by the department was held to be unsupported by evidence.

2.18. On exclusion of this unsupported component, the actual value of clearances remained Rs. 1,18,14,462/-, which is within the SSI exemption limit under Notification No. 8/2003-CE for the relevant year.

2.19. The demand of central excise duty of Rs. 16,65,594/- (with cess) relatable to alleged clandestine clearances, along with interest, was held unsustainable and was set aside.

Issue 3 - Duty demand and confiscation of goods found in stock at the time of search

Legal framework (as discussed):

2.20. Demand on the seized finished goods was confirmed under Section 11A, and confiscation ordered under Rule 25 of the Central Excise Rules, 2002, with an option of redemption fine.

2.21. The Tribunal examined this in the context of the SSI exemption limit under Notification No. 8/2003-CE.

Interpretation and reasoning:

2.22. Central excise duty of Rs. 2,56,000/- and education cess of Rs. 5,120/- had been demanded on the goods lying in stock in the factory on the date of search.

2.23. The Tribunal observed that, after excluding the unsupported alleged clandestine clearances, the total value of clearances for the financial year, even when the value of the seized in-stock goods is included, remained within the SSI exemption threshold.

2.24. Since the assessee's aggregate clearances (including the seized stock) did not exceed the SSI limit, no duty was payable on such goods under the relevant exemption Notification.

2.25. Once no duty liability on such stock existed by reason of SSI exemption, the basis for treating the finished goods as liable to confiscation under Rule 25 also failed.

Conclusions:

2.26. The duty demand of Rs. 2,56,000/- and cess of Rs. 5,120/- on the goods found in stock at the time of search was held unsustainable and set aside.

2.27. The order of confiscation of the finished goods and the associated redemption fine were held to be unjustified and were set aside.

Issue 4 - Interest and penalty on the manufacturer

Legal framework (as discussed):

2.28. Interest had been ordered under Section 11AB, and penalty under Section 11AC of the Central Excise Act, 1944 read with Rule 25 of the Central Excise Rules, 2002, premised entirely on the confirmed duty demands.

Interpretation and reasoning:

2.29. The Tribunal found that all substantive duty demands (on alleged clandestine clearances and on stock in factory) were unsustainable and were being set aside.

2.30. In the absence of any surviving demand of duty, there remained no foundation in law for levy of interest or imposition of penalty upon the manufacturer under Section 11AC/Rule 25.

Conclusions:

2.31. With the duty demands set aside, the consequential interest liability and penalty imposed on the manufacturer were held to be unsustainable and were accordingly set aside.

Issue 5 - Penalties on Director and Supervisor under Rule 26

Legal framework (as discussed):

2.32. Penalties had been imposed on the Director and the Supervisor under Rule 26 of the Central Excise Rules, 2002, which requires evidence of their knowing involvement in dealing with excisable goods in a manner rendering them liable to confiscation.

Interpretation and reasoning:

2.33. The Tribunal examined the record and found no evidence establishing that the Director or Supervisor had knowingly participated in or facilitated any clandestine manufacture, clearance, or other contravention.

2.34. With the primary finding that clandestine removal and duty evasion were not established against the manufacturer, the prerequisite factual foundation for invoking Rule 26 against individuals was absent.

2.35. The Tribunal held that the necessary ingredients for imposition of penalty under Rule 26 had not been proved in the instant case.

Conclusions:

2.36. The penalties imposed on the Director and Supervisor under Rule 26 were held to be unsustainable and were set aside.

2.37. As a result, the entire impugned order was set aside and all appeals were allowed with consequential relief as per law.

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