Gold confiscation and penalties quashed; burden under Sections 112(b) and 123 not met, currency seizure interest ordered

CESTAT set aside confiscation of town-seized gold and all penalties under Section 112(b) of the Customs Act. It held that, in the absence of foreign markings, purity below 99.5%, and any evidence of import, the department failed to establish foreign origin or smuggled nature of the gold; therefore, the statutory burden under Section 123 did not shift to the appellants. Reliance solely on an untested third-party statement, without affording cross-examination, was held impermissible, rendering the allegation of ownership unsustainable. As confiscation of the Indian currency was also found illegal, interest at the applicable rate was directed from the date of seizure until return.

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1. ISSUES PRESENTED AND CONSIDERED

1.1. Whether the seizure and confiscation of gold recovered in a town area, without foreign markings and with purity below 99.5%, were legally sustainable under Sections 110 and 123 of the Customs Act, 1962.

1.2. Whether the burden of proof under Section 123 of the Customs Act, 1962 shifted to the person from whose possession the gold was recovered in the facts of the present case.

1.3. Whether penalties under Section 112(b) of the Customs Act, 1962 were imposable on any of the appellants in the absence of proof of smuggled character of the gold and, in the case of Appellant Nos. 2 and 3, where the sole incriminating material was an untested third-party statement not subjected to cross-examination under Section 138B.

1.4. Whether the Indian currency recovered from Appellant No. 1 was liable to confiscation as sale proceeds of smuggled gold and whether the appellant was entitled to interest on its return.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2 - Legality of seizure/confiscation of gold in town seizure and applicability of burden under Section 123

Legal framework (as discussed)

2.1. The Court examined Sections 110 and 123 of the Customs Act, 1962, and considered the concept of "reasonable belief" for seizure and the statutory presumption and burden-shifting under Section 123.

2.2. The Court referred to the principles laid down by the Hon'ble Supreme Court in Ganesh Das v. Collector of Central Excise and Commissioner of Customs v. Abdul Gani, and to Tribunal decisions including Balanagu Naga Venkata Raghavendra v. Commissioner of Customs, Vijayawada and Sarvendra Kumar Mishra & Anr. v. Commissioner of Customs, on the evidentiary threshold for invoking Section 123 in town seizures of gold without foreign markings.

Interpretation and reasoning

2.3. The Court found that the gold was seized in the midst of the town of Kolkata, not at an airport, seaport, or upon arrival from abroad, and that gold with foreign markings is freely available in the local market.

2.4. It was noted that: (i) there was no evidence on record establishing who imported the gold, when and how it was imported, or by whom it was handed over to the person from whose possession it was seized; (ii) the investigation did not produce any evidence of foreign origin or of contravention of import conditions; and (iii) the purity of the gold was below 99.5% and there were no foreign markings.

2.5. The Court accepted the contention that mere absence of purchase documents and mere possession of gold in a town area, without more, cannot be treated as sufficient to characterise the gold as "smuggled" or to found a "reasonable belief" of smuggling under Section 110.

2.6. The Court held that to shift the burden of proof under Section 123 to the person from whose possession the gold was seized, the Customs authorities must first establish: (a) that the gold is of foreign origin; and (b) that the seizure was effected under a reasonable belief that the goods were smuggled. Only upon satisfaction of these preconditions can the burden shift to the person claiming ownership.

2.7. The Court observed that, in the present case, the investigation failed to prove the foreign origin or smuggled nature of the gold; consequently, the burden under Section 123 never shifted to any appellant. It was further noted that the primary appellant had not claimed ownership of the gold, which also negatived the application of Section 123 in the manner assumed by the Department.

2.8. On these facts, the Court concluded that the seizure of the gold was not based on a legally tenable "reasonable belief" of smuggling, and that the requirements for invoking Section 123 were not met.

Conclusions

2.9. The Court held that the seizure of gold under Section 110 was legally unsustainable, that the presumption under Section 123 did not arise and the burden of proof did not shift to the appellants, and that the Department failed to discharge its onus to establish the foreign and smuggled character of the gold. Consequently, the gold was held not liable to confiscation.

Issue 3 - Validity of penalties under Section 112(b) on all appellants; evidentiary value of untested third-party statements

Legal framework (as discussed)

3.1. The Court considered Section 112(b) of the Customs Act, 1962, relating to penalties for acts or omissions rendering goods liable to confiscation or for abetment thereof, and Section 138B concerning the use of statements and the right to cross-examination.

Interpretation and reasoning (Appellant No. 1)

3.2. In view of the finding that the Department had not established that the gold was smuggled or liable to confiscation, the Court held that the foundational requirement for imposing penalty under Section 112(b) was missing in respect of Appellant No. 1.

3.3. As there was no legally sustainable confiscation and no cogent evidence of any act or omission on his part in relation to smuggled goods, the ingredients of Section 112(b) were held not to be satisfied.

Interpretation and reasoning (Appellant Nos. 2 and 3)

3.4. The Court found that Appellant Nos. 2 and 3 were not present at the place of interception, no gold was recovered from their possession, and there was no independent evidence linking them to the seized gold.

3.5. The entire case against them rested solely on the statement of one Girish Bhosale, alleged to be a gold melting shop operator, who purportedly stated that the seized gold belonged to these appellants. The person from whose possession the gold was seized did not implicate them as owners or participants.

3.6. During adjudication, Appellant Nos. 2 and 3 specifically sought an opportunity to cross-examine Girish Bhosale under Section 138B, but such opportunity was not granted.

3.7. The Court held that where the sole incriminating material is a statement of a third party, denial of cross-examination is contrary to the requirements of Section 138B and principles of natural justice. In such circumstances, the untested statement cannot safely be relied upon to fasten penal consequences.

3.8. As there was no other corroborative evidence on record to connect Appellant Nos. 2 and 3 with the alleged smuggling or with the seized gold, the Court concluded that the allegations of their involvement or abetment were unsustainable.

Conclusions

3.9. The Court held that, since the gold was not proved to be smuggled or liable to confiscation, and there was no reliable evidence of acts or omissions attracting Section 112(b), no penalty was imposable on any of the appellants. The penalties on all appellants under Section 112(b) were therefore set aside.

Issue 4 - Confiscation of Indian currency as sale proceeds of smuggled gold and entitlement to interest

Interpretation and reasoning

4.1. The Court noted that Indian currency of Rs. 2,00,000/- was seized from Appellant No. 1 on the allegation that it represented sale proceeds of smuggled gold.

4.2. It was found that the Department failed to adduce any evidence to prove that the seized currency was derived from sale of gold of foreign origin or from any smuggling activity.

4.3. On the contrary, Appellant No. 1 produced a photocopy of his ITR-V for Assessment Year 2017-18, showing that he possessed more than Rs. 2,00,000/- under "cash and bank", which the Court accepted as sufficient to substantiate licit possession of the seized currency.

4.4. In light of the finding that the gold itself was not proved to be smuggled, and in the absence of any specific evidence linking the currency to proceeds of smuggling, the Court held that the basis for treating the Indian currency as sale proceeds of smuggled goods was not made out.

4.5. On the appellant's claim for interest on the amount to be returned, the Court relied on its own finding that the confiscation of the currency was illegal and that the appellant had been deprived of his licit property for the duration of the seizure.

Conclusions

4.6. The Court held that the Indian currency of Rs. 2,00,000/- was not liable to confiscation, ordered its return to Appellant No. 1, and further held that he was entitled to interest at the applicable rate from the date of seizure until the date of actual return.

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