Excise demand fails where s.14 statements used without s.9D compliance; clandestine scented supari removal unsustainable

The Tribunal allowed the assessee's appeal and set aside the Commissioner (Appeals)' order confirming clandestine removal of scented supari for July 2014-June 2017. It held that the entire demand was vitiated as it was founded solely on statements of the assessee's Director and Supervisor recorded under s.14 of the Central Excise Act, without complying with s.9D. Since these persons were never examined as witnesses before the adjudicating authority, nor was any opinion formed on admissibility or opportunity granted for cross-examination, their statements had no evidentiary value. In the absence of legally admissible evidence, the allegation of clandestine clearances and consequential demands and penalties could not be sustained.

---

---

1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the findings of clandestine manufacture and removal of excisable goods, and the consequent duty demand, interest, and penalties, could be sustained when they were based substantially on statements recorded under section 14 of the Central Excise Act, 1944 without compliance with section 9D.

1.2 Whether, in the absence of compliance with section 9D of the Central Excise Act, statements recorded during investigation could be treated as relevant and admissible evidence for proving the truth of their contents.

1.3 Whether, in the facts of the case, the denial of cross-examination and reliance on such statements resulted in violation of the mandatory statutory procedure and vitiated the order of the appellate authority.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Admissibility and evidentiary relevance of statements recorded under section 14 in the absence of compliance with section 9D; sustainability of findings of clandestine removal and consequential demands/penalties

Legal framework

2.1 The Tribunal examined sections 14 and 9D of the Central Excise Act, 1944. Section 14 empowers Central Excise Officers to summon persons to give evidence or produce documents in any inquiry, and statements are recorded under this provision. Section 9D governs the "relevancy of statements under certain circumstances" and prescribes when such statements can be treated as relevant to prove the truth of the facts they contain.

2.2 Section 9D(1)(a) provides that a statement made and signed before a gazetted Central Excise Officer shall be relevant in prosecution when the maker is dead, cannot be found, is incapable of giving evidence, is kept out of the way by the adverse party, or cannot be produced without unreasonable delay/expense. Section 9D(1)(b) applies in other cases and requires that the person who made the statement be examined as a witness before the court/adjudicating authority and that the authority form an opinion that, in the interests of justice, the statement should be admitted in evidence.

2.3 By virtue of section 9D(2), the requirements of section 9D(1) apply equally to adjudication proceedings under the Central Excise Act. The Tribunal also noted that section 9D is substantially identical to section 138B of the Customs Act, 1962, both of which have been judicially held to be mandatory.

Interpretation and reasoning

2.4 The Tribunal held that statements recorded under section 14 become relevant for proving the truth of their contents only if the procedure in section 9D is followed. Where the circumstances in section 9D(1)(a) do not apply, section 9D(1)(b) mandates a two-step process: (i) examination of the maker of the statement as a witness before the adjudicating authority, and (ii) a reasoned opinion of the adjudicating authority that, having regard to the circumstances, the statement should be admitted in evidence in the interests of justice, followed by an opportunity for cross-examination.

2.5 The Tribunal relied on judicial precedents interpreting section 9D and section 138B, including decisions wherein High Courts and the Tribunal had consistently held that: (a) section 9D is mandatory, not directory; (b) statements recorded during investigation have a possibility of being obtained under coercion or compulsion; (c) to neutralize such risk, the statute requires examination before the adjudicating authority and a conscious decision on admissibility; and (d) if this procedure is not followed, such statements cannot be treated as relevant evidence and must be eschewed from consideration.

2.6 Applying these principles, the Tribunal noted that the Commissioner (Appeals) had explicitly founded the conclusions of clandestine manufacture and removal on the statements of the Director and Supervisor recorded under section 14, treating them as reliable and sufficient evidence, and further held that denial of cross-examination did not vitiate the proceedings.

2.7 The Tribunal found that in the present case: (i) the two persons whose statements were relied upon (Director and Supervisor) were not examined as witnesses before the adjudicating authority; (ii) there was no finding or assertion that any of the conditions under section 9D(1)(a) existed; and (iii) there was no recorded opinion by the adjudicating authority on the admissibility of such statements under section 9D(1)(b). Consequently, the mandatory procedure under section 9D had not been followed.

2.8 In light of the above, the Tribunal held that the statements of the Director and Supervisor, recorded under section 14, could not be treated as relevant or admissible evidence for proving the alleged clandestine removals. Any finding sustained solely or substantially on such statements, without compliance with section 9D, was legally unsustainable.

Conclusions

2.9 The Tribunal concluded that the statements recorded under section 14, in the absence of examination of the makers as witnesses before the adjudicating authority and without a determination under section 9D(1)(b), had no evidentiary relevance for proving the truth of the alleged clandestine manufacture and removal.

2.10 As the findings regarding clandestine removal were based on such inadmissible statements, the Tribunal held that the conclusions on clandestine clearances, and the resulting demand of duty, interest, and penalties, could not be sustained.

Issue 3: Effect of non-compliance with section 9D and denial of cross-examination on validity of the appellate order

Interpretation and reasoning

3.1 The Tribunal noted that the Commissioner (Appeals) had rejected the assessee's challenge to the evidentiary value of the statements and to the denial of cross-examination, holding that there was no violation of natural justice and that the statements were reliable under section 14.

3.2 However, the Tribunal, following the binding interpretation of section 9D, held that the very foundation of relying on such statements in adjudication was vitiated due to non-compliance with the mandatory statutory procedure. Where section 9D is not followed, such statements are to be excluded from consideration, and findings based on them cannot stand.

Conclusions

3.3 The Tribunal held that the order of the Commissioner (Appeals), to the extent it upheld the demand, interest and penalties on the basis of statements recorded under section 14 without following section 9D, was legally unsustainable.

3.4 Consequently, the impugned appellate order was set aside in its entirety, and the appeals were allowed.

---