No Penalty Under s.112(b)(i) When Knowledge of Smuggled Origin of Gold Jewellery Not Proven by Revenue

CESTAT New Delhi allowed the appeal and set aside the penalty imposed under s.112(b)(i) of the Customs Act, 1962. The Tribunal held that there was no material to establish that the appellant had knowledge that the recovered gold jewellery and cut pieces, kept by a co-noticee, were manufactured from smuggled gold. As mens rea is a necessary precondition for penalty under s.112(b)(i), mere possession or handling without proven knowledge of smuggled origin was insufficient. Relying also on a prior finding in the co-noticee's appeal that the seized jewellery was licitly possessed, the Tribunal held that the allegation of dealing in smuggled gold was unsustainable.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether penalty under section 112(b)(i) of the Customs Act could be imposed on the appellant for allegedly handling gold jewellery and cut pieces manufactured from smuggled foreign-origin gold bars.

1.2 Whether the statutory requirement of knowledge or reason to believe that the goods were liable to confiscation under section 111 of the Customs Act was satisfied for invoking section 112(b)(i) against the appellant.

1.3 Whether, in view of the finding in the connected appeal that the seized gold jewellery and cut pieces were in licit possession and not proved to be smuggled, the allegation that the appellant handled goods manufactured from smuggled gold could be sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Legality of penalty under section 112(b)(i) and requirement of knowledge/mens rea

Legal framework (as discussed):

2.1 The show cause notice alleged that gold jewellery 11,224.4 gms and gold cut pieces 2,818.5 gms recovered from the premises of Bikaner Jewellers were manufactured from smuggled foreign-origin gold bars and were liable to confiscation under section 111 of the Customs Act, and that the appellant had indulged in handling such goods, rendering him liable to penalty under section 112(b)(i).

2.2 The Commissioner recorded that the appellant had "knowingly allowed" jewellery/articles/cut pieces made from foreign-origin gold to be kept at his premises without asking for documents and, on that basis, held him liable to penalty under section 112(b)(i).

2.3 The appellant, in reply and in argument, specifically invoked the settled position that for penalty under section 112(b)(i), it must be established that the person "knew or had reason to believe" that the goods were liable to confiscation under section 111 and asserted absence of such knowledge or intent.

Interpretation and reasoning:

2.4 The Court noted that the core factual premise was undisputed: gold jewellery weighing 11,224.4 gms and gold cut pieces weighing 2,818.5 gms were recovered from an almirah at the premises of Bikaner Jewellers; at the time of search and in his section 108 statement, the appellant consistently stated that these goods belonged to another person (Bharat Shantilal Shah), who had kept them there temporarily due to urgent travel to Mumbai, with an assurance to collect them after 4-5 days.

2.5 The Court further noted that the said version was fully corroborated by the statements of the alleged owner, recorded under section 108 of the Customs Act, including the assertion that the appellant was not aware of the contents of the bags.

2.6 On this evidentiary basis, the Court found that there was no material to substantiate the Commissioner's finding that the appellant knew the goods were manufactured from smuggled gold or that he had any knowledge of their illicit nature.

2.7 The Court held that, for imposition of penalty under section 112(b)(i), it is necessary that the person have knowledge of the fact that the goods are liable to confiscation (i.e., that they are smuggled or manufactured from smuggled goods). Mere consent to keep another's bag in the premises, without knowledge of its contents or their illicit character, does not satisfy the statutory requirement.

2.8 The Court characterized the Commissioner's inference that the appellant "knowingly" allowed foreign-origin smuggled gold to be kept in his premises as "perverse," since it was unsupported by any positive evidence and ran contrary to the consistent statements of both the appellant and the owner of the goods.

Conclusions:

2.9 The essential ingredient of section 112(b)(i)-knowledge or reason to believe that the goods were liable to confiscation-was not established against the appellant.

2.10 The finding that the appellant "knowingly" handled or allowed storage of goods manufactured from smuggled gold was held to be unsustainable in law and on facts.

2.11 Penalty imposed on the appellant under section 112(b)(i) of the Customs Act was consequently held to be invalid.

Issue 3: Effect of finding that the goods were in licit possession and not proved to be smuggled

Legal framework (as discussed):

3.1 The Commissioner had confiscated the gold jewellery and cut pieces recovered from the appellant's premises under sections 111(a), 111(b), and 111(d), proceeding on the premise that they were manufactured out of smuggled foreign-origin gold and that the persons concerned had failed to prove licit possession under section 123 of the Customs Act.

3.2 In a connected Customs Appeal filed by the owner of the goods (Bharat Shantilal Shah), the same seized gold jewellery and cut pieces were the subject matter of adjudication. In that appeal, the Court examined the invoices produced to support licit purchase/possession of the jewellery.

Interpretation and reasoning:

3.3 The Court recorded that, in the connected appeal, after considering the invoices and related documents, a categorical finding had been returned that licit possession of the goods was established.

3.4 On that basis, the Court held that penalty could not be imposed on the owner in the connected matter and, consequently, it could no longer be asserted that the jewellery and cut pieces recovered from Bikaner Jewellers were made out of smuggled gold.

3.5 The Court reasoned that once the principal allegation that the goods were of smuggled origin and liable to confiscation under section 111 stood negated, the foundational premise for alleging that the appellant handled "smuggled" goods or goods manufactured out of smuggled gold automatically failed.

Conclusions:

3.6 In light of the categorical finding in the connected appeal that the seized gold jewellery and gold cut pieces were in licit possession and not proved to be smuggled, the allegation that the appellant had handled goods manufactured from smuggled gold was held to be untenable.

3.7 With the very basis for invoking sections 111 and 112(b)(i) collapsing, no penalty could be sustained against the appellant.

3.8 The portion of the impugned order imposing a penalty of Rs. 5,00,000/- on the appellant under section 112(b)(i) of the Customs Act was set aside, and the appeal was allowed.

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