Penalty under Section 112(b)(i) Customs Act quashed as employee cannot be punished after main smuggling case fails

CESTAT set aside the penalty imposed on the appellant under s.112(b)(i) of the Customs Act, 1962 for alleged involvement in smuggling of foreign-origin gold. The appellant was an employee assisting in business activities of the main noticees, in whose names the bulk of the seized jewellery was claimed. In separate connected appeals decided the same day, penalties on the primary noticee under ss.112(b)(i) and 114AA and confiscation of the remaining jewellery under s.119 were quashed. As the foundational findings against the claimed owners did not survive, the derivative penalty of Rs. 5,00,000/- on the appellant was held unsustainable and the appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the penalty imposed on the appellant under section 112(b)(i) of the Customs Act, 1962 could be sustained when, in connected appeals, the entire seized jewellery was held not liable to confiscation and the penalties on the alleged owners were set aside.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Sustainability of penalty under section 112(b)(i) of the Customs Act

Legal framework (as discussed or applied)

2.1 Section 112(b)(i) of the Customs Act provides for penalty on any person who acquires possession of, is in any way concerned in carrying, removing, depositing, harbouring, keeping, concealing, selling or purchasing, or in any other manner dealing with goods which he knows or has reason to believe are liable to confiscation under section 111.

2.2 The Commissioner had earlier invoked sections 111(a), 111(b), 111(d) and 119 of the Customs Act to confiscate the jewellery weighing 20,756.3 gms recovered from the appellant and to support the penalty on him under section 112(b)(i), relying also on section 123 (burden of proof regarding smuggled gold) and statements recorded under section 108 without following section 138B.

2.3 In connected appeals relating to the same seizure, the Tribunal examined the application of sections 111, 112(b)(i), 114AA, 119, 123 and 138B, and the evidentiary standard for establishing smuggling, including reliance on precedent such as Radha Kishan Bhatia vs. Union of India and decisions on the requirement of proof of unauthorized importation as distinct from mere possession.

Interpretation and reasoning

2.4 The Commissioner's finding against the appellant was that he collected gold jewellery allegedly manufactured from smuggled foreign-origin gold bars from the shop of another person, transported it from Mumbai to Delhi, assisted in its sale without licit documents, and did so knowingly, thereby rendering himself liable under section 112(b)(i).

2.5 The Tribunal noted that the entire seized quantity of 20,756.3 gms of gold jewellery recovered from the appellant's possession was already the subject-matter of two connected appeals: one by the alleged main owner of 18,035.26 gms (plus the quantity covered by certain invoices), and another by the alleged owner of 4,440.84 gms.

2.6 In the connected appeal concerning 18,035.26 gms, the Tribunal held that:

- The jewellery carried by the appellant was brought to Delhi on approval basis for marketing, and invoices (SG-160, SG-460, SG-465 and SG-466) covering substantial portions of the seized jewellery were produced.

- These invoices were rejected by the adjudicating authority only on assumptions and presumptions, without verification of authenticity, despite being available for departmental scrutiny.

- For drawing an inference of smuggling, evidence must relate to unauthorized importation and not merely unauthorized possession; mere possession of smuggled goods does not, by itself, establish involvement in illegal importation without other connecting circumstances.

- Neither the show cause notice nor the impugned order in that case established any connection of the owner with importation of gold prior to its entry into India, and the burden of proving that the jewellery was manufactured from smuggled gold was not discharged by the department.

- Statements recorded under section 108 could not be treated as relevant evidence as the procedure under section 138B had not been followed.

- Consequently, the penalty on that owner under sections 112(b)(i) and 114AA was set aside.

2.7 In the other connected appeal concerning 4,440.84 gms, the Tribunal held that:

- The claimant-owner had provided detailed records of the jewellery, corresponding GST invoices (SG-460, SG-465 and SG-466) and an approval voucher, and details of the gold from which the jewellery had been prepared, and asserted that the invoices were reflected on the GSTN portal.

- The adjudicating authority did not dispute the genuineness of the invoices or their reflection in GST records, and only asserted that they had been issued "to cover up" the full jewellery, without any supporting finding that the jewellery was made from smuggled gold.

- On these facts, the requirements of section 119 for confiscation of goods "used to conceal" or "used as a means of transport" in relation to smuggled goods were not met, and it could not be concluded that the jewellery was made from smuggled gold.

- The burden of proof under section 123 stood discharged by the owner via documentary evidence, while the department led no evidence to establish that the jewellery was manufactured from smuggled gold bars.

- Statements under section 108 could not be relied upon as section 138B had not been complied with.

- Therefore, confiscation under section 119 could not be upheld.

2.8 The Tribunal observed in the present appeal that the findings in the two connected appeals fully covered the entire quantity of 20,756.3 gms of jewellery recovered from the appellant, and thus the legal foundation for treating that jewellery as smuggled or as liable to confiscation under sections 111 and 119 had been removed.

2.9 Since liability under section 112(b)(i) presupposes that the goods dealt with are "liable to confiscation" and that the person knew or had reason to believe this, once the Tribunal held in the connected matters that confiscation and related penalties were unsustainable for the whole quantity, the premise that the appellant was knowingly involved in dealing with confiscable or smuggled goods could not survive.

Conclusions

2.10 In view of the Tribunal's determinations in the connected appeals that:

- the entire seized jewellery was not proved to have been made from smuggled gold,

- confiscation under sections 111 and 119 and penalties on the alleged owners under sections 112(b)(i) and 114AA were unsustainable, and

- the burden of proof under section 123 had been discharged by the owners while the department failed to prove smuggling,

the penalty of Rs. 5,00,000/- imposed on the appellant under section 112(b)(i) had no surviving legal basis.

2.11 The Tribunal therefore set aside the penalty of Rs. 5,00,000/- imposed on the appellant under section 112(b)(i) of the Customs Act and allowed the appeal.

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