Penalty under section 112(b)(i) quashed for relying on inadmissible section 108 statements without proof of confiscation liability

CESTAT New Delhi allowed the appeal and set aside the penalty imposed on the appellant under section 112(b)(i) of the Customs Act, 1962. The Tribunal held that statements recorded under section 108 were not legally admissible, as the mandatory procedure under section 138B had not been followed, and the Commissioner had relied solely on such statements. No incriminating material was recovered from the appellant or his premises. The department failed to establish the requisite knowledge or reason to believe that the goods were liable to confiscation under section 111.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether statements recorded under section 108 of the Customs Act could be relied upon to impose penalty under section 112(b)(i) when the procedure under section 138B was not followed.

1.2 Whether, in the absence of incriminating recovery from the appellant or his premises and in the absence of independent corroborative evidence, the statutory precondition of "knowledge or reason to believe" under section 112(b)(i) read with section 111 was satisfied so as to justify imposition of penalty.

1.3 Whether, on the facts, the burden of proof under section 123 of the Customs Act could be cast upon the appellant.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Reliance on statements under section 108 without compliance with section 138B

Legal framework:

2.1 The judgment considers sections 108 and 138B of the Customs Act. Section 108 empowers recording of statements, while section 138B prescribes the conditions and procedure for treating such statements as relevant and admissible in evidence.

Interpretation and reasoning:

2.2 The Court records that the statements of the appellant, Manish Kumar and Naresh Kumar were recorded under section 108 of the Customs Act and were subsequently retracted.

2.3 Referring to a Division Bench decision in M/s Surya Wires Pvt. Ltd. vs. Principal Commissioner, CGST, Raipur, the Court holds that statements recorded under section 108 cannot be treated as relevant unless the procedure contemplated under section 138B is duly followed.

2.4 The Court notes that the Commissioner, in the impugned order, had "merely relied upon" these section 108 statements for imposing penalty on the appellant, without demonstrating compliance with section 138B.

Conclusions:

2.5 The statements recorded under section 108, in the absence of compliance with section 138B, could not be considered as relevant evidence.

2.6 As the penalty under section 112(b)(i) was founded solely on such statements, the imposition of penalty was unsustainable.

Issue 2 - Absence of incriminating recovery, lack of corroboration, and the requirement of "knowledge or reason to believe" under section 112(b)(i)

Legal framework:

2.7 The Court examines section 112(b)(i) of the Customs Act, which requires that a person, in order to be penalised, must knowingly or having reason to believe, deal with goods liable to confiscation under section 111.

Interpretation and reasoning:

2.8 The Court notes that no incriminating goods were recovered from the appellant or during the search at his residence conducted by the DRI.

2.9 The Court further notes that apart from the inadmissible section 108 statements, no independent or corroborative evidence was produced by the department to show that the appellant had knowingly and intentionally transported, carried or dealt with smuggled gold liable to confiscation under section 111.

2.10 The Court emphasises that the "pre-requisite condition" for imposition of penalty under section 112(b)(i) is proof that the person concerned had knowledge, or at least reason to believe, that the goods in question were liable to confiscation under section 111.

2.11 In the present case, the department failed to lead any evidence, apart from the inadmissible statements, to substantiate this essential element of mens rea.

2.12 The Court also notes that co-noticees, against whom similar penalties under section 112(b)(i) were imposed on the same factual matrix, had their penalties set aside in separate appeals decided on the same date.

Conclusions:

2.13 In view of the absence of incriminating recovery from the appellant or his premises, and the absence of any reliable and corroborative evidence of his conscious involvement or knowledge, the statutory requirement under section 112(b)(i) was not fulfilled.

2.14 Penalty under section 112(b)(i) could not be imposed on the appellant merely on the basis of uncorroborated, inadmissible statements.

2.15 The penalty of Rs. 5,00,000/- imposed on the appellant under section 112(b)(i) was therefore liable to be, and was, set aside.

Issue 3 - Applicability of burden of proof under section 123 of the Customs Act

Interpretation and reasoning:

2.16 The appellant argued that the burden under section 123 cannot be cast upon him since no gold or incriminating goods were recovered from his possession or premises.

2.17 The Court notes that, on the facts, there was indeed no such recovery from the appellant and that the department did not produce any independent evidence of his possession of, or direct dealing with, the seized gold.

Conclusions:

2.18 In the absence of any recovery from the appellant or his premises, the burden of proof under section 123 could not be shifted to him.

2.19 With no statutory presumption under section 123 operating against the appellant, and with no independent evidence led by the department, the foundation for penal action against the appellant was lacking.

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