Penalties under s.112(b)(i) quashed as smuggling of 12 gold bars not proved, s.138B safeguards ignored

CESTAT allowed the appeals and set aside penalties imposed under s.112(b)(i) of the Customs Act for alleged smuggling of gold. It held that the department failed to establish that the 12 gold bars were smuggled goods or that appellants were concerned with their importation. The explanation that the gold was received on job-work basis and was being transported with cash and documents was not investigated, and a key person was not examined. Statements recorded under s.108 were disregarded as s.138B safeguards were not followed. As the goods were not shown to be liable to confiscation under s.111, the foundational requirement for penalty under s.112(b)(i) was not met.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the seized 12 gold bars were established to be "smuggled" and hence liable to confiscation under section 111 of the Customs Act, 1962.

1.2 Whether statements recorded under section 108 of the Customs Act could be relied upon, in the absence of compliance with section 138B and in the face of retraction, to prove smuggling and ownership of the seized gold bars.

1.3 Whether, in the facts of the case, the statutory burden under section 123 of the Customs Act was discharged by the appellants and whether the burden could be shifted back to the department to prove smuggling.

1.4 Whether penalty under section 112(b)(i) of the Customs Act could be imposed on the appellants when liability of the gold to confiscation under section 111 was not established.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Liability of the seized gold bars to confiscation under section 111

Legal framework (as discussed)

2.1 The Court examined sections 111(a)/(b)/(d), 120 and 123 of the Customs Act. Section 111 applies to goods "brought from a place outside India" and liable to confiscation if imported contrary to prohibitions or restrictions. Section 123 reverses the burden of proof in respect of certain notified goods (including gold) on the "person from whose possession" such goods are seized or the "person who claims to be the owner". Section 120 concerns confiscation of goods made from, or derived from, smuggled goods.

Interpretation and reasoning

2.2 The impugned order had proceeded on the premise that the seized gold bars were owned by a particular person and that they were smuggled, relying mainly on statements recorded under section 108 and on the foreign markings on the gold.

2.3 In a connected appeal decided on the same date, the Court had already held that this alleged owner was not proved to be the owner of the 12 gold bars, as the section 108 statements (of that person and of the present appellants) could not be relied upon.

2.4 The appellants' specific explanation was that the 12 gold bars and Rs. 2,40,000/- were part of a documented job-work transaction originating from a jeweller at Jaipur (via a will and instructions to return the gold and cash), and that they were merely transporting those bars and cash to the legatee. This explanation, supported by reference to job-work issue orders, ledger entries and a will, directly addressed the question of licit possession.

2.5 The Court noted that this explanation was not examined in the impugned order. Further, the department did not examine or even attempt to examine the person (Rinkesh Kumar alias Prem Singh) who, according to the appellants, had handed over the gold and documents in Chennai, and whose testimony was crucial to test the veracity of the appellants' explanation.

2.6 The Court relied upon its own prior decisions and the Supreme Court's judgment in holding that for an inference of smuggling, the evidence must relate to "unauthorized importation" and not merely to "unauthorized possession" of gold. A mere finding that a person was in possession of smuggled goods does not justify the conclusion that such person was "concerned in the commission of the offence of illegal importation"; circumstances connecting such person with importation prior to the actual import must be established.

2.7 Applying this principle, the Court observed that neither the show cause notice nor the impugned order alleged or established any circumstances connecting the appellants with the importation of the gold prior to actual import. It was not even the department's case that the appellants were importers of the gold.

2.8 The Court further observed that, in the connected appeal, section 123 was held inapplicable to fasten the burden upon the alleged owner because he was not established as owner of the gold; consequently, section 123 could not be invoked to treat the gold as smuggled. The obligation thus lay on the department to establish smuggling without improperly relying on reversed burden.

2.9 Section 120 had not been invoked and, in any event, could not have been invoked in the absence of evidence that the appellants or the alleged owner had smuggled the gold bars. The Court referred to precedent clarifying that section 120 applies when goods are made from smuggled goods and the underlying smuggling is established.

2.10 The Court held that mere foreign markings on gold, absence of import documents from the alleged owner, and non-acceptance of appellants' documents, without proper investigation or testing of their explanation, could not by themselves establish that the bars were "brought from a place outside India" by way of smuggling for purposes of section 111.

Conclusions

2.11 The department failed to establish that the seized 12 gold bars were smuggled goods or that they had been imported in violation of prohibitions or restrictions under the Customs Act or allied laws.

2.12 Section 123 could not validly be used against the appellants in the circumstances of the case to presume smuggling; the primary burden remained on the department and was not discharged.

2.13 Section 120 was neither invoked nor factually attracted.

2.14 The seized 12 gold bars were not shown to be "goods brought from a place outside India" in contravention of law and, therefore, were not liable to confiscation under section 111 of the Customs Act.

Issue 2: Admissibility and evidentiary value of statements under section 108

Legal framework (as discussed)

2.15 The Court considered section 108 (power to summon persons to give evidence and produce documents) and section 138B (conditions for use of statements made and signed before customs officers) of the Customs Act. It also noted that the appellants had retracted their earlier statements made under section 108.

Interpretation and reasoning

2.16 The department's case regarding smuggling, ownership of the gold, and the role of the appellants as carriers was primarily rested on statements recorded under section 108 from the appellants and the alleged owner.

2.17 The appellants specifically contended that their section 108 statements had been extracted under threat and coercion and were retracted while in judicial custody, with an alternate factual narrative then furnished.

2.18 The Court noted that the statutory safeguards contained in section 138B, which govern the admissibility and use of such statements, were not shown to have been complied with by the department.

2.19 In the connected appeal, the Court had already held that, in the absence of compliance with section 138B, no reliance could be placed upon statements recorded under section 108 for purposes of proving either ownership or smuggling in respect of the same gold bars.

2.20 Applying that reasoning, the Court held in the present appeals that such section 108 statements, especially when retracted and not tested in accordance with section 138B, could not form the legal basis for concluding that the gold was smuggled or that the appellants were knowingly acting as carriers of smuggled gold.

Conclusions

2.21 Statements recorded under section 108, in the absence of due compliance with section 138B and in view of their retraction, could not validly be relied upon to establish that the seized gold bars were smuggled, to fix ownership on the alleged owner, or to establish the appellants' conscious involvement in smuggling.

2.22 The department's reliance on such statements, without satisfying the statutory preconditions, rendered the foundation of the confiscation and penalty unsustainable.

Issue 3: Sustainability of penalty under section 112(b)(i)

Legal framework (as discussed)

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

Interpretation and reasoning

2.24 The Court emphasized that liability under section 112(b)(i) is contingent upon the foundational fact that the goods in question are "liable to confiscation under section 111". Knowledge or reason to believe on the part of the person penalized must relate to this confiscability.

2.25 Since, for the reasons recorded under Issue 1, the seized 12 gold bars were held not to have been established as smuggled goods and not liable to confiscation under section 111, the basic condition for the applicability of section 112(b)(i) itself failed.

2.26 Moreover, in the absence of admissible and reliable evidence (other than the inadmissible section 108 statements) linking the appellants with importation or with any prior stage of smuggling, the requirement that the appellants "knew or had reason to believe" that the goods were liable to confiscation was also not satisfied.

2.27 The impugned order treated the appellants as "carriers of smuggled gold" solely on the basis of the rejected evidentiary foundation and without independent evidence of their knowledge of smuggled character of the goods.

Conclusions

2.28 As the seized gold bars were not shown to be liable to confiscation under section 111, the essential jurisdictional precondition for imposing penalty under section 112(b)(i) was absent.

2.29 The department did not establish that the appellants knew or had reason to believe that the gold was liable to confiscation.

2.30 The penalties imposed on the appellants under section 112(b)(i) of the Customs Act were unsustainable and were therefore set aside.

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