Retracted statements held unreliable; clandestine removal duty demand, seized goods confiscation and related penalties fully quashed

CESTAT allowed the appeal, setting aside the findings of clandestine manufacture and removal. It held that the statements of the appellant's spouse and others, having been retracted and not proven voluntary, could not be treated as reliable substantive evidence, and must be excluded. Apart from such statements, the Revenue produced no independent corroborative material to link the goods found at the appellant's residence with the alleged factory premises or to prove clandestine clearances. Loose papers and documents seized were also not substantiated through investigation. Consequently, the demand of duty, confiscation of goods and currency seized from the residence, and penalty on the appellant were unsustainable and were quashed.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the statements recorded from various persons, subsequently retracted, and not subjected to the procedure under Section 9D of the Central Excise Act, 1944, could be relied upon as substantive evidence to link the appellant with the alleged factory premises and the alleged clandestine manufacture and clearance of gutkha and tobacco.

1.2 Whether there was sufficient admissible and corroborative evidence on record to establish that the appellant was the owner or controller of the premises at 105, Baldau Chowk, Orai and was engaged in manufacture and clandestine removal of excisable goods therefrom, so as to justify the demand of central excise duty, interest and penalties.

1.3 Whether the goods and currency seized from the appellant's residence and the goods and materials seized from the alleged factory premises were liable to confiscation, and whether any legal nexus was established between them and any alleged clandestine manufacturing activity.

1.4 Whether, in the facts found, mere presence of raw materials and finished pouches without any machinery for sealing could establish "manufacture" of marketable gutkha/tobacco pouches attracting duty.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Admissibility and evidentiary value of statements (retractions and Section 9D)

Legal framework

2.1 The judgment considers Section 9D(1) of the Central Excise Act, 1944, which prescribes the conditions under which statements recorded before a gazetted Central Excise Officer become relevant for proving the truth of their contents, and mandates, where clause (a) is not attracted, that the maker be examined as a witness before the adjudicating authority before such statement can be admitted as evidence.

2.2 The Court refers to the principles laid down in decisions explaining that: (i) the burden lies on the department to establish that a confession/statement is voluntary; (ii) statements recorded under duress or coercion cannot be relied upon; and (iii) retracted statements, even if admissible, cannot be safely relied upon as substantive evidence without independent corroboration.

Interpretation and reasoning

2.3 The revenue's case primarily relied on the initial statement of Shri Ram Kumar Parihar recorded on 08.03.2017, the statement of the appellant's wife recorded on the same date, and the statements of Shri Ramesh Soni and Shri Manoj Chaurasiya, to link the appellant to the alleged factory and the brands in question.

2.4 Shri Ram Kumar Parihar, by letter dated 28.03.2017, categorically retracted his earlier statement, claiming it was recorded under pressure, and asserted that he himself had taken the premises at 105, Baldau Chowk, Orai on rent from the owners and was using it as a godown. He also explained the presence of empty pouches.

2.5 The appellant, by letter dated 26.03.2017, asserted that his wife was coerced during the search to sign blank papers and that her statement was recorded under pressure and coercion.

2.6 Shri Ramesh Soni also retracted his statement via letter dated 28.03.2017, alleging incorrect recording of facts. Shri Manoj Chaurasiya's first statement dated 03.04.2017 did not name the appellant, and his later statement dated 13.02.2020 merely relayed what agents allegedly told him, which the Court treated as hearsay.

2.7 Despite these retractions and allegations of coercion, the adjudicating authority treated the statements as voluntary without undertaking any examination or analysis to determine voluntariness or to address the allegations of pressure, contrary to the principles laid down by higher courts.

2.8 The Court finds that the adjudicating authority did not comply with Section 9D(1)(b). None of the persons whose statements were relied upon were examined as witnesses in adjudication proceedings; nor was clause (a) of Section 9D(1) invoked. In the absence of following the statutory procedure, such statements could not be treated as relevant for proving the truth of their contents.

2.9 The Court, relying on the interpretation of Section 9D, holds that failure to admit the statements in evidence in the prescribed manner renders reliance on them as substantive material legally impermissible and vitiates the adjudication.

2.10 Further, even as retracted statements, they required independent corroboration by reliable, independent material, which was absent in the present case.

Conclusions

2.11 The statements of Shri Ram Kumar Parihar, the appellant's wife, Shri Ramesh Soni and Shri Manoj Chaurasiya, being retracted and not admitted in evidence as mandated under Section 9D(1)(b), are held to be inadmissible as substantive evidence and are required to be eschewed from consideration.

2.12 In the absence of compliance with Section 9D and in view of retractions and allegations of coercion, the statements cannot be relied upon to link the appellant with the alleged factory premises or to establish clandestine manufacture or clearance.

Issue 2: Sufficiency of evidence linking appellant to alleged factory and clandestine manufacture/removal

Interpretation and reasoning

2.13 Once the statements are excluded, the remaining material relied on by the revenue comprised: (i) seizure of goods and raw materials at the alleged factory premises; (ii) seizure of goods, currency and loose papers from the appellant's residence; and (iii) certain test reports on samples.

2.14 The Court notes that the owner/co-owner of the premises at 105, Baldau Chowk, Orai confirmed, by letter dated 09.09.2017 and rent receipts, that the premises was rented to Shri Ram Kumar Parihar, not the appellant. This supported Parihar's own retracted statement that he had taken the premises on rent for storage.

2.15 No independent or admissible evidence was produced to show that the appellant had any proprietary, possessory, or managerial connection with the premises at 105, Baldau Chowk, Orai.

2.16 Regarding alleged clandestine manufacture and removal, the Court stresses that the charge of clandestine removal is a "serious charge" which must be established by "tangible and sufficient evidence".

2.17 The department did not establish, through admissible evidence, any: (i) records of purchase of raw materials by the appellant for the alleged factory; (ii) factory workforce under the appellant's control; (iii) transport or movement of material between the appellant's residence and the alleged factory; (iv) details of purchasers, recipients or buyers; or (v) corroborative documents evidencing manufacture and clandestine clearance.

2.18 The loose papers resumed from the appellant's residence were consistently disputed by the appellant as planted and not in his handwriting. Despite this, the department neither conducted any handwriting examination nor verified the details therein by tracing recipients or corroborating any alleged transactions.

2.19 Instead, the adjudicating authority presumed that the entries in the loose papers represented clandestine clearances by the appellant and quantified duty solely on that basis, without corroboration.

2.20 The Court finds that this approach is contrary to the requirement that the department must prove the truth of the contents of such documents by independent evidence and investigation, particularly when their very recovery and authorship are disputed.

Conclusions

2.21 There is no admissible and corroborative material linking the appellant to the alleged factory premises at 105, Baldau Chowk, Orai.

2.22 The revenue has failed to establish, by tangible and sufficient evidence, any clandestine manufacture or removal of gutkha/tobacco by the appellant.

2.23 Consequently, the demand of duty of Rs.49,62,028/-, interest thereon, and the penalties imposed on the appellant and on Shri Ram Kumar Parihar, based on alleged clandestine manufacture/clearance, are unsustainable and are set aside.

Issue 3: Confiscation of goods and currency seized from residence and alleged factory premises

Interpretation and reasoning

2.24 Goods including raw materials and packing materials were seized from the alleged factory premises at 105, Baldau Chowk, Orai, and goods, raw materials and currency of Rs.16,72,000/- were seized from the appellant's residence.

2.25 The appellant's consistent plea was that the goods at his residence were procured for starting a trading business during Navratri. He could not produce purchase documents, but apart from the inadmissible statements, there was no evidence to show that these goods were intended for or were in fact transferred to or used at the alleged factory premises.

2.26 The Court observes that once the statements are excluded, there is "absolutely no material" to link the goods found at the appellant's residence with those at the alleged factory premises.

2.27 The department did not undertake any matching or comparative analysis between the goods found at the residence and those at the alleged factory to establish such linkage.

2.28 As regards the loose papers seized from the residence, since their recovery and authorship were specifically disputed, and no handwriting or other corroborative investigation was conducted, and no independent verification of the contents was made, the Court holds that they cannot be treated as reliable evidence of clandestine removal or of the nature of the currency seized.

2.29 In the absence of any proved connection between the appellant, the alleged factory, and the alleged clandestine manufacture, there is also no basis to treat the seized currency as sale proceeds of illicitly manufactured gutkha/tobacco.

Conclusions

2.30 In the absence of any legally acceptable evidence linking the goods and currency seized from the appellant's residence with any clandestine manufacture or with the alleged factory premises, confiscation of those goods and of the currency of Rs.16,72,000/- is unsustainable and is set aside.

2.31 The penalties imposed on the appellant in relation to such confiscation, including the penalty of Rs.1,50,000/- under Rule 25 of the Central Excise Rules, 2002, are also unsustainable and are set aside.

Issue 4: Existence of "manufacture" and marketability in absence of sealing machinery

Interpretation and reasoning

2.32 The revenue's case was that gutkha/tobacco products were manufactured at the alleged factory premises by mixing raw materials by hand.

2.33 The Court notes that neither the panchnama nor the show cause notice records presence of any sealing machine or even a hand sealer at the alleged factory premises.

2.34 The Court considers it a matter of common knowledge that merely mixing raw materials does not render gutkha/tobacco marketable; such mixture becomes marketable excisable goods only when filled into pouches and sealed.

2.35 In the absence of any evidence of machinery or equipment for sealing pouches at the alleged factory premises, the allegation of actual "manufacture" of marketable gutkha/tobacco pouches at that site is found to be doubtful and unsupported by necessary evidence.

Conclusions

2.36 The department has failed to prove existence of manufacturing activity at the alleged factory premises in the sense of producing marketable excisable goods in sealed pouches.

2.37 Even assuming the presence of mixture or intermediate material, this alone, without evidence of sealing/packaging facility, is insufficient to fasten excise duty liability on the appellant.

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