Penalties and confiscation under Customs Act set aside for breach of s.108, s.138B; burden u/s123, s.111 fails

CESTAT set aside penalties imposed under ss. 112(b)(i) and 114AA of the Customs Act on the appellant. The Tribunal held that statements recorded under s. 108 could not be relied upon as evidence, as the mandatory procedure under s. 138B, including examination before the adjudicating authority and opportunity for cross-examination, was not followed. Consequently, the appellant could not be treated as owner of the 12 gold bars, rendering inapplicable the burden-shifting under s. 123 and vitiating the confiscation under s. 111 of both gold and seized currency. The confiscation of gold jewellery/ornaments was also held unsustainable, as there was no proof of smuggled origin or illicit manufacture and non-production of e-way bills could not justify adverse findings.

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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 without complying with the mandatory procedure under section 138B for purposes of adjudication.

1.2 Whether the appellant could be treated as the "owner" of the 12 foreign-marked gold bars seized from Manish Kumar and Naresh Kumar and, consequently, saddled with the burden of proof under section 123 of the Customs Act.

1.3 Whether confiscation of the 12 foreign-marked gold bars and the Indian currency seized from Manish Kumar and Naresh Kumar under sections 111(b), 111(d) and 121 of the Customs Act was sustainable as against the appellant.

1.4 Whether penalties imposed on the appellant under sections 112(b)(i) and 114AA of the Customs Act in relation to the 12 gold bars and associated transactions were legally sustainable.

1.5 Whether confiscation under sections 111(a), 111(b), 111(d) and 119 of the Customs Act of gold jewellery weighing 20756.3 gms seized from Subhash Tukaram Karan and gold jewellery/cut pieces seized from the premises of M/s. Bikaner Jewellers, allegedly linked to the appellant, was legally justified.

1.6 Whether, in the absence of any finding that the appellant imported smuggled gold or that section 120 of the Customs Act was invoked, gold jewellery/ornaments manufactured in India could be confiscated under section 111 on the allegation that they were made from smuggled gold.

1.7 Whether the adjudicating authority was justified in rejecting documentary evidence, including invoices, approval vouchers, GST records and affidavits of manufacturers/owners, and in drawing adverse inferences regarding alleged "planting" of 19 documents during de-sealing of the appellant's premises.

2. ISSUE-WISE DETAILED ANALYSIS

2.1 Admissibility and evidentiary value of statements under section 108 read with section 138B

Legal framework

2.1.1 The Court examined section 108 (power to summon and record statements) and section 138B (relevancy of statements under certain circumstances) of the Customs Act. Under section 138B(1)(b), read with section 138B(2), a statement made before a Gazetted Officer during inquiry can be treated as relevant in adjudication proceedings only when (i) the maker is examined as a witness before the adjudicating authority, and (ii) the adjudicating authority then forms an opinion, in the interests of justice, to admit the statement in evidence. Only thereafter can cross-examination be afforded.

2.1.2 The Court relied on decisions interpreting section 9D of the Central Excise Act, which is materially identical to section 138B, holding that the scheme is mandatory and aims to neutralise the possibility of statements being obtained under coercion: Ambika International; Jindal Drugs; Hi Tech Abrasives; and Tribunal decisions following these principles, as well as the Delhi High Court decision in Its My Name Pvt. Ltd. on section 138B itself.

Interpretation and reasoning

2.1.3 The Court held that, where the circumstances in clause (a) of section 138B(1) do not apply, the adjudicating authority must: (i) summon and examine the person whose statement was recorded under section 108; (ii) then decide whether to admit that earlier statement in evidence; and (iii) only thereafter allow cross-examination. This sequence is mandatory.

2.1.4 As this procedure was admittedly not followed in respect of the statements of the appellant, Manish Kumar and Naresh Kumar, those statements could not legally be treated as relevant or relied upon to prove the truth of their contents.

2.1.5 The Court rejected the departmental contention that the original section 108 statements could be relied upon irrespective of later retractions, holding that, in the absence of compliance with section 138B, such statements must be eschewed from consideration.

Conclusions

2.1.6 The statements under section 108 of the appellant, Manish Kumar and Naresh Kumar were inadmissible as evidence for proving the facts contained therein, since the mandatory procedure under section 138B(1)(b) was not followed. The Commissioner could not base adverse findings against the appellant on those statements.

2.2 Ownership of 12 foreign-marked gold bars; applicability of section 123; validity of confiscation and treatment of seized currency

Interpretation and reasoning

2.2.1 The Commissioner had held the appellant to be the "owner" of the 12 foreign-marked gold bars solely on the basis of section 108 statements, and then invoked section 123 to place the burden on the appellant to prove licit possession.

2.2.2 The Court found that once the section 108 statements are excluded for non-compliance with section 138B, there is no reliable material to treat the appellant as owner of the 12 gold bars.

2.2.3 The Court noted that the appellant, while in judicial custody, formally retracted his earlier statement in a communication to the Chief Metropolitan Magistrate on 30.01.2023, and consistently denied ownership of the 12 bars in subsequent section 108 statements and in his reply to the show cause notice. Manish Kumar and Naresh Kumar also retracted their statements and did not support the case against the appellant thereafter.

2.2.4 As the appellant was neither the person from whose possession the goods were seized nor a person claiming ownership, and there being no sustainable finding of ownership, the presumption under section 123 could not be invoked against him.

2.2.5 In the absence of proof that the appellant was the owner or otherwise liable under section 123, the confiscation of the 12 gold bars under section 111(b) and 111(d) qua the appellant could not be sustained.

2.2.6 Regarding currency seized from Manish Kumar and Naresh Kumar, the Court held that there was no evidence conclusively linking the cash to any smuggling consideration for the 12 gold bars; the Commissioner's conclusion that the cash was monetary consideration for carriage of smuggled gold was based on conjectures.

Conclusions

2.2.7 The finding that the appellant was the owner of the 12 foreign-marked gold bars is unsustainable.

2.2.8 Section 123 could not be invoked to shift the burden of proof onto the appellant with respect to those bars; consequently, confiscation of the 12 gold bars under section 111(b)/(d) against the appellant is not legally tenable.

2.2.9 There was no sufficient basis to treat the seized Indian currency as sale consideration of smuggled gold for purposes of confiscation in relation to the appellant.

2.3 Validity of penalties under sections 112(b)(i) and 114AA in relation to 12 gold bars and associated conduct

Interpretation and reasoning

2.3.1 The Commissioner had held the appellant to be the "mastermind" of smuggling of foreign-origin gold bars and gold jewellery, and imposed penalties under sections 112(b)(i) and 114AA on the basis of the alleged ownership of the 12 bars, alleged smuggling, and alleged use/planting of forged documents.

2.3.2 The Court held that once confiscation of the 12 bars under section 111 could not be sustained against the appellant, the foundational requirement for penalty under section 112(b)(i) (dealing with goods liable to confiscation) failed.

2.3.3 On section 114AA, the Court found no evidence that the appellant had signed any document knowingly or intentionally concerning the transaction of any business so as to render such document false or incorrect in any material particular. The conclusion of "planting" or using forged documents was not substantiated.

Conclusions

2.3.4 Penalty on the appellant under section 112(b)(i), built on the alleged confiscability of the 12 bars, is unsustainable.

2.3.5 Penalty under section 114AA is also unsustainable, as there is no proof that the appellant knowingly or intentionally signed or used any false or fraudulent document in relation to the alleged smuggling transactions.

2.4 Confiscation of gold jewellery (20756.3 gms) from Subhash Tukaram Karan and gold jewellery/cut pieces from M/s. Bikaner Jewellers under sections 111 and 119

Interpretation and reasoning

2.4.1 The jewellery weighing 20756.3 gms seized from Subhash Tukaram Karan and the gold jewellery (11224.4 gms) and cut pieces (2818.5 gms) seized from M/s. Bikaner Jewellers were treated by the Commissioner as manufactured out of smuggled gold and confiscated under sections 111(a), 111(b), 111(d) and 119, relying primarily on statements under section 108 and alleged failure to discharge burden under section 123.

2.4.2 The appellant's case was that the seized jewellery was Indian-manufactured, brought on approval basis for marketing in Delhi, either by the appellant's firm or other manufacturers, and was duly backed by invoices, GST records and approval/delivery challans, including:

• Invoice No. SG-160 dated 18.01.2023 (M/s. Mahalaxmi Chains & Jewellery to M/s. Khandelwal Chain Co.);
• Invoice No. SG-460 dated 17.01.2023 and Nos. SG-465 & 466 dated 18.01.2023 (M/s. Anand Shah Jewels LLP to Vikas Chain Jewellery, Delhi);
• Job-work/karigar vouchers showing cut pieces given by R.K. Jewellers to the appellant's firm.

The Commissioner rejected these documents as not credible, largely on presumptions.

2.4.3 The Court observed that the department did not undertake verification of these invoices or GST entries, despite their availability and the ease with which authenticity could have been checked. The rejection of such documentary evidence was thus unjustified.

2.4.4 The Court further noted that it was not the department's case that the seized jewellery itself had been imported. Section 111 applies to "goods brought from a place outside India", and in the absence of any finding that the appellant imported gold or jewellery, section 111 could not be applied merely on the allegation that the jewellery was manufactured out of smuggled gold.

2.4.5 The Court reiterated that evidence must justify an inference of "unauthorised importation" rather than merely "unauthorised possession". Reliance was placed on Tribunal decisions and the Supreme Court's ruling that mere possession of smuggled goods does not establish that a person was concerned in the illegal import; other circumstances linking the person to importation must be shown. Such circumstances were neither alleged nor established in respect of the appellant.

2.4.6 Neither the show cause notice nor the impugned order established that the appellant had any connection with the importation of gold prior to its entry into India. Section 120 of the Customs Act, which deals with goods made from smuggled goods, was not invoked, and in any event there was no evidence that the appellant smuggled the base gold from which the jewellery was allegedly manufactured.

2.4.7 The Commissioner's reliance on non-production of e-way bills as evidence against the appellant was rejected. The Court found that, as per the Circular dated 12.09.2022 of the Central Board of Indirect Taxes and Customs, issuance of e-way bills for transport of jewellery was not prescribed as a mandatory requirement; non-production of e-way bills could not be a conclusive basis for confiscation or adverse inference.

Conclusions

2.4.8 There was no legal or factual basis to treat the seized jewellery/ornaments and cut pieces, manufactured in India, as liable to confiscation under section 111 of the Customs Act, in the absence of proof of importation or smuggling of the underlying gold by the appellant.

2.4.9 Confiscation under section 119, on the premise that some jewellery covered by invoices (e.g., SG-160 and SG-460) was used to "cover up" other smuggled jewellery, was also unsustainable for want of reliable foundational evidence of smuggling and of any link between the appellant and importation.

2.5 Treatment of affidavits, ownership claims and allegation of "planting" documents

Interpretation and reasoning

2.5.1 The appellant produced affidavits from manufacturers and owners, including:

• Affidavit of proprietor of M/s. Swamini Creations regarding 6179.49 gms of jewellery given to the appellant on trade approval basis and forming part of the seizure.
• Affidavit of M/s. Falcon Gold House Pvt. Ltd. regarding 12204.81 gms of jewellery given on approval basis.
• Affidavit of partner of M/s. Khandelwal Chain Co. regarding purchase of 745.250 gms of jewellery from the appellant's firm under Invoice No. SG-160 dated 18.01.2023.
• Affidavit of proprietor of M/s. R.K. Jewellers regarding cut pieces weighing 2818.5 gms given to the appellant's firm for job work under karigar vouchers.

2.5.2 The Court held that the Commissioner could not reject these affidavits arbitrarily without giving cogent reasons or undertaking verification. If doubts existed, the adjudicating authority ought to have summoned the deponents for cross-examination or tested the statements by other permissible means. Reliance was placed on the Bombay High Court's view that affidavits normally cannot be discarded without affording an opportunity to test their correctness.

2.5.3 Regarding the 19 documents allegedly "planted" during de-sealing of the appellant's shop on 03.05.2023, the Court found that:

• There was no finding of tampering with the seal before entry into the premises.
• The appellant and officers had been frisked prior to entry, reducing the likelihood of surreptitious introduction of documents.
• Several of the impugned documents, such as Invoice No. SG-160, had already surfaced during the earlier search, and others were reflected in GST records or in the ledgers of concerned parties.

The Commissioner's finding of "planting" was thus without basis and made without verification.

Conclusions

2.5.4 The rejection of affidavits and supporting documentary evidence by the adjudicating authority was improper and contrary to settled principles; such evidence should have been either accepted or duly tested but not summarily discarded.

2.5.5 The allegation that the appellant planted 19 documents at the time of de-sealing was unsupported by evidence and could not form a valid basis for adverse findings or penalties.

2.6 Overall consequence for penalties on the appellant

Interpretation and reasoning

2.6.1 The Court held that the department's case against the appellant was fundamentally based on inadmissible section 108 statements and unverified assumptions of smuggling/import, without compliance with section 138B and without adequate corroborative evidence.

2.6.2 As the confiscation of 12 foreign-marked gold bars and the related currency could not be maintained against the appellant, and as the confiscation of Indian-manufactured jewellery/cut pieces under sections 111 and 119 was itself unsustainable, the foundation for imposing penalties under sections 112(b)(i) and 114AA fell.

Conclusions

2.6.3 The Commissioner was not justified in imposing penalties under sections 112(b)(i) and 114AA of the Customs Act on the appellant in respect of the seized gold bars, jewellery and related transactions.

2.6.4 The impugned order was set aside to the extent that it imposed penalties on the appellant under section 112(b)(i) and section 114AA; the appeal was allowed accordingly.

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