Smuggling of watches: confiscation and penalties set aside where department failed to prove smuggling and statements inadmissible

Dispute concerns alleged smuggling and confiscation of watches. Once the appellant produced evidence of licit possession, the evidential burden shifted to the department to prove smuggling, which it failed to discharge; consequence: confiscation could not be sustained. A conviction based on a prior intercepted seizure and an inquiry statement was rejected because the statements procedural safeguards were not followed and the prior modus operandi inference could not be extended to the later consignment; consequence: penalties imposed on the appellant and co-accused were set aside.

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Issues: (i) Whether the confiscation of 838 watches, confirmation of duty and imposition of penalties under Sections 111, 28(4) and 114A of the Customs Act, 1962 against the appellant and co-noticees is sustainable; (ii) Whether the extended period of limitation under Section 28(4) could be invoked by treating the date of search as the relevant date; (iii) Whether statements recorded under Section 108 of the Customs Act are admissible without compliance with Section 138B; (iv) Whether penalty under Section 112 could be imposed on the co-noticee based on the impugned material.

Issue (i): Whether confiscation of the 838 watches and imposition of penalties/confirmation of duty is sustainable.

Analysis: The issue concerns whether the department proved smuggling or otherwise displaced the evidential material produced by the appellant showing import and stock entry. The adjudicating authority relied on lack or mismatch of serial/model numbers in supplier/import documents and on statements recorded during investigation. The appellant produced import documents, stock registers and explained age/entry of certain watches; many goods had been cleared by customs earlier. The adjudicator did not require or identify positive evidence of clandestine import after the appellant produced documentary material and did not independently prove smuggling.

Conclusion: The confiscation, demand of duty and penalties under Sections 111, 114A and related provisions cannot be sustained and are set aside in favour of the appellant.

Issue (ii): Whether the extended period under Section 28(4) could be invoked by treating the date of search as the relevant date.

Analysis: Section 28(4) permits extended time where duty was not paid by reason of collusion or willful mis-statement or suppression of facts and refers to the relevant date as the date of clearance. The show cause notice was issued beyond five years from the relevant date of clearance; the notice presumed the date of search as the relevant date without articulating reasons to invoke the extended period.

Conclusion: Invocation of the extended period of limitation under Section 28(4) is not justified; the issuance of the show cause notice after the statutory period is a valid ground to set aside the demand.

Issue (iii): Whether statements recorded under Section 108 are admissible without following Section 138B procedure.

Analysis: Statements recorded during investigation under Section 108 can be relevant in adjudication only upon compliance with the procedure in Section 138B, which requires examination of the person as a witness before the adjudicating authority, formation of an opinion on admissibility and opportunity for cross-examination. The adjudicator relied on investigative statements without following Section 138B procedure.

Conclusion: The investigative statements relied upon without compliance with Section 138B are inadmissible for proving smuggling; reliance on such statements is not sustainable.

Issue (iv): Whether penalty under Section 112 could be imposed on the co-noticee based on the impugned material.

Analysis: The imposition of penalty on the co-noticee was founded on investigative statements and inference of a common modus operandi; the linkage between the co-noticee and the 838 watches was not established independently and relied on inadmissible investigative material.

Conclusion: The penalty under Section 112 against the co-noticee is not sustainable and is set aside.

Final Conclusion: The collective effect of the determinations is that the adjudicator's findings of smuggling, the demand under the extended period, and penalties based on investigative statements fail; accordingly the appeals are allowed and the impugned confiscation, duty confirmation and penalties are set aside.

Ratio Decidendi: Where a person produces sufficient documentary evidence of import/possession, the initial burden under Section 123 shifts to the department to prove smuggling; investigative statements recorded under Section 108 are admissible in adjudication only upon satisfaction of the mandatory procedure in Section 138B, and the extended limitation under Section 28(4) cannot be invoked without establishing statutory grounds and the proper relevant date.

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