2026 (2) TMI 677 - AT - Customs

Admissibility of Section 108 statements: failure to follow Section 138B(1)(b) renders them inadmissible and penalties unsustainable.

Admissibility of statements recorded under Section 108 is contingent on compliance with Section 138B(1)(b): where clause (a) is inapplicable, the ... Relevancy of statements recorded u/s 108 - Procedure u/s 138B(1)(b) for admitting statements in adjudication - Mandatory character of statutory procedure for admission of recorded statements - Admissibility of statements recorded during investigation versus evidence after examination and opinion of adjudicating authority - Penalty liability u/s 112(a)(i) and 112(a)(ii) - Right to cross-examination - Whether the Commissioner committed an error in solely placing reliance upon the statements made by the appellant and Lokesh Garg u/s 108 for the purpose of imposing penalties upon the appellant. - HELD THAT:- A Division Bench of this Tribunal in Surya Wires [2025 (4) TMI 441 - CESTAT NEW DELHI] held that the statements made under section 108 of the Customs Act during the course of an inquiry under the Customs Act shall be relevant for the purpose of proving the truth of the facts contained in them only when such persons are examined as witnesses before the adjudicating authority and the adjudicating authority forms an opinion that the statements should be admitted in evidence. Both section 138B(1)(b) of the Customs Act and section 9D(1)(b) of the Central Excise Act contemplate that when the provisions of clause (a) of these two sections are not applicable, then the statements made under section 14 of the Central Excise Act or under section 108 of the Customs Act during the course of an inquiry under the Acts shall be relevant for the purpose of proving the truth of the facts contained in them only when such persons are examined as witnesses before the adjudicating authority and the adjudicating authority forms an opinion that the statements should be admitted in evidence. It is thereafter that an opportunity has to be provided for cross-examination of such persons. The provisions of section 138B(1)(b) of the Customs Act and section 9D of the Central Excise Act have been held to be mandatory and failure to comply with the procedure would mean that no reliance can be placed on the statements recorded either under section 108 of the Customs Act or under section 14D of the Central Excise Act. The Courts have also explained the rationale behind the precautions contained in the two sections. It has been observed that the statements recorded during inquiry/investigation by officers has every chance of being recorded under coercion or compulsion and it is in order to neutralize this possibility that statements of the witnesses have to be recorded before the adjudicating authority, after which such statements can be admitted in evidence. As seen from the show cause notice and the order impugned, penalty upon the appellant has been imposed only on the basis of the statement made by the appellant under section 108 of the Customs Act. A statement made under section 108 of the Customs Act cannot be considered as relevant as the procedure contemplated under section 138B of the Customs Act was not followed. In view of the aforesaid decisions and the fact that penalties have been imposed upon the appellant solely on the basis of statements made by the appellant and Lokesh Garg under section 108 of the Customs Act, the imposition of penalties upon the appellant under sections 112(a)(i) and 112(a)(ii) of the Customs Act cannot be sustained and are set aside. The appeal, insofar as it imposes penalties upon the appellant, is accordingly, allowed. Issues: Whether the Commissioner erred in imposing penalties under Section 112(a)(i) and Section 112(a)(ii) of the Customs Act, 1962 by relying solely on statements recorded under Section 108 of the Customs Act, 1962 without following the admissibility procedure laid down in Section 138B(1)(b) of the Customs Act.Analysis: Section 108 of the Customs Act empowers recording of statements during inquiry; Section 138B(1) prescribes the circumstances in which such statements become relevant. Where clause (a) of Section 138B(1) does not apply, clause (b) mandates (i) examination of the person who made the statement as a witness before the adjudicating authority and (ii) formation of an opinion by the adjudicating authority that, having regard to the circumstances, the statement should be admitted in evidence in the interests of justice. Parallel provisions in Section 14 and Section 9D of the Central Excise Act and judicial decisions consistently treat this procedure as mandatory to neutralize the risk of statements recorded under coercion and to enable the affected party to cross-examine. In the present case the penalties were founded solely on statements recorded under Section 108 without complying with Section 138B(1)(b) - the persons were not examined before the adjudicating authority and no recorded opinion admitting those statements into evidence appears to have been formed.Conclusion: The reliance solely upon statements recorded under Section 108 of the Customs Act without following the mandatory procedure in Section 138B(1)(b) renders those statements not relevant for proving the facts alleged; the penalties imposed under Section 112(a)(i) and Section 112(a)(ii) of the Customs Act, 1962 cannot be sustained and are set aside in favour of the assessee.