Clandestine manufacture allegations cannot rest solely on third-party private records; demands and director penalty set aside.

A demand for central excise duty, interest and penalties premised solely on private records recovered from a third party and statements of that third party is legally insufficient where there is no tangible corroborative evidence (e.g., excess raw-material consumption, production records, transportation/receipt proofs, or receipt of sale proceeds) and where the assessee was not given copies of relied documents or an opportunity to cross-examine witnesses; consequently such demands may be set aside. Similarly, penalty liability under Rule 26(1) cannot be sustained in the absence of evidence connecting the director to clandestine manufacture once the primary demand is unsupportable.

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Issues: (i) Whether the demand of central excise duty (with interest and penalty) confirmed against the assessee based solely on private records recovered from a third party (M/s SPRML) and statements of that third party is sustainable; (ii) Whether the penalty imposed on the director under Rule 26(1) of the Central Excise Rules, 2002 is sustainable in the absence of evidence of his involvement in clandestine manufacture and clearance.

Issue (i): Whether the demand of central excise duty, interest and penalty confirmed on the basis of documents seized from a third party and statements of that third party is legally sustainable.

Analysis: The Tribunal examined the evidentiary basis for alleging clandestine manufacture and clearance and identified the categories of tangible corroborative evidence ordinarily required (e.g., excess/raw material purchase, production/consumption records, transportation and delivery proof, receipt of sale proceeds, electricity consumption, links between recovered documents and factory activities). The Tribunal found that the Department relied solely on loose private records recovered from the third party and statements of third-party personnel, that copies of those documents were not furnished to the appellants and that the appellants were not permitted to cross-examine the persons whose statements were relied upon. The Tribunal applied its precedents and relevant High Court authority emphasising that clandestine removal is a serious allegation requiring direct and corroborative evidence and that private third-party records alone, without corroboration and without opportunity for cross-examination, cannot form the sole basis for confirming demands.

Conclusion: The demand of central excise duty, interest and penalties confirmed on the basis of documents and statements recovered from the third party is unsustainable and is set aside.

Issue (ii): Whether the penalty under Rule 26(1) of the Central Excise Rules, 2002 imposed on the director is sustainable absent evidence of his involvement in clandestine activities.

Analysis: The Tribunal observed that neither the director nor the general manager accepted the allegation of clandestine removal in their statements, that there was no corroborative evidence establishing clandestine manufacture and clearance, and that the primary demand itself was set aside for lack of admissible and corroborative evidence and for denial of cross-examination. In that factual and evidentiary context, imposition of penalty on the director was examined.

Conclusion: The penalty imposed on the director under Rule 26(1) of the Central Excise Rules, 2002 is unwarranted and is set aside.

Final Conclusion: The impugned adjudication order confirming demands of central excise duty, interest and penalties and imposing penalty on the director is set aside and the appeals are allowed with consequential reliefs as per law.

Ratio Decidendi: A demand for clandestine manufacture and clearance cannot be sustained where it is based solely on private records recovered from a third party and statements of third-party personnel without corroborative tangible evidence (such as excess raw material, production/consumption anomalies, transportation and receipt proofs, or receipt of sale proceeds) and where the assessee is not afforded the opportunity to cross-examine the witnesses relied upon; in such circumstances the burden on Revenue to produce direct corroborative evidence remains unmet and the demand must be set aside.

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