Rule 26 penalty requires knowledge of confiscable goods and compliant reliance on statements under section 9D.

Penalty under rule 26(1) of the Central Excise Rules, 2002 requires proof that the person dealt with excisable goods and knew or had reason to believe they were liable to confiscation; the order recorded no finding on that mental element, so the penalty failed. Reliance on the appellant's statement recorded under section 14 of the Central Excise Act, 1944 was also impermissible because the statutory procedure under section 9D was not followed, leaving the factual basis for the penalty without admissible support. The penalty order was therefore unsustainable.

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Issues: (i) Whether the ingredients of rule 26(1) of the Central Excise Rules, 2002 were satisfied so as to sustain the penalty imposed on the appellant. (ii) Whether the finding of purchase of excisable goods based on the appellant's statement recorded under section 14 of the Central Excise Act, 1944 could be relied upon without following the procedure under section 9D of the Central Excise Act, 1944.

Issue (i): Whether the ingredients of rule 26(1) of the Central Excise Rules, 2002 were satisfied so as to sustain the penalty imposed on the appellant.

Analysis: Rule 26(1) is a penal provision and requires strict construction. Penalty can be imposed only if the person has dealt with excisable goods and knew or had reason to believe that the goods were liable to confiscation under the Act or the rules. The order under challenge did not record any finding that the appellant had such knowledge or reason to believe, though that mental element is a necessary constituent of the rule.

Conclusion: The ingredients of rule 26(1) were not established, and the penalty could not be sustained against the appellant.

Issue (ii): Whether the finding of purchase of excisable goods based on the appellant's statement recorded under section 14 of the Central Excise Act, 1944 could be relied upon without following the procedure under section 9D of the Central Excise Act, 1944.

Analysis: The impugned order relied on the appellant's statement under section 14 of the Central Excise Act, 1944 to hold that he purchased the goods from an unregistered factory. Such a statement cannot be treated as relevant unless the statutory procedure under section 9D of the Central Excise Act, 1944 is followed. The factual foundation for the penalty therefore lacked admissible support.

Conclusion: The reliance on the statement was not permissible in the absence of compliance with section 9D of the Central Excise Act, 1944.

Final Conclusion: The penalty order was unsustainable in law, and the appellant was entitled to relief.

Ratio Decidendi: A penalty under rule 26(1) of the Central Excise Rules, 2002 requires proof of actual dealing with excisable goods coupled with knowledge or reason to believe that they are liable to confiscation, and a statement under section 14 of the Central Excise Act, 1944 cannot be relied upon unless section 9D of that Act is complied with.

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