The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a central excise duty demand of ₹16.94 lakh, along with interest and penalties, holding that allegations of clandestine manufacture and removal cannot be sustained merely on the basis of private records and the statement of an authorised signatory without independent corroborative evidence. 

The Division Bench comprising Somesh Arora (Judicial Member) and Satendra Vikram Singh (Technical Member) has observed that  no enquiry was conducted with raw material suppliers. No investigation was undertaken at the recipients’ end. No transport evidence was produced. No evidence of excess production or excess consumption of electricity was brought on record. There was no proof of additional labour or procurement of unaccounted raw materials. The show cause notice did not explain how the value of allegedly clandestinely cleared goods had been determined for computation of duty.

The appellant/assesse is a manufacturer of PVC insulated electrical cables, automobile cables, lead-free cables, power cords, tinned copper wires and other products, came under investigation after Central Excise officers conducted a search at its factory in January 2012.

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During the search, officers seized handwritten notebooks, challan books and other private records. Based on these documents, the department alleged that the company had clandestinely cleared finished goods without issuing invoices and without payment of central excise duty.

The investigation also relied heavily on the statement of the company’s authorised signatory, who allegedly admitted that certain goods were removed without invoices and payment of duty. Subsequently, a show cause notice dated 20 November 2015 demanded ₹16,94,770 as central excise duty under Section 11A(4) of the Central Excise Act, along with interest and penalties. Separate penalties were also proposed against the firm’s partner and authorised signatory. 

The appellants challenged the demand before the Tribunal contending that the department’s case suffered from multiple legal and factual deficiencies.

The appellant argued that the entire demand was founded only on unsigned private notebooks and challan books. No discrepancy was found in stock during the factory search. There was no evidence of excess procurement of raw materials. The department failed to establish excess electricity consumption, additional labour deployment or transportation of allegedly clandestinely removed goods. No investigation was carried out at the buyers’ end despite names of alleged purchasers appearing in the recovered challan books. The persons who allegedly authored or maintained the seized records were never examined. Cross-examination of relevant witnesses was not granted. The valuation adopted for determining duty liability was never explained.

According to the appellants, clandestine removal is a serious allegation requiring substantial independent evidence, which was completely absent in the present case. 

The department maintained that the authorised signatory had clearly admitted clandestine clearance of finished goods and that the admission was supported by the seized private records.

The department argued that the statement was never retracted and that recovery of private challan books sufficiently established removal of goods without following statutory excise procedures.

The department also justified invocation of the extended limitation period and the penalties imposed upon the firm and its partner. 

After examining the records, the Tribunal found significant deficiencies in the investigation.

It observed that although several private documents had been recovered during the search, the department never recorded statements of the employees who actually authored or maintained those documents, despite the authorised signatory specifically identifying them.

The Tribunal held that the department’s entire case rested substantially upon the statement of one authorised signatory and private records whose authors were never examined or authenticated. 

The Bench reiterated the well-settled legal principle that clandestine manufacture and removal must be established through positive, tangible and corroborative evidence, not merely through assumptions or private records.

Referring to earlier decisions including Gupta Synthetics Ltd., Aum Aluminum Pvt. Ltd., Bihariji Manufacturing Co. Pvt. Ltd., Nova Petrochemicals, Chandan Tobacco Company, and Raghuveer Rolling Mills, the Tribunal observed that Revenue is expected to establish a complete chain of evidence, including unaccounted purchase of raw materials, actual manufacture of excess goods, transportation, identified buyers, receipt of sale proceeds, excess electricity consumption, and corroborative statements.

The Tribunal emphasised that these essential links were entirely missing in the present case. 

The Bench also distinguished the judgments relied upon by the department, observing that those cases involved voluntary admissions by partners or managing directors or were supported by substantial documentary evidence establishing clandestine removals.

In contrast, the present matter contained no voluntary admission by the partner, no confirmation from the authors of the private records and no independent corroborative investigation. 

Holding that the department had failed to discharge the burden of proving clandestine manufacture and removal, the Tribunal set aside the excise duty demand of ₹16.94 lakh, the interest liability, the equivalent penalty imposed on the company, and the ₹20,000 penalty imposed on partner D. Saravanan under Rule 26 of the Central Excise Rules.

Both appeals were accordingly allowed. 

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