The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has held that diaries, notebooks and statements recorded during an investigation are insufficient to establish clandestine removal of excisable goods unless the Revenue produces concrete evidence covering the entire chain of manufacture, transportation, receipt and payment.

The Bench of Dr Rachna Gupta (Judicial Member) set aside the ₹3 lakh penalty imposed on a steel trader under Rule 26 of the Central Excise Rules, 2002. The Tribunal found no reliable evidence showing that the trader had knowingly acquired or dealt with goods liable to confiscation.

The appeal arose from an investigation alleging that CTD/TMT bars had been clandestinely cleared by a manufacturer without invoices and without payment of central excise duty.

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The appellant was engaged in trading iron and steel products, including TMT/CTD bars and cement. Acting on intelligence that the trader was receiving goods without invoices and without payment of central excise duty, Central Excise preventive officers searched its premises on February 14, 2013.

During the search, officers recorded the statement of the proprietor under Section 14 of the Central Excise Act, 1944, and seized a diary containing details relating to purchases of CTD/TMT bars.

The diary allegedly recorded purchases made from several persons between May 22, 2011 and February 9, 2013.

In a subsequent statement, the proprietor allegedly admitted purchasing CTD/TMT bars through the proprietor of Sai Deva Steels, who acted as a steel broker. The broker’s premises were also searched, and a notebook allegedly recording the sale of 643.195 metric tonnes of CTD/TMT bars to different parties was seized.

The broker stated that the goods were primarily procured from Swastik Steels and that he received a commission of ₹100 per metric tonne for arranging the transactions.

On the basis of these diaries, notebooks and statements, the Department alleged that Swastik Steels had cleared 901.155 metric tonnes of CTD/TMT bars, valued at approximately ₹3.06 crore, to the appellant without issuing central excise invoices and without paying duty.

The Department also allegedly discovered shortages of 118.938 metric tonnes of CTD/TMT bars and 65.027 metric tonnes of scrap at the manufacturer’s premises.

A show cause notice dated January 8, 2016 was issued to the manufacturer, its partner, the appellant and the broker.

The notice proposed recovery of central excise duty of ₹37.86 lakh in relation to the alleged clandestine clearance of 901.155 metric tonnes of CTD/TMT bars. It also proposed a further duty demand of ₹6.29 lakh relating to the alleged stock shortages, along with interest and penalties.

While the duty demand was principally raised against the manufacturer, a penalty of ₹3 lakh was imposed on the appellant under Rule 26 of the Central Excise Rules for allegedly dealing with goods known to be liable to confiscation.

The adjudicating authority confirmed the demands and penalties. The Commissioner (Appeals) subsequently upheld the penalty, prompting the trader to approach CESTAT.

The matter had previously reached the Tribunal, which remanded it for fresh adjudication. CESTAT had directed the adjudicating authority to follow the procedure prescribed under Section 9D of the Central Excise Act before relying upon statements recorded during the investigation.

The Tribunal had clarified that the authority must either follow the procedure prescribed under Section 9D or discard the statements.

In the fresh proceedings, the adjudicating authority offered the noticees opportunities to appear for examination and cross-examination. However, they did not appear personally despite several opportunities between March and July 2024.

The authority consequently treated the statements recorded under Section 14 as relevant and once again imposed the penalty.

Before CESTAT, the appellant argued that the directions contained in the earlier remand order had not been properly followed. It also contended that the evidence was insufficient to establish clandestine clearance or its knowing involvement in the alleged evasion.

CESTAT rejected the trader’s objection concerning non-compliance with Section 9D.

The Tribunal observed that the adjudicating authority had provided opportunities for examination and cross-examination after the matter was remanded. However, the appellant and the other witnesses did not make themselves available.

It held that a noticee who fails to avail the opportunity granted by the adjudicating authority cannot subsequently allege a violation of natural justice.

The Tribunal observed that denial of cross-examination may amount to a violation of natural justice where a noticee specifically requests cross-examination and the adjudicating authority refuses it. That principle could not assist the appellant because opportunities had been granted but were not utilised.

Accordingly, CESTAT held that the statements recorded under Section 14 could be considered as evidence.

Despite permitting reliance on the statements, the Tribunal found that the substantive charge of clandestine removal remained unproved.

CESTAT observed that the panchnamas established only that a diary was recovered from the appellant’s premises and a notebook was recovered from the broker’s premises. The mere recovery of these documents did not prove the correctness of their contents or establish that unaccounted goods had actually been manufactured and cleared.

The Tribunal also noted that proceedings against the alleged manufacturer arising from connected investigations had already been set aside.

It found no direct evidence demonstrating that the manufacturer had clandestinely produced and cleared the goods allegedly purchased by the appellant.

Relying on settled judicial principles, CESTAT held that allegations of clandestine production and removal cannot be sustained on assumptions, presumptions or theoretical calculations.

The department must produce affirmative evidence addressing the complete chain of alleged clandestine activity, including: Unaccounted procurement of raw materials required to manufacture the final goods. Evidence of actual unrecorded production. Proof of transportation and physical movement of the goods, such as vehicle records, gate registers, lorry receipts or check-post documents. Identification of buyers supported by acknowledgements or other evidence of receipt. Tangible proof of cash payments or the flow of unaccounted consideration from purchasers to the manufacturer.

CESTAT found that none of these essential elements had been proved by the Department.

The diary and notebook, without supporting evidence relating to manufacturing, transport, delivery or financial consideration, could not discharge the Revenue’s burden of proving clandestine clearance.

The Tribunal explained that a penalty under Rule 26 can be imposed only when a person acquires possession of, transports, stores, sells or otherwise deals with excisable goods while knowing, or having reason to believe, that those goods are liable to confiscation.

In the present case, the appellant had placed orders through the broker and made payments through the same channel. The broker’s statement indicated that the goods were supplied under invoices and that payment was collected only after delivery.

There was no evidence establishing that the appellant knew that the goods were allegedly cleared without payment of duty or were otherwise liable to confiscation.

CESTAT consequently held that the statutory requirements for imposing a penalty under Rule 26 were not satisfied.

Setting aside the appellate order, the Tribunal quashed the ₹3 lakh penalty and allowed the trader’s appeal.

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