The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad w held that the mere possession of a substantial amount of cash cannot establish that the money represents the sale proceeds of smuggled gold.
The Bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) observed that suspicion regarding the source of cash or allegedly inconsistent explanations by its possessor cannot substitute the statutory evidence required for confiscation under Section 121 of the Customs Act.
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The bench directed that the seized currency be released forthwith to the person lawfully entitled to it, unless its release was restrained or required in proceedings under any other applicable law.
The dispute arose from searches conducted at the residential and business premises of the respondent, Shri Varun Donthamsetty, in Nellore. Customs officers recovered ₹84.95 lakh from his residence and ₹84 lakh from his office, aggregating to ₹1.68 crore.
Significantly, no gold, bullion, foreign-origin packaging material or document evidencing the illicit importation of gold was recovered during the searches.
In his initial statement recorded on October 18, 2022, the respondent stated that the ₹84 lakh recovered from his office related to transactions involving foreign-origin gold biscuits and old gold ornaments. He sought time to furnish a detailed bifurcation and stated that bullion had been purchased from Chennai.
The respondent subsequently explained that his business, M/s Modern Bullion, traded in bullion of 999 and 995 purity. According to him, cash was received from legitimate retail transactions involving amounts below ₹2 lakh and as booking advances from customers, particularly ahead of Dhanteras. Transactions exceeding ₹2 lakh were stated to have been routed through banking channels.
In support of his explanation, the respondent submitted sales registers, GST returns for October 2022, bill books and the KYC details of customers who had paid advances. Customs authorities summoned three customers, who confirmed in their respective statements that they had paid cash to the respondent towards bullion purchases or booking advances.
Despite these materials, the Additional Commissioner, through an order dated July 5, 2023, ordered the absolute confiscation of the entire ₹1.68 crore under Section 121 of the Customs Act. A penalty of ₹10 lakh was also imposed upon the respondent under Sections 112(a) and 112(b).
The adjudicating authority additionally drew an adverse inference from a separate proceeding concerning the seizure of gold from certain carriers at the Bollapalli toll plaza.
On appeal, the Commissioner of Customs and Central Tax (Appeals), Guntur, concluded that Section 123 of the Customs Act applied to gold but not to Indian currency. The appellate authority held that the burden of establishing that the seized currency represented the sale proceeds of smuggled gold remained upon the Customs Department.
The Commissioner (Appeals) further found that the essential ingredients of Section 121 had not been established. There was no evidence of an identified sale of smuggled gold by a person who knew or had reason to believe that the gold was smuggled.
It was also found that the statements and other evidence submitted by the respondent in support of the alternative sources of the currency had not been properly evaluated. However, despite recording these findings, the Commissioner (Appeals) remanded the matter for fresh adjudication.
The Revenue approached the CESTAT principally on the ground that, following the amendment to Section 128A of the Customs Act, the Commissioner (Appeals) did not possess the power to remand the matter to the adjudicating authority.
The respondent supported the substantive findings recorded in his favour but challenged the direction for de novo adjudication. He contended that once the Commissioner (Appeals) had categorically held that the requirements of Section 121 were not satisfied, there was no justification for remanding the same issues.
Examining Section 123, the Tribunal observed that the provision creates an exception to the ordinary rule governing the burden of proof. It applies only to the goods specified in the provision or separately notified by the Central Government.
While gold and articles manufactured from gold are covered by Section 123, Indian currency is not a notified category of goods. Since the property seized in the present case was Indian currency and not gold, the burden could not be shifted onto the respondent to establish that the cash was not the sale proceeds of smuggled gold.
The Tribunal clarified that the failure of a person to satisfactorily establish the lawful acquisition of cash would not, by itself, render the currency liable to confiscation under Section 121. The initial burden of proving the conditions prescribed under Section 121 continued to rest with the Revenue.
The Bench explained that Section 121 permits the confiscation of sale proceeds of smuggled goods where such goods are sold by a person having knowledge or reason to believe that they are smuggled. The provision requires proof of several cumulative ingredients.
The Department must establish the existence of goods having a legally proven smuggled character, the sale of those goods, the seller’s knowledge or reason to believe that they were smuggled, and a direct and identifiable connection between the sale and the currency sought to be confiscated.
“Mere possession of a substantial amount of cash may give rise to suspicion or justify enquiry. It does not, by itself, establish that the currency represents sale proceeds of smuggled goods,” the Tribunal observed.
In the present case, the Department had failed to identify any particular consignment of smuggled gold, the manner, place or date of its illegal importation, the person who allegedly smuggled or supplied the gold, the quantity allegedly sold, or the buyer of the purported smuggled gold.
The Customs authorities also failed to identify the date and consideration of any alleged sale or any specific portion of the seized currency that could be related to such a transaction.
The Tribunal rejected the contention that the respondent’s initial statements, when read in isolation, established the Department’s case. It noted that the respondent had furnished business records, GST returns, bill books and customer details.
Three customers examined by the Department had confirmed making payments towards bullion purchases or booking advances. Their statements could not be rejected merely because they appeared before the authorities on the same day pursuant to summons.
The Bench held that statements recorded under Section 108 of the Customs Act constitute relevant evidence, but their actual effect must be determined after considering the complete record. An ambiguous or qualified statement could not be enlarged into an admission of facts that it did not expressly contain.
Addressing the penalties, the Tribunal observed that Section 112(a) applies where a person does or omits to do an act in relation to goods that renders them liable to confiscation under Section 111 or abets such conduct. Section 112(b) applies when a person knowingly deals with goods liable to confiscation under Section 111.
Liability under Section 112, therefore, required the Department to identify the particular goods liable to confiscation and establish the respondent’s act, omission or conscious dealing with those goods.
Since no specific smuggled gold had been identified and no act or omission by the respondent concerning identified goods liable to confiscation had been established, the penalties under Sections 112(a) and 112(b) could not be sustained.
The Tribunal also held that reliance on the separate proceedings concerning the seizure of gold from carriers at the Bollapalli toll plaza could not determine the respondent’s liability in the present case.
“Every SCN must stand upon its own allegations and evidence,” the Bench stated, adding that conduct attributed to a person in an unconnected proceeding could not replace proof of the statutory ingredients in the case under adjudication.
On the question of remand, the Tribunal agreed with the Revenue’s limited contention that the Commissioner (Appeals) could not issue the remand direction. However, it held that this finding did not entitle the Department to the revival of the confiscation order or the penalties.
The Revenue had not raised any specific substantive ground challenging the findings that Section 123 was inapplicable to the seized currency, that the burden of proof remained upon the Department and that the requirements of Section 121 were not proved.
The Tribunal further noted that the Commissioner (Appeals), after holding that the confiscation lacked authority of law and that the statutory requirements had not been established, could not logically remand the same issues for fresh adjudication. The findings on merits and the operative remand direction were irreconcilable.
It held that remand may be justified where a curable procedural defect requires reconsideration. It cannot be used to allow the investigating agency to identify, after the completion of adjudication, a new smuggled consignment, a new sale, a new buyer or seller, or a fresh evidentiary link that was absent from the original show-cause notice.
An adjudicating authority deciding a matter after remand remains confined to the allegations contained in the show-cause notice and cannot reconstruct a fundamentally deficient case by travelling beyond the notice, the Tribunal added.
Accordingly, the CESTAT deleted the direction for de novo adjudication, affirmed the findings on merits, set aside the absolute confiscation of ₹1.68 crore and quashed the ₹10 lakh penalty. The Revenue’s appeal was dismissed and the respondent’s cross-objection was allowed.
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