The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad, has dismissed the department’s appeal against relief granted to a chewing tobacco manufacturer, holding that allegations of clandestine manufacture and removal cannot be sustained through unsigned loose sheets, WhatsApp images, third-party electronic accounts and transport records without reliable corroboration.
The bench of P. K. Choudhary (Judicial Member) and K. Anpazhakan (Technical Member) emphasises that numerical entries and electronic records must be linked to actual manufacture, transportation, delivery and receipt of sale proceeds before they can support a clandestine removal demand.
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The investigation began with intelligence that a pan masala manufacturer, and a scented zarda tobacco manufacturer, were allegedly producing and supplying goods without paying applicable taxes.
Officers of the Directorate General of GST Intelligence, Ghaziabad Regional Unit, conducted searches at 22 premises connected with the businesses, including factories, godowns, offices and residential premises, in September and December 2021.
Two show cause notices subsequently sought different levies on the same underlying evidence. One concerned GST and compensation cess, while the other, dated May 4, 2023, sought Basic Excise Duty and NCCD from assessee. The present appeal concerned the latter notice.
The adjudicating authority partially confirmed the demand while dropping substantial portions. Both the Department and the manufacturer challenged that decision before the Commissioner (Appeals), who rejected the departmental appeal and allowed the manufacturer’s appeal. The Revenue then approached CESTAT.
One component of the demand arose from 30 handwritten loose sheets recovered from a godown in Varanasi. Investigators treated entries relating to loading and unloading of bags as evidence of unaccounted supplies of chewing tobacco.
The Tribunal found that the papers neither named assessee nor bore the signatures of its directors, employees or authorised representatives. They also lacked essential product particulars, including a clear description of the goods, brand, pouch size, weight and packing configuration.
The bench held that unexplained numerical expressions could not establish the identity, quantity or origin of the goods merely because investigators assigned a particular meaning to them.
It also questioned whether repeated entries had been checked to prevent double counting and noted deficiencies in the documentation of the precise location from which the papers were recovered.
Without evidence of corresponding raw material procurement, production, transportation, buyers or sale proceeds, the sheets could provide leads for investigation but could not independently prove taxable clandestine clearances.
The Department also relied on WhatsApp messages and images retrieved from the mobile phone of Salil Bhardwaj during a search in Delhi. It argued that transporter names, vehicle numbers and quantity details, read with his statement, demonstrated supplies without invoices.
CESTAT identified deficiencies in the documentation of the retrieval process. The search record did not clearly establish the chats accessed, communicating accounts, relevant timestamps, extraction method, preparation of a forensic copy or preservation of the material.
The Tribunal examined these shortcomings in light of the statutory safeguards governing electronic evidence, referring to Section 36B of the Central Excise Act, 1944.
Separately, the authors of the handwritten slips appearing in the images had not been identified, and their connection with the assessee remained unproved.
The absence of panch witnesses’ signatures on the printouts was considered alongside the inadequate description of retrieval and printing. The Tribunal clarified that missing signatures alone did not conclusively establish that witnesses were absent, but the combined deficiencies weakened the assurance that the relied-upon printouts were the material recovered during the search.
A substantial portion of the case rested on Tally data extracted from a laptop found at premises in Naini, Prayagraj. The accounts were maintained under the name “Jai Bajrang Bali,” which the Department described as fictitious.
The Revenue relied on statements from persons allegedly involved in marketing and distribution, along with dealers’ statements, to connect those accounts with the manufacturers.
The Tribunal held that a marketing association did not automatically establish participation in a parallel clandestine supply network. General statements about purchases could not validate every entry in private accounts covering more than three years.
It also observed that payments through RTGS or NEFT could not automatically be treated as consideration for unaccounted supplies. Such payments needed reconciliation with the seller’s and purchaser’s statutory records.
The bench identified discrepancies in the laptop’s identification particulars and inadequate evidence regarding its ownership, sealing and custody. It further noted the absence of primary documents supporting the entries, such as invoices, delivery slips, transport receipts or payment records.
Ownership of a device, authorship of its entries and the truth of the transactions recorded in it were separate matters requiring proof, the Tribunal explained.
CESTAT also rejected the Revenue’s attempt to treat the omission of a relied-upon statement as an inconsequential scanning error.
The Department explained that one statement had been reproduced twice in the relied-upon documents instead of supplying a later statement used to interpret the data and quantify the demand.
The Tribunal held that the manufacturer was entitled to the complete statement, including the questions, answers and qualifications, rather than merely the investigating officer’s summary in the show cause notice.
It similarly regarded the omitted panchnama concerning a subsequent extraction or printing exercise as relevant to the evidentiary chain. A later explanation during appeal could not retrospectively restore the opportunity to examine and challenge that material.
The final component concerned a transport file allegedly recording movements of printed laminates used for packaging.
Investigators applied a 13:7 ratio to an aggregate quantity of laminate and attributed approximately 4.49 lakh kilograms to the assessee. They then calculated the tobacco pouches allegedly manufactured and cleared from that quantity.
The Tribunal found no independent evidence establishing that the attributed laminate had actually reached the factory, been received or been consumed in production.
It also noted the absence of corroboration concerning tobacco inputs, additional labour, excess electricity consumption, transport of finished goods, identified buyers or receipt of sale proceeds.
The resulting calculation rested on successive assumptions about delivery, consumption, manufacture and clearance. The bench held that these stages could not be established merely by extending an inference drawn from a third-party transport record.
CESTAT acknowledged that clandestine transactions are often kept outside statutory books and that the Department may rely on circumstantial evidence. It nevertheless held that such evidence must form a complete and coherent chain.
The bench clarified that departmental adjudication does not apply the same standard as a criminal prosecution. Even on a preponderance of probability, however, the conclusion must arise from proven circumstances and reliable material.
Finding no perversity or legal infirmity in the Commissioner (Appeals)’ decision, the Tribunal dismissed the Revenue’s appeal. It also held that interest and penalties linked to the unproved clandestine-clearance allegations could not survive to the extent the underlying demand failed.
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