The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad Regional Bench, has dismissed five appeals filed by the department against an order that had set aside the confiscation of 5.541 kg of gold and ₹68.80 lakh in Indian currency. 

The bench of P. K. Choudhary (Judicial Member) and K. Anpazhakan (Technical Member) has held that the Customs Department failed to establish the foundational requirement of a “reasonable belief” that the seized gold was smuggled, and therefore the statutory presumption under Section 123 of the Customs Act, 1962 could not be invoked.

The case originated from an interception by officers of the Directorate of Revenue Intelligence (DRI) at Charbagh Railway Station, Lucknow, on December 12, 2023. Acting on specific intelligence, the officers intercepted persons travelling towards Mumbai by the Pushpak Express.

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During the search of a trolley bag, the officers recovered 43 cut pieces of yellow-coloured bars, two pieces of yellow-coloured metal and ornaments. Indian currency amounting to ₹68.80 lakh was also recovered. Samples were drawn and chemically tested. One sample was found to contain 99.49% gold, while other samples contained gold in alloys having gold content of 84.82% and 64.56%.

The Department alleged that the gold was of foreign origin and had been smuggled into India. Since the persons carrying it could not produce documents at the time of interception, the gold and cash were seized.

A subsequent show cause notice dated February 9, 2024 proposed confiscation of 5,541 grams of gold valued at ₹3.32 crore under Section 111 of the Customs Act and confiscation of ₹68.80 lakh under Section 121. The adjudicating authority thereafter ordered absolute confiscation of both the gold and currency and imposed penalties on the persons involved.

The Commissioner (Appeals), however, took a different view and set aside the confiscation of the gold and currency along with the penalties. The Revenue challenged that decision before CESTAT.

The Department argued that the large quantity of gold, its alleged foreign origin, the absence of documents at the time of seizure and statements recorded during investigation were sufficient to establish a reasonable belief that the gold was smuggled.

According to the Revenue, once such reasonable belief existed, Section 123 of the Customs Act shifted the burden onto the persons from whose possession the gold had been recovered to establish that the goods were not smuggled. The Department also relied upon the absence of documents relating to the import, purchase, transportation and accounting of the gold.

The Tribunal rejected the Revenue’s approach to Section 123.

CESTAT observed that the statutory presumption under Section 123 does not operate automatically merely because gold has been seized. Before the burden can shift to the person from whom the goods were seized, the Revenue must first establish the foundational fact that the seizure was made on the basis of a valid and reasonable belief that the goods were smuggled.

The Tribunal stressed that reasonable belief cannot be based on conjecture, assumption or mere suspicion. It must arise from objective circumstances existing at the time of seizure. If the foundational requirement is absent, the statutory reverse burden under Section 123 cannot be invoked and the Department must independently establish that the goods were smuggled.

A significant factor considered by the Tribunal was that the seizure was a “town seizure” and did not take place at an international border, customs station or port of import.

CESTAT noted that the 43 pieces of gold bars weighing 5,541 grams did not bear foreign markings, inscriptions, serial numbers, refinery marks or embossments indicating foreign manufacture or origin. Although the seizure records described the country of origin as Nepal, the Department failed to produce independent contemporaneous material explaining the basis for attributing Nepalese origin to the gold.

The Tribunal further held that the mere quantity of gold or the circumstances in which it was found could not, by themselves, establish the reasonable belief contemplated under Section 123.

CESTAT also rejected reliance on the chemical purity report as proof of foreign origin.

Although the Chemical Examiner found the seized gold to have purity of around 99.4%, the Tribunal observed that the Revenue had not produced any technical or scientific material establishing that such purity was exclusively associated with imported or smuggled gold.

In the absence of foreign markings or other scientific evidence connecting the gold to a foreign source, purity alone could not establish the reasonable belief required under Section 123.

The Tribunal found that the respondents had produced substantial documentary evidence supporting their claim that the gold was domestically purchased and accounted for in the books of a Mumbai-based gold trading business.

The records included GST-compliant purchase invoices, stock registers, GST returns, tax-paid challans, sale bills and other business records. The Tribunal noted that GST at 3% had been paid on the purchases and that the corresponding transactions were reflected in the GST records.

The firm had reported sales turnover of ₹18 crore between April 1, 2023 and November 30, 2023 and had paid approximately ₹53 lakh in GST. Its stock as on December 12, 2023 was recorded at 6,731.538 grams, valued at approximately ₹3.97 crore, which was higher than the 5,541 grams seized by the Department.

CESTAT held that once such documentary evidence was produced, the burden shifted back to the Revenue to establish that the records were fabricated, forged or unrelated to the seized gold. The Tribunal found that the Department had not produced substantive evidence to demonstrate that the transactions were fictitious or that the seized gold could not have originated from the recorded purchases.

Another important issue before the Tribunal concerned statements recorded under Section 108 of the Customs Act.

The Revenue substantially relied upon statements recorded from persons allegedly involved in transporting the gold. The respondents, however, disputed the manner in which the statements had been recorded and contended that they were pre-typed and signed after being prepared by investigating officers.

The Tribunal found that the statements had not been supported by sufficient independent corroborative evidence. It also considered the statutory safeguards governing reliance upon statements under Section 138B of the Customs Act.

CESTAT observed that statements recorded during investigation cannot automatically be treated as substantive evidence against a noticee. Where reliance is placed upon such statements, the statutory safeguards concerning examination and cross-examination have to be respected.

The Tribunal concluded that, in the facts of the case, the Revenue’s reliance on untested and uncorroborated statements could not displace the documentary evidence produced by the respondents.

CESTAT separately examined the confiscation of ₹68.80 lakh in cash.

The adjudicating authority had proceeded on the assumption that the currency represented sale proceeds of ornaments made from smuggled gold. The respondents, on the other hand, claimed that the cash represented legitimate business proceeds from gold ornament sales supported by GST invoices.

The Tribunal found that the Department had failed to place any cogent material establishing a nexus between the seized cash and the alleged smuggling activity. Since the underlying allegation of smuggling itself had not been established, there was no basis for treating the currency as sale proceeds of smuggled goods.

The Tribunal also relied upon its earlier decision in Rajendra Roy & Anr. v. Commissioner of Customs (Preventive), Kolkata, observing that currency seized during investigation cannot be retained indefinitely without legally admissible evidence establishing its connection with the alleged offence.

The failure of the department to establish that the gold was smuggled also affected the penalties imposed under the Customs Act.

CESTAT held that penalty under Section 112 is consequential because it presupposes the existence of goods liable to confiscation. Once the confiscation itself fails, the consequential penalty cannot independently survive.

The Tribunal also upheld the setting aside of penalties under Section 114AA. It noted that Section 114AA requires proof of a deliberate and conscious act involving a false or incorrect declaration, statement or document. Since the Revenue had failed to establish through independent evidence that the documents produced by the respondents were forged or fabricated, the essential ingredients for invoking Section 114AA were not proved.

The CESTAT upheld the Commissioner (Appeals)’ decision setting aside the absolute confiscation of the gold under Sections 111(b) and 111(d) of the Customs Act.

It also upheld the setting aside of all penalties imposed on the respondents.

The Tribunal directed that the seized ₹68.80 lakh be released to the respondents forthwith along with applicable interest. The five appeals filed by the Revenue were consequently dismissed with consequential relief in accordance with law.

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