The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad Bench, has set aside penalties imposed in connection with the alleged diversion of gold and silver jewellery from a Noida Special Economic Zone (NSEZ) unit, holding that uncorroborated statements of witnesses who did not appear for cross-examination could not be relied upon to establish the alleged offence. 

The bench of P. K. Choudhary (Judicial Member) and K. Anpazhakan (Technical  Member) found that the recovery of silver by police was insufficient to establish that the recovered goods were the same goods allegedly found short during stock verification.

The dispute arose from a substantial shortage of 12,000 grams of gold and 46,222.748 grams of silver detected at a jewellery manufacturing unit in the Noida SEZ. While the Tribunal upheld the differential customs duty and interest, it held that the evidence on record did not justify the penalties imposed on the parties.

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The case concerned an approved NSEZ unit engaged in manufacturing gold and silver jewellery. On June 29, 2021, information regarding an alleged theft at the unit was received from NSEZ gate security.

Preventive Customs officers subsequently visited the premises and sealed three safes because authorised personnel were not present. A Panchnama was prepared in the presence of independent witnesses, and statements were recorded during the ensuing investigation.

A subsequent stock-taking exercise revealed a shortage of 46,222.748 grams of silver of .999 purity and 12,000 grams of gold. The Department proceeded on the basis that the shortage represented diversion of goods that had been procured without payment of customs duty.

A show-cause notice dated June 24, 2023, proposed recovery of customs duty amounting to ₹79,99,182, along with interest and penalties against various persons.

The adjudicating authority subsequently confirmed the customs duty demand of ₹79,99,182 under Section 28(4) of the Customs Act, 1962. It also ordered appropriation of ₹79,99,179 already deposited towards the duty and ₹1,30,178 deposited towards interest.

A penalty equivalent to the duty demand was imposed on the company under Section 114A. Separate penalties of ₹6 lakh each were imposed on two individuals under Section 112(a) and (b)(i) of the Customs Act.

The company maintained that the shortage had been detected during its own internal stock verification. It stated that it had suspected theft and informed Customs authorities, following which the Department conducted stock verification.

The company further submitted that it had voluntarily paid the customs duty applicable to the goods found short, despite maintaining that the goods had been stolen. According to the company, there was no evidence that it had itself diverted the goods with an intention to evade customs duty.

The record also showed that an FIR had been registered in connection with the alleged theft. During the police investigation, approximately 20 kg of silver was reportedly recovered. However, the criminal complaint was subsequently closed after the parties entered into reconciliation and compounded the matter.

The individual facing the ₹6 lakh penalty challenged the Department’s reliance on statements recorded during investigation.

It was argued that the case against him was based substantially on statements of several persons, including employees and persons associated with the jewellery unit. He sought cross-examination of the witnesses whose statements were relied upon by the adjudicating authority.

The adjudicating authority accepted the request and issued summons to the witnesses. However, despite service of summons, none of the witnesses appeared for cross-examination.

The defence therefore contended that the statements remained untested and that there was no independent documentary or circumstantial evidence establishing clandestine removal of duty-free goods from the NSEZ.

A central issue before the Tribunal was the evidentiary value of statements recorded under Section 108 of the Customs Act when the persons making those statements do not appear for cross-examination.

The defence relied upon Section 138B of the Customs Act, which governs circumstances in which statements recorded before Customs officers may be admitted and relied upon in adjudication proceedings.

The Tribunal noted that the adjudicating authority had itself permitted cross-examination and issued summons to the witnesses. Nevertheless, none appeared, and there was no finding that their attendance could not be secured for any of the circumstances contemplated under Section 138B.

The Tribunal found that the case against the individual was substantially based on statements recorded during investigation.

Since the witnesses did not appear for cross-examination, the Tribunal held that the correctness of those statements could not be tested during adjudication. It specifically observed that Section 138B had not been complied with and that the statements were not corroborated by independent evidence.

Consequently, the Tribunal held that those statements could not legally be relied upon to implicate the individual in the alleged offence.

The Tribunal separately examined the recovery of approximately 20 kg of silver during the police investigation.

It noted that there had been no comparison establishing that the silver jewellery recovered from the individual’s possession was the same jewellery allegedly found short from the NSEZ unit. The Department had not established the identity of the recovered goods through appropriate verification.

The Tribunal also took note of the subsequent reconciliation between the parties and closure of the police complaint. It held that there was no conclusive evidence establishing that the individual was responsible for the alleged theft.

The Tribunal held that the benefit of doubt had to go in favour of the person against whom the penalty had been imposed.

It concluded that the alleged involvement in the theft had not been conclusively established and accordingly set aside the ₹6 lakh penalty imposed under Section 112(a) and (b)(i) of the Customs Act.

The Tribunal also examined the liability of the company and another noticee.

It noted that the shortage had been detected by the company itself and that the company had informed Customs authorities about the discrepancy. Customs officers subsequently conducted stock verification based on that information.

The Tribunal found that the record indicated a case of theft rather than intentional diversion of goods for evasion of customs duty. Since the differential customs duty and interest had already been paid, it concluded that there was no loss of revenue to the exchequer.

Accordingly, the penalties imposed on the company and the other noticee were also set aside.

The Tribunal further addressed the separate penalty imposed on the proprietor of the proprietorship concern.

Relying on earlier judicial decisions, the Bench held that a proprietorship firm and its proprietor are one and the same for this purpose. Therefore, where a penalty had already been imposed on the proprietorship firm, a separate penalty could not be imposed on the proprietor.

The Tribunal accordingly set aside the separate penalty imposed on the proprietor.

While the Tribunal granted relief from all the penalties, it did not interfere with the underlying customs duty liability.

The Bench noted that the customs duty relating to the shortage had already been paid and appropriated in the adjudication order. It therefore upheld the differential customs duty and applicable interest.

The ruling thus distinguishes between recovery of the duty attributable to the shortage and the separate question of whether the evidence was sufficient to impose penal liability for intentional diversion.

The Allahabad CESTAT upheld the differential customs duty and interest but set aside the penalties imposed on all the appellants.

The Tribunal’s order rested principally on the absence of sufficient evidence establishing intentional diversion and the failure to comply with the requirements of Section 138B in relation to statements relied upon against the individual.

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