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2025 (5) TMI 1281 - AT - Central ExciseDemand of duty - Clandestine manufacture - demand with interest and various penalties - solely on the basis of private records found during the course of investigation - satisfying the tests laid down in the case of Arya Fibres Pvt. Ltd. 2013 (11) TMI 626 - CESTAT AHMEDABAD - HELD THAT - As none of those tests has been satisfied as from where the excess raw material has been procured by the appellant from where the excess labour has been employed to manufacture such a huge quantity of the goods how much electricity has been consumed by the appellant what is the production capacity of the plant installed in the factory premises where the clandestine removal of the goods were sold and how the transaction were made by the appellant. None of these tests has been satisfied. Therefore on that ground the demands are not sustainable. Further in the case of Commissioner of C.Ex Chandigarh versus Laxmi Engineering Works ( 2010 (3) TMI 276 - PUNJAB HARYANA HIGH COURT ) the Hon ble High Court observed that even if some record recovered during raid and corroborated by some supportable evidence holding that there was an attempt of clandestine production and removal of goods then it is necessary to have some positive evidence of clandestine production and removal of the goods. Admittedly no such evidence is produced by the Revenue therefore demand against the appellant is not sustainable. Thus it is alleged that appellants were involved in clandestine removal of goods on the basis of private records during the course of investigation and statements recorded during the course of investigation which were not corrugated by the tests laid down in the case of Arya Fibres Pvt. Ltd. (Supra) the demand of Central Excise duty is not sustainable against the appellant. As demand of duty is not sustainable consequently no penalty can be imposed on the appellant. In these terms we drop the demand alongwith penalties imposed on the appellant. In result we set aside the impugned orders and allow the appeal filed by the appellants.
The primary legal question considered by the Tribunal was whether the allegation of clandestine manufacture and removal of goods could be sustained solely on the basis of private records such as loose slips, notebooks, diaries, weighbridge registers, and other documents recovered during a search, absent any corroborative evidence. Specifically, the Tribunal examined whether confirmation of a demand and imposition of penalties on the company and its Directors, based solely on such private documents and statements recorded during investigation, was maintainable in law.
Another key issue was whether the extended period of limitation could be invoked for the demand, given that periodic audits had been conducted without any prior objection or proceedings initiated for clandestine activity. The Tribunal also considered the admissibility and evidentiary value of statements recorded during investigation under Section 9D of the Central Excise Act, 1944, and whether the principles of natural justice were violated by denying cross-examination of witnesses. Further, the Tribunal addressed the question of imposition of penalties on the Directors under Rule 26 of the Central Excise Rules, 2002, in the absence of proved clandestine removal of goods. Issue-wise Detailed Analysis 1. Whether clandestine manufacture and removal of goods can be inferred solely from private records without corroborative evidence The Tribunal referred extensively to the legal framework and precedents governing clandestine manufacture and clearance cases. It reiterated the settled principles laid down in prior decisions, including the Tribunal's own ruling in Arya Fibres Pvt. Ltd. v. Commissioner of Central Excise, Ahmedabad-II, which enumerated the fundamental criteria to establish clandestine removal. These criteria include tangible evidence such as:
The Tribunal emphasized that mere inference or assumption based on private/internal records such as notebooks, diaries, or loose slips is insufficient. Such documents must be supported by independent, cogent, and tangible evidence, including statements of purchasers, distributors, or dealers, records of unaccounted raw material purchase or consumption, and corroborative physical evidence. Applying these principles to the facts, the Tribunal found that none of these tests were satisfied. There was no evidence of excess raw material procurement, no proof of excess electricity consumption, no identification of buyers or transporters of unaccounted goods, and no abnormal financial transactions. The private records seized were maintained in a rough manner, often relating to personal or other firms' transactions, and were not corroborated by any independent evidence. The statements of Directors and officials did not admit clandestine removal, and some statements were contradictory or retracted. The Tribunal also noted that stock verification conducted during the search revealed no discrepancies in raw materials or finished goods. Thus, the demand based solely on private documents and uncorroborated statements was held unsustainable. 2. Admissibility and evidentiary value of statements recorded during investigation under Section 9D The Tribunal considered the mandatory procedural safeguards under Section 9D of the Central Excise Act, which requires that statements recorded during search and seizure operations be admitted only after the person is produced before the adjudicating authority and the authority forms an opinion that admitting the statement is in the interest of justice. The Tribunal relied on the decision of the Chhattisgarh High Court in Hi Tech Abrasives Ltd. v. Commissioner of Central Excise & Customs, which held that without compliance with Section 9D, statements recorded during investigation cannot be treated as relevant evidence. In the present case, the adjudicating authority admitted statements recorded during investigation without examining the persons or forming the requisite opinion, thus violating Section 9D. Consequently, reliance on such statements was impermissible. 3. Whether the extended period of limitation under Section 11A could be invoked The Tribunal observed that the department had conducted periodic audits and inspections during the relevant period without raising any objection or initiating proceedings alleging clandestine removal. Since all facts were within the department's knowledge, invocation of the extended period of limitation was not justified. Therefore, the demand was barred by limitation. 4. Whether denial of cross-examination of witnesses violated principles of natural justice The appellants contended that they were denied the opportunity to cross-examine witnesses, including those responsible for maintaining the private notebooks seized during search. The Tribunal noted that such denial amounted to violation of natural justice principles and vitiated the proceedings. The adjudicating authority failed to consider this aspect. 5. Imposition of penalty on the company and Directors under Rule 26 The Tribunal held that penalty under Rule 26 can only be imposed if clandestine removal is proved. Since the demand itself was not sustainable due to lack of corroborative evidence, the condition precedent for penalty was not satisfied. The adjudicating authority's imposition of penalty on the Directors without sufficient evidence was unjustified. Significant Holdings "In cases of clandestine manufacture and clearances, certain fundamental criteria have to be established by Revenue which mainly are the following: (i) There should be tangible evidence of clandestine manufacture and clearance and not merely inferences or unwarranted assumptions; (ii) Evidence in support thereof should be of raw materials in excess of that contained as per the statutory records; instances of actual removal of unaccounted finished goods; discovery of such goods outside the factory; instances of sale of such goods to identified parties; receipt of sale proceeds; use of electricity far in excess of what is necessary; statements of buyers; proof of actual transportation of goods cleared without payment of duty; links between the documents recovered during the search and activities being carried on in the factory of production." "Reliance on private/internal records maintained for internal control cannot be the sole basis for demand. There should be corroborative evidence by way of statements of purchasers, distributors or dealers, record of unaccounted raw material purchased or consumed and not merely the recording of confessional statements." "Statements recorded during search and seizure operations cannot be treated as relevant evidence unless the person is produced before the adjudicating authority and the authority forms an opinion that admitting the statement is in the interest of justice as mandated under Section 9D of the Central Excise Act." "The extended period of limitation cannot be invoked where the department had knowledge of all facts from periodic audits and inspections and did not initiate proceedings within the normal limitation period." "Denial of cross-examination of witnesses whose statements form the basis of demand amounts to violation of principles of natural justice and vitiates the proceedings." "Penalty under Rule 26 cannot be imposed in the absence of proved clandestine removal of goods." Applying these principles to the facts, the Tribunal concluded that the demand of Central Excise duty based solely on private documents and uncorroborated statements was not sustainable. Consequently, the penalties imposed on the company and its Directors were also set aside. The impugned orders were quashed, and the appeal was allowed.
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