2019 (1) TMI 172 - AT - Central Excise

Clandestine removal - demand based on assumptions and presumptions - alleged parallel invoices - the proposed confiscation of the stock and the penalties confirmed on the Director of the appellant Company on the ground of unaccounted production and clearances being evidenced by the categorical admission of the Director and Supervisor of the appellant Company - Held that - Bare reading of provisions of Rule 25 and 26 of CER, 2002, makes it clear that the confiscation and penalty can be imposed subject to the provisions to Section 11AC of Central Excise Act, 1944 i.e. first of all it need to be seen as to whether the act of the appellant are that of fraud, collusion, wilful misstatement suppression of fact or any contravention of the provisions of law and that too with an intention to evade duty - Thus, it becomes clear that the Commissioner (Appeals) has committed an error while holding that mensrea is not required to Order confiscation under Rule 25. Whether the documents recovered vide Panchnama dated 01.06.2016 and the statements of the Company s Director allegedly being an admission are sufficient for proving the alleged clandestine removal? - Held that - Though mere irregularity and even illegality in case of search and seizure cannot by itself render the documents seized in the case of such search or seizure to be inadmissible in evidence but the fact of the present case is that the Panchnama merely records that the officers on search found certain records which does not give the description of so called record except saying that the same are described in the annexure to SCN. All this information was absolutely necessary to give credibility to the Panchnama particularly when the entire proceedings in that record are sought to be challenged and disputed and also particularly when the permission to cross examine the witnesses of Panchnama was sought however was not granted for. Further basis of confirming the confiscation has been the evidence as that of eye estimation for determination of stock but it has been a settled principle that the allegations of clandestine removal of eye estimation is not correct. The alleged admission of the Director of appellant - Held that - The allegations of clandestine removal are serious in nature and the clandestine activities are quasi criminal hence the revenue alleging the same is required to prove it by sufficient corroborative evidences - there is nothing on record to show that the officers of revenue had done anything for the weightment of the stock as arrived by them. They have not even produced any inventory to show that the stock was physically verified by them. Nor it is the case of the Revenue that the alleged excess stock was not entered in the RG Register deliberately and with malafide intent to remove goods clandestinely. The findings of adjudicating authority for the confiscation of the impugned stock and the imposition of the penalty upon Mr. Bharat Shukla are the findings without any basis and without any cogent and corroborative evidence - appeal allowed - decided in favor of appellant.

Issues Involved:

1. Alleged clandestine clearance of goods.
2. Validity of Panchnama and physical stock verification.
3. Application of Rule 25 and Rule 26 of Central Excise Rules, 2002.
4. Requirement of mens rea for imposition of penalty.
5. Admissibility of statements and documents as evidence.
6. Principles of natural justice and opportunity for cross-examination.

Detailed Analysis:

1. Alleged clandestine clearance of goods:
The appellants were accused of clandestine clearance of TMT Bars and mis-rolls based on a discrepancy between the physical stock and the stock recorded in the Daily Production register (RG-I). The Department observed excess stock during a search conducted on 01.06.2016, leading to the issuance of a Show Cause Notice (SCN) alleging clandestine clearance from February to May 2016.

2. Validity of Panchnama and physical stock verification:
The appellants argued that the Panchnama was vitiated due to the lack of witness testimony and the opportunity for cross-examination. The physical verification of stock was based on eye estimation, which the appellants claimed could lead to significant errors. The Tribunal noted that proper procedures for documenting and safeguarding the seized documents were not followed, casting doubt on the credibility of the Panchnama.

3. Application of Rule 25 and Rule 26 of Central Excise Rules, 2002:
The adjudicating authority confirmed the confiscation and penalties based on Rule 25 and Rule 26, which allow for such actions if excisable goods are not accounted for or are removed in contravention of the rules. However, the Tribunal emphasized that these rules are subject to Section 11AC of the Central Excise Act, which requires proof of fraud, collusion, willful misstatement, suppression of facts, or intent to evade duty.

4. Requirement of mens rea for imposition of penalty:
The Tribunal referred to the Delhi High Court's interpretation that Rule 25 is subject to Section 11AC, which necessitates the presence of mens rea (intent to evade duty) for imposing penalties. The Commissioner (Appeals) erred in holding that mens rea was not required for confiscation under Rule 25.

5. Admissibility of statements and documents as evidence:
The Tribunal found that the statements of the Director and Supervisor, alleged to be admissions of clandestine removal, were not corroborated by sufficient evidence. The Panchnama did not provide a detailed description of the seized documents or the steps taken to ensure their integrity. The denial of cross-examination of witnesses further weakened the credibility of the evidence.

6. Principles of natural justice and opportunity for cross-examination:
The Tribunal highlighted the importance of adhering to the principles of natural justice. The denial of the opportunity to cross-examine witnesses who prepared the Panchnama was a significant procedural lapse. The Supreme Court's ruling in Andaman Timber Industries emphasized that denying cross-examination when the truthfulness of statements is contested is unjustified.

Conclusion:
The Tribunal set aside the findings of the adjudicating authority, holding that the confiscation of the stock and the imposition of penalties were not based on cogent and corroborative evidence. The appeals were allowed, emphasizing the need for adherence to proper procedures, the requirement of mens rea for penalties, and the importance of natural justice in adjudication processes.

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