2025 (1) TMI 674 - AT - Central Excise

Clandestie removal - difference between balance sheet and ER-1 return - demand of clandestine manufacture or clearance confirmed purely on assumption and presumption - Invocation of Extended period of limitation. Whether the difference between the financial statement and ER-1 returns is sufficient proof of alleged clandestine removal? - HELD THAT - The entire case of Revenue is based upon the audit objection which is based on the comparison of entries made in the statutory records vis- -vis the balance sheet. It is observed that the appellant has explained the differences by referring to the number of their final product as entered in ER-1 returns as also on balance sheet. Apart from that it is found that there is virtually no evidence on record to indicate and establish clandestine manufacture and removal of goods. It is well settled law that the onus to prove clandestine activities is upon the Revenue and the same is required to be discharged by production of positive evidences. Such a demand cannot be confirmed on assumptions and presumptions - This Tribunal in the case of Sharma Chemical Vs. CCE 2000 (12) TMI 161 - CEGAT, KOLKATA has held that noting in the private records may raise suspicion but for confirming the charge of clandestine removal based on those records, there must be corroborative evidence in the form of installed capacity, raw material, utilization, labour employed, power consumed, goods actually manufactured and packed etc. Similar have been the findings of Hon ble High Court of Allahabad in their another decision titled as Commissioner of C.Ex., Meerut-I Vs. R.A. Castings Pvt. Ltd. 2010 (9) TMI 669 - ALLAHABAD HIGH COURT holding that the income shown in balance sheets unless and until is linked to some other clinching evidence, cannot be the proof of clandestine removal of goods, has been upheld by Hon ble Apex Court in the case of Commissioner Vs. R.A. Castings Pvt. Ltd. 2011 (1) TMI 1302 - SC ORDER . In light of this discussion, the department has failed to prove the allegations of clandestine removal of goods and noticed difference in the balance sheet compared with the ER-1 return is the presumptory basis of raising the said allegation - the findings in the impugned order to this aspect are therefore liable to be set aside. Based on said difference whether appellant is liable to pay duty on the differential amount? - HELD THAT - It is a settled principle of law that service tax can be levied only when there is a clear identification of service provider, service recipient and consideration paid for the same. In the absence of any such evidence of the service recipient and the service provided, service tax cannot be demanded and confirmed. For this reason, it is not open for the Department to raise demands on the basis of other statutory returns like Income Tax Returns or balance sheets without proving that such service has been rendered by the assessee and consideration thereof has been received. Similarly, no service tax demand can be raised and confirmed on the basis of notional income. Section 32(2) of Indian Evidence Act, 1872 also permits acceptance of such document without a formal proof. The recent decisions of the Tribunal, as follows, have also held that the difference between the financial statements of the assessee and the returns cannot be the sole basis of the demand confirmed. Invocation of Extended period of limitation - HELD THAT - The show cause notice has been issued invoking the provision of sub-section (1) of Section 73 of Finance Act, 1994. It has already been observed that the demand has been confirmed on the basis of assumptions and that the no evidence has been produced by the department to support the allegations to suggest any positive action of the appellant to have any intent to evade the duty - Since, the burden was upon the department to prove the allegations which remains undischarged. The extended period of limitation and the provision of Section 73(1) of Central Excise Act, 1944 has wrongly been invoked. Conclusion - i) The department failed to prove clandestine removal and that the demand based on financial discrepancies was unsustainable. ii) The extended period of limitation and the provision of Section 73(1) of Central Excise Act, 1944 has wrongly been invoked. iii) The show cause notice itself is barred by time. In fact, the imposition of penalty is also liable to be set aside. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment primarily revolves around two core legal questions:

• Whether the difference between the financial statement and ER-1 returns is sufficient proof of alleged clandestine removal of goods?
• Based on the said difference, whether the appellant is liable to pay duty on the differential amount?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the difference between the financial statement and ER-1 returns is sufficient proof of alleged clandestine removal?

• Relevant legal framework and precedents: The court referenced several precedents, including Sharma Chemical Vs. CCE and Continental Cement Company Vs. Union of India, which emphasize the necessity for corroborative evidence beyond mere discrepancies in financial documents to substantiate claims of clandestine removal.
• Court's interpretation and reasoning: The Tribunal observed that the entire case was based on audit objections arising from discrepancies between statutory records and balance sheets. It emphasized that the burden of proof lies with the Revenue to establish clandestine activities through positive evidence rather than assumptions.
• Key evidence and findings: The appellant provided explanations for the discrepancies and submitted a Chartered Accountant's certificate for reconciliation, which the department failed to consider adequately.
• Application of law to facts: The Tribunal held that discrepancies alone, without corroborative evidence of clandestine manufacture and removal, are insufficient for confirming the demand.
• Treatment of competing arguments: The appellant argued that the discrepancy was not evidence of clandestine removal, while the department insisted that the appellant needed to justify the differences. The Tribunal sided with the appellant, noting the lack of evidence from the department.
• Conclusions: The Tribunal concluded that the department failed to prove the allegations of clandestine removal, and the findings in the impugned order regarding this aspect were set aside.

Issue 2: Based on said difference, whether appellant is liable to pay duty on the differential amount?

• Relevant legal framework and precedents: The Tribunal referred to precedents such as Synergy Audio Visual Workshop (P) Ltd. and Indian Oil Corporation, which establish that service tax demands cannot be based on notional income or discrepancies in statutory returns without clear evidence of services rendered and consideration received.
• Court's interpretation and reasoning: The Tribunal emphasized that service tax can only be levied when there is clear evidence of service provision and payment. It rejected the notion that discrepancies in financial documents alone could justify tax demands.
• Key evidence and findings: The appellant's Chartered Accountant certificate, which reconciled the discrepancies, was a critical piece of evidence that the department failed to consider appropriately.
• Application of law to facts: The Tribunal found that the department did not provide evidence of services rendered or consideration received, thus invalidating the demand based on financial discrepancies.
• Treatment of competing arguments: The appellant argued against the basis of the demand, while the department relied on the discrepancies. The Tribunal favored the appellant, highlighting the lack of substantial evidence from the department.
• Conclusions: The Tribunal held that the demand based on financial discrepancies was unsustainable, and the order was set aside.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "It is well settled law that the onus to prove clandestine activities is upon the Revenue and the same is required to be discharged by production of positive evidences. Such a demand cannot be confirmed on assumptions and presumptions."
• Core principles established: The judgment reinforced the principle that discrepancies in financial documents alone are insufficient to substantiate claims of clandestine removal or justify tax demands. The burden of proof lies with the Revenue to provide positive evidence.
• Final determinations on each issue: The Tribunal concluded that the department failed to prove clandestine removal and that the demand based on financial discrepancies was unsustainable. The appeal was allowed, and the order under challenge was set aside.