The Customs Appellate Tribunal has delivered a pivotal ruling clarifying the application of Section 123 of the Customs Act, 1962 in cases involving gold seizures, emphasizing that the burden of proving smuggling does not automatically fall on the accused when the seized goods lack foreign markings and the accused is neither the possessor nor the claimed owner. The judgment also reinforces the mandatory procedural safeguards under Section 138B for the admissibility of statements recorded under Section 108, setting a new standard for evidentiary reliability in customs adjudication.
Background & Facts
The Dispute
M/s. S.R. & Co., a gold bullion trading firm, was implicated in the seizure of 69kg of gold bars by the Directorate of Revenue Intelligence (DRI) on 20.03.2021. The gold was found in a vehicle driven by Ajay Kumar and Mohammad Nisar Mew, who had taken delivery from Gourav Jain of M/s. Pulak Ornaments LLP. The appellant, Mitul Kumar Patel, a partner in M/s. S.R. & Co., was alleged to be the supplier of the gold. The DRI suspected the gold was smuggled foreign-origin bullion, re-cast to conceal its origin.
Procedural History
- 20.03.2021: Gold bars seized during transit; statements recorded under Section 108 from Ajay Kumar, Mohammad Nisar Mew, and Gourav Jain.
- 21.03.2021: Search conducted at appellant’s premises; purchase and sale invoices, digital records seized.
- 30.04.2021: Appellant submitted a written statement asserting the gold was purchased from M/s. Ariplutus Metals Pvt. Ltd. under invoice dated 19.03.2021 and sold to Pulak Ornaments LLP under invoice dated 20.03.2021.
- 17.09.2021: Show cause notice issued under Sections 112(b)(i) and 114AA, alleging smuggling, fabrication of invoices, and malafide intent.
- 09.09.2022: Additional Commissioner confirmed penalties, rejecting appellant’s documents as backdated and fabricated.
- 11.10.2023: Commissioner (Appeals) dismissed appeal, relying on Section 108 statements and holding that burden under Section 123 was not discharged.
- 06.02.2026: Customs Appellate Tribunal allowed appeal, setting aside penalties.
Relief Sought
The appellant sought quashing of the penalty orders under Sections 112(b)(i) and 114AA, arguing that the statements relied upon were inadmissible due to non-compliance with Section 138B, and that the burden under Section 123 did not apply to him as he neither possessed nor claimed ownership of the seized gold.
The Legal Issue
The central question was whether Section 123 of the Customs Act, 1962 imposes the burden of proving non-smuggling on a person who neither possessed nor claimed ownership of the seized gold, and whether statements recorded under Section 108 can be relied upon without compliance with the mandatory procedure under Section 138B.
Arguments Presented
For the Appellant
Shri Somesh Jain, Advocate, contended that:
- Section 123 applies only when goods are seized from the possession of the person or when that person claims ownership. Since the gold was seized from the vehicle of third parties and the appellant never claimed ownership, the burden did not shift to him.
- Statements under Section 108 were inadmissible because the adjudicating authority failed to examine the declarants as witnesses or record an opinion under Section 138B(1)(b), rendering them legally irrelevant.
- Production of purchase and sale invoices after seizure does not imply fabrication; courts have consistently held that delayed production does not invalidate genuine documents.
- The gold’s purity (99.20%) and absence of foreign marking negated the Revenue’s reasonable belief of smuggling, shifting the burden back to the Department.
For the Respondent
Shri Nikhil Mohan Goyal, Authorized Representative, argued that:
- Section 123 applied because the appellant was the supplier and had admitted to the transaction, making him a person "concerned" in the smuggling.
- Statements under Section 108 were corroborated by documentary evidence and were admissible as part of the investigation record.
- The timing of invoice production - after seizure - indicated fabrication, and the absence of cash payment supported the inference of smuggling.
- The Tribunal’s prior decisions in Balwant Raj Soni and Kapildeo Prasad were distinguishable as they involved possession.
The Court's Analysis
The Tribunal conducted a meticulous review of statutory provisions and binding precedents. It held that Section 123 is not a blanket burden-shifting provision. The provision explicitly states that the burden lies on "the person from whose possession the goods were seized" or "any other person who claims to be the owner." The appellant was neither. The gold was seized from a vehicle driven by third parties; the appellant had no physical custody, nor did he assert ownership. The Tribunal emphasized that the Revenue’s belief in smuggling must be grounded in objective indicators - such as foreign markings or purity exceeding 99.9% - to trigger Section 123. Here, the gold’s purity was below 99.9% and bore no foreign embossment, making the Revenue’s assumption legally unsustainable.
"The burden under Section 123 cannot be thrust upon a person who neither possessed the goods nor claimed ownership. The Revenue must establish a reasonable belief based on tangible characteristics of the seized goods."
The Tribunal further held that Section 138B(1)(b) imposes a mandatory two-step procedure: (1) examination of the declarant as a witness before the adjudicating authority, and (2) a reasoned opinion that the statement should be admitted in the interests of justice. The failure to examine Ajay Kumar, Mohammad Nisar Mew, or Gourav Jain rendered their Section 108 statements legally inadmissible. The Tribunal cited Ambika International, Hi Tech Abrasives, and Additional Director General v. Its My Name Pvt. Ltd. to affirm that non-compliance with Section 138B renders such statements irrelevant, regardless of corroboration.
The Tribunal also rejected the inference that delayed production of invoices equated to fabrication. It relied on Shri Balwant Raj Soni and Sri Samir Kumar Roy, holding that the law imposes no obligation to carry documents during transport of gold. The absence of documents at the time of seizure cannot be used to invalidate them later, especially when the Revenue failed to verify their authenticity through independent inquiry.
The Verdict
The appellant won. The Tribunal held that Section 123 of the Customs Act does not impose the burden of proving non-smuggling on a person who neither possessed nor claimed ownership of the seized gold, and that Section 138B mandates strict compliance for the admissibility of statements under Section 108. The penalty orders under Sections 112(b)(i) and 114AA were set aside.
What This Means For Similar Cases
Burden Under Section 123 Is Not Automatic
- Practitioners must challenge the applicability of Section 123 where the accused is not the possessor or claimant of ownership.
- The Revenue must establish reasonable belief based on physical characteristics of the gold (e.g., foreign marking, purity >99.9%) before shifting the burden.
- In town-seizure cases with low-purity, unmarked gold, the burden remains on the Department to prove smuggling.
Statements Under Section 108 Are Inadmissible Without Section 138B Compliance
- Any reliance on Section 108 statements without examining the declarant and recording a reasoned opinion under Section 138B(1)(b) is legally void.
- Practitioners should file objections at the earliest stage, citing Ambika International and Hi Tech Abrasives to exclude such evidence.
- Cross-examination cannot be granted unless the statement is first admitted under Section 138B - procedural compliance is non-negotiable.
Delayed Production of Documents Does Not Equal Fabrication
- Invoices, bank records, or purchase proofs produced after seizure are not ipso facto fabricated.
- The Revenue must independently verify the authenticity of documents rather than rely on timing alone.
- Tribunals and courts have consistently held that absence of documents during transit is not illegal under current gold trade policies.
