The Customs Appellate Tribunal has delivered a pivotal ruling that redefines the evidentiary and procedural foundations for imposing penalties under the Customs Act, 1962. By invalidating penalties based on non-compliant statements, the judgment reinforces that mens rea cannot be inferred from procedural violations, setting a new standard for enforcement actions in customs matters.
Background & Facts
The Dispute
The dispute arose from the seizure of 6.9 kg of gold bars by the Directorate of Revenue Intelligence on 20 March 2021, during transit from Ahmedabad to Indore. The appellants, Mohammad Nisar Mew and Ajay Kumar Jain, were employees of M/s. Pulak Ornaments LLP and were allegedly transporting the gold under instructions from Gourav Jain, a partner in the same firm. The authorities alleged the gold was smuggled foreign-origin bullion, concealed in a secret cavity of the vehicle.
Procedural History
- 20 March 2021: Gold seized by DRI during transit; statements recorded under Section 108 of the Customs Act
- 30 April 2021: Mitul Kumar Patel of M/s. S.R. & Co. submitted documents proving lawful purchase of gold from M/s. Ariplutus Metals Pvt. Ltd.
- 17 September 2021: Show cause notice issued to appellants under Section 112(b)(i) alleging smuggling and concealment
- 9 September 2022: Additional Commissioner imposed penalties, finding appellants had mens rea due to concealment and repeated trips
- 11 October 2023: Commissioner (Appeals) dismissed appeals, upholding penalties based on statements and modus operandi
- 6 February 2026: Customs Appellate Tribunal allowed appeals, setting aside penalties
Relief Sought
The appellants sought quashing of the penalty orders under Section 112(b)(i), arguing that their statements under Section 108 were inadmissible due to non-compliance with Section 138B, and that no mens rea could be established without lawful evidence.
The Legal Issue
The central question was whether Section 112(b)(i) of the Customs Act, 1962 permits imposition of penalty based on statements recorded under Section 108 when the mandatory procedural safeguards under Section 138B have not been followed, and whether mens rea can be presumed solely from conduct in the absence of legally admissible evidence.
Arguments Presented
For the Appellant
Shri Hardik Modh, Advocate, argued that the statements of the appellants and Gourav Jain recorded under Section 108 were inadmissible because the procedural requirements of Section 138B - which mandates recording statements in the presence of a legal practitioner or authorized representative - were not complied with. He relied on the Tribunal’s own earlier decision in Customs Appeal No. 50647 of 2024, which had set aside penalties against Gourav Jain on identical grounds. He further contended that mere employment, receipt of nominal additional payment, and travel to collect goods cannot establish mens rea without proof of actual knowledge of illegality.
For the Respondent
Shri Nikhil Mohan Goyal, Authorized Representative for the Department, supported the Commissioner (Appeals)’s finding that the appellants’ repeated trips, use of concealed compartments, and failure to produce documents at the time of seizure demonstrated mens rea. He argued that Section 138B is procedural and its non-compliance does not invalidate the substance of the statements, especially where the conduct itself indicates guilt.
The Court's Analysis
The Tribunal conducted a rigorous analysis of the interplay between Section 108 and Section 138B of the Customs Act. It held that while Section 108 permits recording of statements during investigation, Section 138B imposes a mandatory procedural safeguard to ensure fairness and voluntariness. The Tribunal emphasized that Section 138B is not a mere formality but a substantive right designed to prevent coercion and ensure due process.
"The failure to comply with Section 138B renders the recorded statements legally inadmissible for the purpose of establishing guilt or mens rea. The Tribunal cannot rely on such statements to infer intention, especially where the underlying goods have been found not to be smuggled."
The Tribunal noted that in Customs Appeal No. 50647 of 2024, it had already held that the gold bars were not smuggled, as lawful purchase documents were produced, albeit belatedly. Since the gold was not proven to be smuggled, the foundation for invoking Section 111(d) and Section 111(h) collapsed. Consequently, the basis for inferring mens rea under Section 112(b)(i) - which requires proof of intent to evade customs law - was entirely undermined.
The Tribunal further observed that the appellants’ roles were purely operational: they were employees receiving fixed salaries and modest additional payments for travel. Their conduct, without evidence of prior knowledge, participation in planning, or benefit beyond employment, could not be equated with active participation in smuggling. The use of a secret cavity, while suspicious, was insufficient to establish mens rea without legally valid corroborative evidence.
The Verdict
The appellants prevailed. The Tribunal held that penalties under Section 112(b)(i) cannot be sustained where the underlying statements relied upon for establishing mens rea are rendered inadmissible due to non-compliance with Section 138B, and where the goods in question are not proven to be smuggled. The penalty orders were set aside.
What This Means For Similar Cases
Procedural Compliance Is Non-Negotiable
- Practitioners must now challenge any penalty order based on Section 108 statements if Section 138B was not followed
- The burden shifts to the Department to prove compliance with Section 138B; failure invalidates the evidentiary value of statements
- This applies equally to civil and penal proceedings under the Customs Act
Mens Rea Cannot Be Presumed from Conduct Alone
- Employment, travel, or receipt of incidental payments do not equate to knowledge of illegality
- Courts will no longer infer mens rea from circumstantial conduct without legally admissible evidence of intent
- Defense strategies must focus on challenging the admissibility of statements and proving lack of actual knowledge
Documentary Evidence Supersedes Allegations
- Even delayed production of purchase invoices can rebut allegations of smuggling if they establish lawful origin
- Authorities must prove contraband status at the time of seizure; retrospective documentation can negate the presumption of illegality
- Practitioners should prioritize gathering and preserving purchase records, GST invoices, and transport documents from the outset
