The Customs, Excise & Service Tax Appellate Tribunal has clarified that penalty under Rule 26 of the Central Excise Rules, 2002 cannot be imposed unless the noticee is shown to have known or had reason to believe the excisable goods were liable to confiscation. This ruling reinforces the necessity of mens rea in administrative penalties and sets a critical precedent for enforcement proceedings under the Central Excise regime.
Background & Facts
The Dispute
The appellant, Shri Rajendra Prasad Baid, proprietor of a business in Nagpur, was issued a show cause notice dated 28.12.2020 by the Additional Director General (Adjudication), New Delhi, proposing penalty under Rule 26 of the Central Excise Rules, 2002 read with Rule 17 and Rule 18 of the Pan Masala Packing Machine (Capacity Determination and Collection of Duty) Rules, 2008. The penalty was imposed on the ground that the appellant was allegedly involved in the handling of excisable goods - specifically, pan masala - without proper duty payment. The order-in-original dated 27.09.2024 upheld the penalty of Rs. 10,000, the statutory minimum under Rule 26(1).
Key Facts
- The appellant was not the manufacturer or importer of the pan masala in question
- The goods were seized during transit from a warehouse in Delhi
- The show cause notice dated 28.12.2020 did not allege that the appellant knew or had reason to believe the goods were liable to confiscation under the Central Excise Act, 1994 or the 2002 Rules
- A separate show cause notice dated 27.01.2018, which did propose confiscation and penalty under Rule 26, named a different person as the noticee
- The appellant was not named or referred to in the 27.01.2018 notice
- No evidence was produced to establish the appellant’s knowledge of the excise liability or confiscatory status of the goods
Procedural History
- 27.01.2018: Show cause notice issued to another party proposing confiscation and penalty under Rule 26
- 28.12.2020: Show cause notice issued to the appellant proposing penalty under Rule 26, without alleging knowledge or reason to believe
- 27.09.2024: Order-in-original passed by Additional Director General (Adjudication) imposing penalty of Rs. 10,000
- 19.02.2026: Hearing before CESTAT, Principal Bench, New Delhi
- 06.04.2026: Final order passed by CESTAT
Relief Sought
The appellant sought setting aside of the penalty imposed under Rule 26, arguing that the show cause notice failed to establish the essential ingredient of knowledge or reason to believe, rendering the penalty legally unsustainable.
The Legal Issue
The central question was whether Rule 26(1) of the Central Excise Rules, 2002 permits imposition of penalty against a person who is not alleged to have known or had reason to believe that the excisable goods were liable to confiscation.
Arguments Presented
For the Appellant
Shri Ankur Upadhyay, Advocate, contended that Rule 26(1) is a penal provision requiring mens rea. He emphasized that the show cause notice dated 28.12.2020 contained no allegation that the appellant knew or had reason to believe the goods were liable to confiscation. He relied on the Tribunal’s decision in Shri Ramesh Garg, Chairman of M/s K.S. Oil Ltd. v. Commissioner, CGST, Customs & Central Excise, which held that without confiscation or a finding of liability to confiscation, the penalty under Rule 26 cannot be imposed. He further argued that the appellant’s inclusion in the notice was a procedural error, as he was not the party against whom confiscation was proposed.
For the Respondent
Shri P.R.V. Ramanan, Special Counsel, and Shri Rakesh Kumar, authorized representative, argued that the appellant’s involvement in the movement of goods was sufficient to attract liability under Rule 26. They contended that the appellant’s role as a consignee or transporter inherently implied constructive knowledge. However, they did not point to any specific allegation in the show cause notice establishing actual or constructive knowledge, nor did they cite any precedent supporting liability without mens rea.
The Court's Analysis
The Tribunal examined the language of Rule 26(1), which states: "Any person who acquires possession of, or is in any way concerned in transporting, removing, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with, any excisable goods which he knows or has reason to believe are liable to confiscation under the Act or these rules, shall be liable to a penalty..."
The Court observed that the phrase "which he knows or has reason to believe" is not a mere procedural formality but a substantive condition precedent to liability. The Tribunal noted that the show cause notice dated 28.12.2020, which formed the basis of the penalty order, contained no such allegation. The notice merely stated that the appellant was involved in the handling of goods without specifying his awareness of their confiscatory status.
The Tribunal further relied on its own precedent in Shri Ramesh Garg, where it held:
"In the impugned order, goods have not been confiscated nor have any goods been held liable to be confiscated. We, therefore find, the essential ingredient to impose penalty under Rule 26, namely, confiscation of the goods or goods are liable for confiscation, has not been fulfilled in this case. Therefore, the penalty could not have been imposed under Rule 26."
The Court emphasized that the absence of any allegation of knowledge or reason to believe renders the penalty proceeding legally defective. The fact that another notice dated 27.01.2018 proposed confiscation against a different person did not retroactively impute knowledge to the appellant. The Tribunal held that administrative penalties, particularly those with penal consequences, must strictly comply with the statutory conditions laid down by Parliament.
The Verdict
The appeal was allowed. The Tribunal set aside the penalty imposed under Rule 26 of the Central Excise Rules, 2002 in the order dated 27.09.2024. The penalty of Rs. 10,000 is quashed. No costs were awarded.
What This Means For Similar Cases
Knowledge Is a Mandatory Element
- Practitioners must ensure that show cause notices under Rule 26 explicitly allege that the noticee knew or had reason to believe the goods were liable to confiscation
- Absence of such an allegation is a fatal defect that cannot be cured by subsequent evidence or general allegations of involvement
Procedural Defects Cannot Be Overlooked
- Merely being involved in the movement or handling of goods is insufficient to attract penalty under Rule 26
- The burden of pleading and proving knowledge lies squarely on the department
- Tribunals and courts will not infer knowledge from circumstantial involvement alone
Precedent Reinforces Procedural Rigor
- The Ramesh Garg precedent is now binding on all adjudicating authorities under the Central Excise regime
- Similar penalties imposed under analogous provisions in GST or Customs law may be challenged on the same ground
- Practitioners should routinely scrutinize show cause notices for compliance with statutory mens rea requirements before filing replies or appearing before adjudicating officers
