The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Ahmedabad has delivered a significant ruling on the procedural requirements for imposing penalties under Rule 26 of the Central Excise Rules, 2002. The Tribunal held that penalties cannot be sustained based solely on confessional statements without corroborative evidence, and the adjudicating authority must specify the exact clause of Rule 26 under which the penalty is imposed. This judgment reinforces the principles of natural justice and strict construction of penal provisions in excise law.
Background & Facts
The Dispute
The appeals arose from Order-in-Original No. SIL-EXCUS-000-COM-105-16-17 dated 11.04.2017 passed by the Commissioner, Central Excise, Customs & Service Tax, Audit-III, Vapi. The Commissioner imposed penalties under Rule 26 of the Central Excise Rules, 2002 on two individuals associated with M/s. Rathi Re-rollers (India) Limited (hereinafter M/s. Rathi):
- Shri Sharad Haribhai Naik, Authorised Signatory and Liaisoning Officer (Personnel and Administration), was penalised Rs. 1,00,000
- Shri Vinod Kumar Mittal, Director, was penalised Rs. 50,00,000
Key Facts
- M/s. Rathi was engaged in manufacturing M.S. Bars falling under Chapter Heading 72 of the Central Excise Tariff Act, 1985, and was availing Cenvat Credit under the Cenvat Credit Rules, 2004
- Based on intelligence, searches were conducted at the factory premises in Silvassa, New Delhi, and Vapi between December 2009 and January 2010
- The department alleged clandestine clearance of:
- 5306.408 MT of M.S. Bars and scraps without invoices or duty payment
- 1134.9 MT of Mill Scales during April 2008 to January 2009 without duty payment
- 7693.62 MT of M.S. Bars through M/s. Mahadev Roadlines under invoices issued in the name of M/s. Sai Steel Suppliers and M/s. B K Steel during 2007-08 to 2009-10 without duty payment
- 56.44 MT of M.S. Bars through M/s. Jaipur Transport Corporation under invoices issued in the name of M/s. Sai Steel Suppliers during May 2009
- The department estimated duty evasion of Rs. 4,24,42,283 under Rules 4, 6, 8, 10, 11, and 12 of the Central Excise Rules, 2002
Procedural History
- 03-04.12.2009: Panchanama proceedings conducted; Shri Vinod Kumar Mittal admitted shortages in stock
- Post-December 2009: Multiple summons issued to Shri Mittal, who failed to appear or produce records
- 11.04.2017: Commissioner passed Order-in-Original imposing penalties under Rule 26
- 2017: Both appellants filed appeals before CESTAT Ahmedabad (Appeal Nos. 11524/2017-SM and 11670/2017-SM)
- 07.04.2026: Final hearing before CESTAT
- 06.07.2026: CESTAT delivered final order
The Parties' Positions
Appellants' Contentions:
- The adjudicating authority relied solely on statements recorded during proceedings without providing an opportunity for cross-examination, violating Section 9D of the Central Excise Act, 1944
- No corroborative evidence was presented to support the statements
- Rule 26 contains multiple clauses, but the Commissioner failed to specify which clause was invoked, rendering the penalty unsustainable
- Cited precedents: CCE, Vadodara-1 vs. Paresh Ramabhai Amin (2026) 39 Centax 379 (Guj.) and Western India Ceramics (2026) 38 Centax 212 (Tri. Ahmd)
- Relied on Amrit Foods 2005 (190) ELT 433 (SC) to argue that penalty provisions must be construed strictly
Revenue's Contentions:
- Penalties were imposed based on the appellants' statements during investigation
- Shri Mittal admitted to shortages during Panchanama proceedings and failed to comply with summons
- Shri Naik accepted knowledge of clandestine clearances and his role as Authorised Signatory
- Argued that the penalties were justified under Rule 26
Relief Sought
The appellants sought:
- Setting aside of the Order-in-Original dated 11.04.2017
- Quashing of penalties imposed under Rule 26
- Allowance of the appeals
The Legal Issue
The Tribunal addressed two critical questions:
- Whether penalties under Rule 26 of the Central Excise Rules, 2002 can be imposed based solely on confessional statements without corroborative evidence and without affording the opportunity of cross-examination under Section 9D of the Central Excise Act, 1944?
- Whether the adjudicating authority is required to specify the exact clause of Rule 26 under which the penalty is imposed, failing which the penalty order is unsustainable?
Arguments Presented
For the Appellants
- Violation of Section 9D: The Commissioner relied on statements recorded during proceedings without providing an opportunity for cross-examination, violating Section 9D(1)(b) of the Central Excise Act, 1944
- Lack of Corroborative Evidence: No independent evidence was presented to support the confessional statements
- Non-Specification of Rule 26 Clause: The Commissioner failed to specify which clause of Rule 26 was invoked, rendering the penalty order unsustainable under Amrit Foods 2005 (190) ELT 433 (SC)
- Precedents Cited: CCE, Vadodara-1 vs. Paresh Ramabhai Amin (2026) 39 Centax 379 (Guj.) and Western India Ceramics (2026) 38 Centax 212 (Tri. Ahmd)
For the Respondent
- Statements as Evidence: The penalties were justified based on the appellants' confessional statements during investigation
- Admissions During Proceedings: Shri Mittal admitted shortages during Panchanama, and Shri Naik accepted his role in clandestine clearances
- Penalty Justification: The department contended that the penalties were lawfully imposed under Rule 26
The Court's Analysis
The Tribunal conducted a detailed analysis of the legal principles governing the imposition of penalties under Rule 26 and the procedural safeguards under Section 9D of the Central Excise Act, 1944.
Corroborative Evidence Requirement
The Tribunal examined Section 9D(1)(b) of the Central Excise Act, 1944, which mandates that a person whose statement has been recorded must be examined as a witness before his statement can be relied upon. The provision states:
"9D. Relevancy of statements under certain circumstances. - (1) A statement made and signed by a person before any Central Excise Officer of a gazetted rank during the course of any inquiry or proceeding under this Act shall be relevant, for the purpose of proving, in any prosecution for an offence under this Act, the truth of the facts which it contains, - (b) when the person who made the statement is examined as a witness in the case before the Court and the Court is of opinion that, having regard to the circumstances of the case, the statement should be admitted in evidence in the interests of justice."
The Tribunal relied on the judgment in Commissioner, CGST and Central Excise, Vadodara-1 vs. Pareshbhai Ramabhai Amin (2026) 39 Centax 379 (Guj.), where the Gujarat High Court held:
"We do not find any illegality or infirmity in the order passed by the Tribunal. Moreover, reliance placed by the appellant in the case of N.S. Mahesh (supra) would not come to the rescue of the appellant in wake of the fact that the opportunity of being cross-examined was not afforded to the panchas and co-notices, more particularly when their statements have been relied upon while passing the Order in Original."
Similarly, in Western India Ceramics Pvt. Limited vs. Commissioner of C.E. & S.T., Vadodara-1 (2026) 38 Centax 212 (Tri. Ahmd.), the Tribunal held that statements of dealers and builders could not be relied upon without examination under Section 9D.
Applying these principles, the Tribunal observed that the Commissioner relied solely on the appellants' statements without any corroborative evidence. The Tribunal noted:
"In para 57 of the impugned order, learned Commissioner has observed that Shri Vinod Kumar Mittal, Director of M/s. Rathi has admitted shortage found in the stock during panchanama proceedings and admitted that they had received raw material but did not record the same in their statutory records with intent to utilize them in the manufacture of finished goods which were cleared without payment of Central Excise duty and without invoices. I am of the opinion that there is no sufficient evidence on record for imposing penalties upon Shri Vinod Kumar Mittal, Director of M/s. Rathi and Shri Sharad Haribhai Naik, Authorised Signatory of M/s. Rathi under Rule 26 of Central Excise Rules, 2002."
Specific Clause Invocation Requirement
The Tribunal further analysed Rule 26 of the Central Excise Rules, 2002, which enumerates specific offences for which penalties can be imposed. The Tribunal noted that the Commissioner failed to specify which clause of Rule 26 was invoked while imposing the penalties.
The Tribunal relied on Amrit Foods 2005 (190) ELT 433 (SC), where the Supreme Court held:
"Neither Show Cause Notice nor order of Commissioner specified which particular clause of Rule 173Q of erstwhile Central Excise Rules, 1944 had been allegedly contravened by appellant-assessee to be put on notice as to exact nature of contravention for which assessee was liable under provisions of Rule 173Q."
The Tribunal concluded:
"In view of the law laid down by Hon'ble Supreme Court in the above case, it was necessary for the Adjudicating Authority to have mentioned the exact clause or Section of the Rule 26."
Conclusion
The Tribunal held that the impugned order was unsustainable on two grounds:
- Lack of Corroborative Evidence: The penalties were based solely on confessional statements without corroborative evidence and without affording the opportunity of cross-examination under Section 9D
- Non-Specification of Rule 26 Clause: The Commissioner failed to specify the exact clause of Rule 26 under which the penalties were imposed
The Verdict
The CESTAT allowed the appeals and set aside the Order-in-Original dated 11.04.2017 to the extent of imposing penalties on the appellants. Specifically:
- The penalty of Rs. 1,00,000 imposed on Shri Sharad Haribhai Naik was quashed
- The penalty of Rs. 50,00,000 imposed on Shri Vinod Kumar Mittal was quashed
- The impugned order was set aside in its entirety regarding the penalties
What This Means For Similar Cases
Corroborative Evidence Is Mandatory for Penalty Imposition
- Statements Alone Are Insufficient: Confessional statements recorded during proceedings cannot form the sole basis for imposing penalties under Rule 26 unless supported by corroborative evidence
- Section 9D Compliance: The adjudicating authority must provide an opportunity for cross-examination of witnesses whose statements are relied upon, failing which the penalty order is liable to be set aside
- Precedential Value: Practitioners can rely on Paresh Ramabhai Amin and Western India Ceramics to challenge penalty orders based solely on uncorroborated statements
Specific Clause Invocation Is Non-Negotiable
- Strict Construction of Penal Provisions: Penalty provisions must be construed strictly, and the adjudicating authority must specify the exact clause of Rule 26 under which the penalty is imposed
- Show Cause Notice Requirements: The Show Cause Notice must clearly indicate the specific contravention alleged, and the penalty order must reflect the same
- Defence Strategy: Assessees can challenge penalty orders on the ground of non-specification of the Rule 26 clause, relying on Amrit Foods
Procedural Safeguards Reinforced
- Natural Justice Principles: The judgment reinforces the principles of natural justice, particularly the right to cross-examination and the requirement of corroborative evidence
- Evidentiary Standards: The Tribunal has set a higher evidentiary standard for penalty imposition, requiring independent evidence beyond confessional statements
- Appeal Grounds: Practitioners can cite this judgment to challenge penalty orders in excise, customs, and service tax matters where procedural lapses are evident
