The Customs, Excise & Service Tax Appellate Tribunal has delivered a significant ruling clarifying the strict evidentiary and mens rea requirements for imposing penalties under Section 112(b) of the Customs Act, 1962. The decision reinforces that mere association with third-party allegations, without direct evidence of knowledge or physical involvement with confiscable goods, cannot sustain a penalty order.
Background & Facts
The Dispute
M/s. Rathi Iron & Steel Industries Ltd., a manufacturer of MS Bars and Rods registered with the Central Excise Department in Pithampur, was named as a noticee in a show cause notice issued on 24.08.2012 by the Directorate General of Central Excise Intelligence (DGCEI). The notice alleged that the appellant had purchased MS Ingots that were clandestinely removed from the Special Economic Zone (SEZ) premises of M/s. New Tech Abrasives Ltd. (NTAL) without payment of customs duty, thereby attracting liability under Section 112(b) of the Customs Act, 1962.
Key Facts
- The appellant was not the subject of any search or seizure; no incriminating documents, invoices, ledgers, or transport records were recovered from its premises.
- No statement of any director, employee, or authorized representative of the appellant was recorded under Section 108 of the Customs Act.
- The show cause notice did not specify the quantity, value, date, or mode of purchase of the alleged goods by the appellant.
- The appellant’s name did not appear in the list of confirmed buyers referenced in the notice.
- The allegations against the appellant were based solely on uncorroborated statements of three transporters, recorded under Section 108, which were identical in wording and appeared to be dictated.
- The appellant filed a detailed reply on 21.01.2014 denying all allegations and highlighting the absence of any corroborative evidence.
Procedural History
- 23.11.2009: Searches conducted at NTAL’s premises and employee residences by DGCEI.
- 24.08.2012: Show cause notice issued to NTAL and multiple parties, including the appellant, proposing duty demand and penalty under Section 112(b).
- 21.01.2014: Appellant filed detailed reply denying allegations and challenging evidentiary basis.
- 31.07.2019: Commissioner of Customs, Indore, passed order imposing penalty of Rs. 10,00,000 on the appellant under Section 112(b).
- 28.01.2026: Hearing before CESTAT, Principal Bench, New Delhi.
- 19.05.2026: Final order passed by CESTAT.
Relief Sought
The appellant sought setting aside of the penalty order dated 31.07.2019, arguing that the penalty was imposed without compliance with mandatory procedural safeguards and without proof of the essential ingredients of Section 112(b).
The Legal Issue
The central question was whether Section 112(b) of the Customs Act, 1962 permits imposition of penalty against a person based solely on vague, uncorroborated third-party statements, in the absence of any evidence establishing knowledge that the goods were liable to confiscation or physical involvement with such goods.
Arguments Presented
For the Appellant
Ms. Surbhi Sinha, Advocate, submitted that: (i) The penalty was based exclusively on uncorroborated statements of three transporters, which were identical and appeared to be dictated; (ii) The procedure under Section 138B of the Customs Act - which mandates recording of statements under oath and cross-examination - was not followed, rendering the statements inadmissible; (iii) No documentary or physical evidence linked the appellant to the alleged goods; (iv) The show cause notice did not allege confiscation of goods under Section 111, which is a precondition for invoking Section 112(b); and (v) There was no evidence of mens rea or knowledge on the part of the appellant that the goods were liable to confiscation.
For the Respondent
Shri Ajay Jain, Special Counsel for the Department, supported the impugned order, contending that the penalty was correctly imposed based on the investigation findings and that the appellant’s involvement was evident from the transporters’ statements. He did not address the procedural lapses under Section 138B or the absence of mens rea.
The Court's Analysis
The Tribunal examined the legal framework under Section 112(b), which permits penalty only if a person: (i) acquires possession of, or is otherwise concerned in carrying, removing, selling, purchasing, or dealing with goods liable to confiscation under Section 111; and (ii) has knowledge or reason to believe that such goods are liable to confiscation.
"Penalty under section 112(b) of the Customs Act could not have been imposed upon the appellant as for imposing penalty two conditions are required to be followed namely: (i) Acquiring possession or being in anyway concerned or dealing with any goods that are liable for confiscation; and (ii) Knowledge or belief about such goods being liable for confiscation."
The Tribunal held that the appellant had no physical connection with the goods. No invoice, transport record, payment proof, or communication with NTAL was produced. The statements of the transporters, even if accepted, did not establish the appellant’s knowledge or involvement. The Tribunal relied on its own precedent in M/s Surya Wires Pvt. Ltd. vs. Principal Commissioner, CGST, Raipur, which held that statements under Section 108 are inadmissible unless the procedure under Section 138B is strictly followed.
The Tribunal further noted that Section 112(b) cannot be invoked unless the goods are first liable to confiscation under Section 111, and the show cause notice did not propose confiscation. The absence of any evidence of mens rea or physical dealing rendered the penalty unsustainable.
The Verdict
The appeal was allowed. The order dated 31.07.2019 imposing a penalty of Rs. 10,00,000 on the appellant under Section 112(b) of the Customs Act, 1962, was set aside. No penalty was upheld against the appellant. The Department was directed to take no further action on the penalty demand.
What This Means For Similar Cases
Knowledge and Possession Are Non-Negotiable
- Practitioners must now insist on proof of both physical involvement and subjective knowledge for any penalty under Section 112(b).
- Mere mention of a party in third-party statements, without corroboration or documentary evidence, is insufficient.
- The burden of proving knowledge lies squarely on the Department; it cannot be presumed.
Section 138B Compliance Is Mandatory
- Statements recorded under Section 108 are inadmissible unless the procedure under Section 138B is followed, including recording under oath and opportunity for cross-examination.
- Failure to comply with Section 138B renders the entire evidentiary foundation defective.
- Appeals against penalties based on such statements must be filed on this ground alone.
Confiscation Under Section 111 Is a Prerequisite
- A penalty under Section 112(b) cannot be imposed unless the show cause notice explicitly proposes confiscation under Section 111.
- If confiscation is not proposed, the penalty cannot be sustained, even if the goods are later found to be smuggled.
- Practitioners should challenge penalty orders on this technical ground at the first opportunity.
