The Customs, Excise & Service Tax Appellate Tribunal, Kolkata Regional Bench, has delivered a definitive ruling reinforcing that allegations of clandestine manufacture and clearance of excisable goods cannot be sustained on presumption, uncorroborated data, or inferential reasoning. The Tribunal set aside excise duty demands, interest, and penalties imposed on three appellants after finding the Revenue failed to meet the high threshold of proof required for such serious allegations.
Background & Facts
The Dispute
The appellants - M/s F.W. Ferro Tech Private Limited, M/s Shivani Ispat and Rolling Mills Private Limited, and Shri Krishna Choudhury, Director of both companies - are engaged in the manufacture of MS Ingot, MS Square Bar, MS Patti, and MS Angle. The Revenue alleged that the appellants evaded Central Excise duty by clandestinely clearing approximately 1,971 MT of MS Ingot and 23,924 kg of Riser from the premises of Appellant No. (1) to Appellant No. (2) between December 2016 and June 2017, without issuing Central Excise invoices or paying duty.
Key Facts
- Appellant No. (1) and Appellant No. (2) operated from the same industrial area in Tamulkuchi, Byrnihat, Meghalaya.
- Appellant No. (3), Shri Krishna Choudhury, was the Director and overall in-charge of both companies.
- On 23.03.2018, the Directorate General of GST Intelligence (DGGI) conducted searches at the factories and an undeclared office at Kunj Ispat Bhawan, Guwahati.
- During the search, the DGGI seized:
- A notebook containing handwritten entries of 25 consignments of MS Ingot (478.49 MT) transferred from Appellant No. (1) to Appellant No. (2) between 21.01.2017 and 17.02.2017.
- Loose sheets indicating 63 consignments (802.19 MT) cleared by Appellant No. (2) without invoices between 07.01.2018 and 03.02.2018.
- A Daily Report of Production and Dispatch from Appellant No. (1), showing 126 consignments (1,971.070 MT) cleared clandestinely between 01.11.2017 and 28.02.2018, of which 102 consignments (1,504.520 MT) went to Appellant No. (2).
- A pen drive containing unofficial records.
- The Revenue compared these seized records with statutory records (Daily Stock Register, ER-1 returns, Central Excise invoices) and found discrepancies.
- Appellant No. (3) made three statements: on 27.03.2018, he admitted discrepancies but promised to pay liabilities; on 03.04.2018, he confirmed his role as overall in-charge; on 27.07.2021, he denied ownership of the pen drive records and refused to authenticate them.
- The Revenue quantified duty evasion as Rs. 41,36,972/- by Appellant No. (1) and Rs. 59,87,355/- by Appellant No. (2) for the period December 2016 to June 2017.
- A show-cause notice dated 03.01.2022 was issued, more than four years after the alleged transactions.
Procedural History
- 23.03.2018: DGGI search conducted at premises of Appellant Nos. (1), (2), and (3).
- 03.01.2022: Show-cause notice issued proposing demand of duty, interest, and penalties under Section 11AC of the Central Excise Act, 1944, and Rule 25 of the Central Excise Rules, 2002.
- 22.08.2023: Commissioner (Appeals), Guwahati, confirmed the demand and penalties.
- 2023: Appeals filed before the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Kolkata Regional Bench.
- 23.06.2026: Hearing held before the Tribunal.
- 03.07.2026: Final order pronounced.
The Parties' Positions
For the Appellants
- The show-cause notice dated 03.01.2022 is barred by limitation under Section 11A(1) of the Central Excise Act, as the alleged transactions occurred between December 2016 and June 2017, and the notice was issued after 4 years and 6 months.
- The Revenue failed to prove clandestine manufacture or clearance with tangible, corroborative evidence.
- The seized pen drive data and handwritten notebooks are unofficial, unauthenticated, and cannot form the sole basis for a duty demand.
- The Revenue did not investigate critical corroborative factors: excess raw material procurement, electricity consumption, payment of labour charges, transportation records, or realization of sale proceeds.
- The statements of buyers and transporters were not subjected to cross-examination and are inadmissible as substantive evidence.
- The Tribunal and courts have consistently held that clandestine removal is a quasi-criminal allegation requiring proof beyond reasonable doubt.
For the Respondent
- The discrepancies between statutory records and seized unofficial records establish a prima facie case of evasion.
- The statements of Appellant No. (3) and the consistency between dispatch records of Appellant No. (1) and receipt records of Appellant No. (2) indicate a coordinated effort to evade duty.
- The extended period of limitation under Section 11A(4) applies due to willful suppression and intentional evasion.
- The burden of proof is on the assessee to explain discrepancies, not on the Revenue to prove every link.
Relief Sought
The appellants sought:
- Setting aside of the impugned order dated 22.08.2023.
- Quashing of the duty demand of Rs. 41,36,972/- and Rs. 59,87,355/-.
- Cancellation of interest and penalties imposed under Section 11AC and Rule 25.
- Cancellation of penalty imposed on Shri Krishna Choudhury under Rule 26.
The Legal Issue
The central question was whether the Revenue can sustain a demand for Central Excise duty and impose penalties under Section 11AC and Rule 25 of the Central Excise Rules, 2002, based solely on uncorroborated data from seized pen drives and handwritten notebooks, without establishing tangible evidence of clandestine manufacture, transportation, sale, or receipt of proceeds?
Arguments Presented
For the Appellant
The appellants relied on multiple precedents to argue that clandestine removal is a serious, quasi-criminal allegation requiring proof beyond mere suspicion or presumption. They cited Commissioner of Central Excise, Haldia v. Lords Chemicals Ltd. (2010) 258 ELT 48 (Cal), where the Calcutta High Court held that presumption based on private notebooks is impermissible without independent corroboration. They also relied on Sulekhram Steels Pvt. Ltd. v. Commissioner of Central Excise, Ahmedabad-II (2011) 273 ELT 140 (Tri.-Ahmd.), where the Tribunal held that statements of co-accused traders cannot be relied upon without cross-examination. Further, they invoked Oudh Sugar Mills Ltd. v. Union of India (1978) 2 ELT (J172) (SC), where the Supreme Court quashed a duty demand based on unwarranted assumptions about sugar recovery rates. The appellants emphasized that the Revenue failed to investigate electricity consumption, raw material procurement, transportation logs, or payment records - factors essential to substantiate large-scale clandestine production. They argued that the statements of buyers were identical in wording, suggesting fabrication, and cross-examination was denied on flimsy grounds.
For the Respondent
The Revenue contended that the discrepancies between statutory records and seized unofficial records, coupled with the admission by Appellant No. (3) that records were inconsistent, established a prima facie case. It argued that the extended period of limitation under Section 11A(4) was applicable due to intentional suppression. The Revenue maintained that the burden of proof shifts to the assessee to explain discrepancies and that the Tribunal should not require exhaustive proof of every logistical detail. It relied on the consistency between dispatch records of Appellant No. (1) and receipt records of Appellant No. (2) as sufficient to infer clandestine clearance.
The Court's Analysis
The Tribunal conducted a meticulous review of the evidence and the applicable legal principles. It emphasized that the charge of clandestine removal is quasi-criminal in nature and must be established with tangible, corroborative evidence - not through inference, assumption, or reliance on unverified documents.
"The charge of clandestine removal is very serious charge. Therefore, it is seen that in the facts and circumstances of the case, the Revenue has not been able to prove the charge of clandestine removal of goods against the appellant."
The Tribunal noted that the Revenue’s entire case rested on:
- Unauthenticated data from a seized pen drive.
- Handwritten notebooks of unknown origin.
- Identical, uncorroborated statements of buyers.
- Absence of any investigation into electricity consumption, raw material procurement, or payment of labour.
It cited Gupta Synthetics Ltd. v. CCE, Ahmedabad (2014) 312 ELT 225 (Tri.-Ahmd.), which laid down a clear framework for proving clandestine removal: tangible evidence of excess raw material, actual removal of unaccounted goods, discovery of goods outside the factory, sale to identified parties, receipt of proceeds, excess electricity use, and links between seized documents and factory activities. None of these criteria were met.
The Tribunal rejected the Revenue’s reliance on the consistency between dispatch and receipt records, observing that such correlation alone cannot prove clandestine clearance without evidence of duty evasion. It further held that the statements of buyers, which were typed identically and not subjected to cross-examination, were inadmissible as substantive evidence under the principles laid down in Mohtesham Mohd. Ismail v. Union of India (2007) 220 ELT 3 (SC).
The Tribunal also addressed the issue of electricity consumption, noting that the appellants submitted that 490 units per MT were required for production, while the actual consumption was 900 - 1,000 units per MT - indicating no excess usage to support clandestine production. The Revenue failed to rebut this with any technical analysis.
The Tribunal further held that the extended period of limitation under Section 11A(4) could not be invoked because the Revenue failed to establish wilful suppression or intentional evasion. The delay of over four years in issuing the show-cause notice, coupled with the absence of any evidence of fraud or collusion, rendered the demand time-barred.
"The case of the Revenue is based upon the statement of the co-accused which statements are not supported by any independent corroborative evidence. It is well settled that confession of co-accused cannot be treated as substantive evidence and Court must corroborate the purported confession from independent sources."
The Tribunal concluded that the entire demand was built on presumption and conjecture, violating the fundamental principle that the burden of proof lies with the Revenue in cases of alleged evasion.
The Verdict
The appellants succeeded. The Tribunal set aside the impugned order dated 22.08.2023. The demand for Central Excise duty of Rs. 41,36,972/- against Appellant No. (1) and Rs. 59,87,355/- against Appellant No. (2) was cancelled. All interest and penalties imposed under Section 11AC and Rule 25 were quashed. The penalty of Rs. 10 lakhs imposed on Shri Krishna Choudhury under Rule 26 was also set aside. The appeals were allowed with consequential relief.
What This Means For Similar Cases
Clandestine Removal Requires Tangible Corroboration
- Practitioners must insist that the Revenue produce independent evidence - transport records, payment trails, electricity consumption data, or verified buyer statements - to substantiate claims of clandestine clearance.
- Seized pen drives or handwritten notes alone are insufficient; they must be corroborated by physical or documentary evidence.
Cross-Examination Is Mandatory for Co-Accused Statements
- Statements of traders, brokers, or transporters used against an assessee must be subjected to cross-examination.
- Denial of cross-examination on grounds of "safety" or "convenience" is legally untenable and renders statements inadmissible.
Extended Limitation Cannot Be Invoked Without Proving Intentional Evasion
- The extended period under Section 11A(4) requires clear proof of wilful suppression or fraud.
- Mere discrepancies in records or delayed detection do not qualify as intentional evasion.
- Delayed issuance of show-cause notices beyond two years without such proof renders the demand time-barred.
Burden of Proof Remains With the Revenue
- The principle that "what is admitted need not be proved" applies only to clear, unambiguous admissions - not to ambiguous or qualified statements.
- Assumptions about production capacity, raw material usage, or power consumption cannot substitute for actual investigation.
- In the absence of concrete evidence, the benefit of doubt must go to the assessee.
