Case Note & Summary
The dispute arose out of central excise proceedings initiated against a processor of man-made fabrics and its director following searches on 21 May 2002. The Commissioner of Central Excise, Thane-II, filed the present appeal under Section 35G of the Central Excise Act, 1944, challenging the order dated 22 September 2006 of the Customs, Excise and Service Tax Appellate Tribunal, Mumbai, which had allowed a bunch of appeals preferred by the assessee and set aside substantial duty demands and penalties. The High Court of Judicature at Bombay admitted the appeal on 24 September 2008 and framed four questions of law concerning the correctness of the Tribunal's setting aside of penalties, duties, interest, confiscation, and reduction of penalty under Section 11AC. The appeal was to be heard with Central Excise Appeal No. 261 of 2007. The assessee company, formerly Indo Green Textiles Pvt. Ltd., was engaged in processing man-made fabrics. Searches at the factory on 21 May 2002 led to seizure of records and stock verification, revealing shortages of processed fabrics valued at approximately Rs 74.63 lakhs and excess fabrics valued at Rs 31.80 lakhs. Searches at the transporter's premises and other locations resulted in seizure of documents and statements of many persons. Show cause notices dated 15 November 2002 and 30 March 2004 proposed confiscation and a duty demand of Rs 4,30,85,194.84 with penalties. The demand comprised three components: duty of Rs 11,94,219.20 on shortages found during stock verification, Rs 2,17,004.64 on fabrics seized from merchant manufacturers and transporter, and Rs 4,16,73,971 on fabrics alleged to have been clandestinely cleared as detailed in Annexure B. Before the Tribunal, the assessee did not contest the first two components, but contested the clandestine removal demand of Rs 4,16,73,971. The CESTAT initially had a difference of opinion between its Member (Judicial), who set aside the disputed demand for lack of positive evidence, and Member (Technical), who upheld it. The matter was referred to a third Member, who concurred with the Member (Judicial). The majority thus set aside the clandestine removal demand and all penalties, except the uncontested duty. The Revenue appealed, contending that the assessee's director had admitted shortages and deposited Rs 10 lakhs towards duty, which should substantiate the demand. The assessee argued that the entire case rested on the transporter's statement, whose cross-examination was wrongly denied by the adjudicating authority, and that no corroborative evidence linked the code name 'S One Tex/Dying' to the assessee. The High Court examined the orders and found that the sole basis for linking the code name to the assessee was the statement of the transporter, and that the adjudicating authority had refused permission to cross-examine him despite a request. Relying on Andaman Timber Industries v. Commissioner of C.Ex., Kolkata-II, the Court held that denial of cross-examination of a witness whose statement forms the basis of the demand is a serious flaw amounting to violation of principles of natural justice. It noted that once the transporter's statement was excluded, no other evidence remained. The Court also observed that the statement was in the nature of a co-accused statement and could not be the sole basis for confirming clandestine removal without corroboration. The deposit of Rs 10 lakhs was found to relate only to the uncontested shortage demand and could not prove the disputed clandestine clearance. Accordingly, the High Court upheld the majority view of the Tribunal, finding no merit in the Revenue's appeal. The duty demand of Rs 4,16,73,971 and consequential penalties, interest, and confiscation remained set aside, while the uncontested duty of Rs 11,94,219.20 stood confirmed.
Headnote
A) Central Excise - Adjudication and Evidence - Denial of Cross-Examination - Central Excise Act, 1944, Section 35G - The Revenue appealed against CESTAT order that set aside duty demand and penalties. The High Court held that refusal to allow cross-examination of the transporter, whose statement and seized documents formed the basis of the show cause notice, amounted to violation of principles of natural justice, relying on Andaman Timber Industries v. Commissioner of C.Ex., Kolkata-II. Held that the statement could not be relied upon (Paras 11-13). B) Central Excise - Clandestine Removal - Evidentiary Standard - Central Excise Act, 1944, Section 11A(2) - The demand of Rs 4,16,73,971 was based solely on the transporter's statement linking code name 'S One Tex/Dying' to respondent no.2. After excluding that statement, there was no other evidence to establish clandestine removal; statement of co-accused cannot be the sole basis without corroboration. Held that the demand was not sustainable (Para 11). C) Central Excise - Penalties and Confiscation - Consequential Relief - Central Excise Act, 1944, Sections 11AC, 34, 11AB; Central Excise Rules, 2002, Rules 25, 26 - Since the principal demand of clandestine removal was set aside, the penalties, fines, and confiscation imposed on respondents were also set aside. The uncontested duty of Rs 11,94,219.20 was upheld. Held that no penalty could survive absent sustainable demand (Paras 7-10, 12). D) Central Excise - Admission and Deposit - Limitation of Admission - Central Excise Act, 1944, Section 11A - The deposit of Rs 10 lakhs by the director towards duty related only to the uncontested shortage of processed fabrics involving duty of Rs 11,94,219.20 and could not justify linking the transporter's code name to respondent no.2. Held that admission of shortage did not prove clandestine removal (Para 12).
Issue of Consideration
Whether CESTAT was right in setting aside penalties and duties; whether denial of cross-examination vitiated proceedings; whether statement of transporter was sufficient evidence; whether order was perverse.
Final Decision
The High Court concurred with the CESTAT majority and found no merit in the Revenue's appeal. Denial of cross-examination was a serious flaw violating natural justice, rendering the transporter's statement inadmissible; without that evidence, the clandestine removal demand of Rs 4,16,73,971 could not be sustained. Penalties, interest, and confiscation were also set aside. The uncontested duty of Rs 11,94,219.20 stood confirmed.
Law Points
- Denial of cross-examination violates principles of natural justice
- Statement of co-accused cannot be sole basis for demand
- Corroborative evidence required for clandestine removal
- CESTAT majority based on no evidence
- Uncontested demand remains confirmed
