Tangible Evidence, Not Assumptions, Essential for Clandestine Removal Charges: Delhi High Court Affirms CESTAT Ruling

New Delhi: In a significant judgment concerning indirect tax enforcement, the Delhi High Court has dismissed an appeal by the Commissioner of Central Excise, upholding a majority decision of the Central Excise Sales Tax Appellate Tribunal (CESTAT) that had set aside substantial demands of excise duty and penalties against tobacco manufacturers, M/s. Kuber Tobacco Products Pvt. Ltd. ( KTPL ) and M/s. Kuber International (India) Ltd. (KTIL). The court underscored that charges of clandestine removal must be proven with cogent and tangible evidence, not merely on the basis of assumptions, presumptions, or uncorroborated evidence, including retracted statements.

The judgment, delivered by a bench of Justices Yashwant Varma and Ravinder Dudeja on March 11, 2024 (with judgment reserved on December 13, 2023), centered on whether the CESTAT's majority opinion, which found the evidence against the respondents unreliable, was legally sound and not perverse.

Background of the Case

The case originated from intelligence received by the Revenue Department alleging clandestine removal of gutkha, pan masala, and chewing tobacco by KTPL and KTIL. Searches conducted in October 1998 at multiple locations led to the seizure of goods, cash, and various documents, including "Kacha challans" and "Hisaba books," purported to contain details of unaccounted clearances.

Following the investigation, Show Cause Notices were issued to the companies and their key personnel in 2000, demanding large sums of evaded excise duty (over ₹11.99 Crore from KTPL and over ₹4.18 Crore from KTIL, including differential duty), along with interest and proposing confiscation of assets and imposition of heavy penalties.

The Adjudicating Authority, the Commissioner of Central Excise, confirmed the demands and imposed penalties totaling over ₹12 Crore on KTPL and over ₹4.18 Crore on KTIL, besides penalties on individuals.

CESTAT's Divided Verdict

Appeals against the Commissioner's orders were filed before CESTAT. The Tribunal delivered a split verdict. The President (Judicial) found the entire evidence unreliable and uncorroborated, concluding that the charge of clandestine removal was not proven and allowed the appeals. The Member (Technical), in dissent, largely upheld the demands, suggesting only a modification in penalty quantum. The matter was then referred to a third Member (Judicial), who agreed with the President (Judicial), forming a 2:1 majority in favour of the respondents, setting aside the impugned orders.

Arguments Before the High Court

The Revenue argued that the CESTAT majority erred by requiring proof beyond reasonable doubt, whereas the standard in adjudication proceedings is 'preponderance of probabilities'. They contended that seized documents, corroborated by statements and recovery of excess stock (57 bags from KTPL factory), provided sufficient evidence. They argued that retracted statements were unreliable and that links between seized documents, premises, and the respondents were clearly established.

The respondents supported the CESTAT majority, arguing that the Revenue failed to provide cogent evidence. They challenged the voluntariness and reliability of the statements, noting their retraction. They pointed out the lack of evidence regarding excess raw material procurement, unaccounted production based on capacity utilization, or the actual removal and sale of alleged clandestinely removed goods. They highlighted that key documents were seized from third-party premises and their authorship was unverified.

High Court's Analysis and Findings

The High Court acknowledged that 'preponderance of probabilities' is the standard in adjudication but stressed that conclusions must be logical, and suspicion, however grave, cannot substitute proof.

Critically examining the evidence, the Court concurred with the CESTAT majority on several points:

1. Retracted Statements: Citing the Supreme Court judgment in Vinod Solanki vs Union of India , the Court noted that the burden is not on the deponent to prove threat or coercion in retraction; it is for the court to assess if it appears so. The Court found credence in the retractions, noting instances of alleged harassment, 'Under Protest' endorsements on payments, and contradictions revealed during cross-examination. Retracted statements were deemed unreliable without independent corroboration.
2. Seized Documents: The Court found that the credibility of the loose sheets, Hisaba books, and Kachcha challans was questionable. Their author was not traced or examined, they were not recovered from the respondents' factory or office premises, and there was no tangible evidence directly linking them to the companies except the unreliable retracted statements. The Court agreed with the CESTAT President's observation that even the seizure panchnama did not clearly list these specific documents in its annexure, raising serious doubts about their collection process and credibility.
3. Physical Stock Seizure: The seizure of 57 bags from the KTPL factory, while excess over statutory records, was deemed insufficient proof of clandestine removal of the huge quantities alleged over extended periods. It could simply have been stock of the day.
4. Absence of Corroborating Evidence: The Court emphasized the lack of evidence on crucial aspects typically required to prove clandestine removal:
   • Procurement of major raw materials (supari, tobacco) in quantities sufficient for the alleged production.
   • Evidence of disproportionate power consumption, capacity utilization beyond declared levels, or increased labour force necessary for the alleged production.
   • Tangible proof of removal of unaccounted goods from the factory, transportation arrangements, or freight payments.
   • Identification of actual customers/recipients of the alleged clandestinely removed goods or recovery of unaccounted sale proceeds.

The Court referenced established principles laid down in cases like Commissioner of Central Excise Vs. Shakti Zarda Factory (I) Ltd. and Commissioner of Central Excise Vs. Saakeen Alloys Pvt. Ltd. (both upheld by the Supreme Court), and Arya Fibres Pvt. Ltd. v. CCE, Ahmedabad-II , which mandate positive and tangible evidence covering the entire chain from raw material to sale proceeds to establish clandestine removal. The Court found the Commissioner's findings heavily reliant on assumptions regarding machine capacity, working shifts, labour, and raw material sourcing, without sufficient factual basis or testing.

Conclusion

The Delhi High Court concluded that the CESTAT majority had meticulously examined the evidence against the backdrop of settled legal principles regarding proof of clandestine removal. Finding no tangible evidence to support the allegations and noting the unreliability of the evidence relied upon by the Revenue, the Court held that the charges could not be sustained. The Court found no serious error or perversity in the CESTAT's majority order.

Accordingly, the appeal filed by the Commissioner of Central Excise was dismissed, reaffirming that while indirect tax evasion can be proven by preponderance of probabilities, this standard necessitates logical conclusions drawn from cogent, reliable, and tangible evidence, not speculative assumptions.