A penalty under Rule 26 of the Central Excise Rules, 2002, requires evidence that the individual knew or had reason to believe that the goods were liable to confiscation; additionally, statements recorded under Section 14 of the Central Excise Act are inadmissible unless the procedural requirements of Section 9D are satisfied.

JUSTICE DILIP GUPTA:

This appeal has been filed to assail that portion of the order dated 27.09.2024 passed by the Additional Director General (Adjudication) that has imposed penalty upon the appellant under rule 26 of the Central Excise Rules, 2002¹1. the 2002 Rules read with rules 17 and 18 of the Pan Masala Packing Machine (Capacity Determination and Collection of Duty) Rules, 2008.

2. A show cause notice dated 27.01.2018 was issued to the appellant alleging violation of regulation 26 of the 2002 Rules in respect of an unregistered factory situated at Khasra No. 1340, village Belinga in District Bastar. The appellant filed a detailed reply to the show cause notice and contended that the ingredients of rule 26 were not satisfied. The appellant also pointed out that the statement made on 30.01.2017 by the appellant under section 14 of the Central Excise Act, 1944²2. the Central Excise Act cannot be relied upon as the procedure contemplated under section 9D of the Central Excise Act was not followed. The appellant further stated that during the search of his residential premises at Indore 65 pouches of 2 grams each of ‘Nazar’ brand Pan Masala Packets were resumed in which the name of the manufacturer was shown as Devesh Industry, Industrial Area, Delhi. The appellant also stated that the statements made by the appellant while he was in his custody, were immediately retracted. The appellant also pointed out that he had no connection with the unregistered unit at village Belinga as neither was he the owner or the tenant of the land nor was there any evidence to show that he was in touch with the raw material suppliers or the purchasers of the finished goods. The appellant also pointed out that the machinery was also not purchased by the appellant. The appellant also stated that the case of the department was based on unsubstantiated and uncorroborated statements of few persons which cannot be considered as relevant.

3. The Additional Director General (Adjudication) however, imposed penalty upon the appellant under rule 26 for the following reasons:

“Penalty Proposal upon Shri Rajkumar Menghani, Indore: The SCN dated 27.01.2018 & 28.12.2020 proposes penalty on Shri Nitin Sabhagchand under Rule 26 of the Central Excise Rules, 2002 readwith readwith Rule 17 & 18 of Pan Masala Packing Machines (Capacity Determination and Collection of Duty) Rules, 2008. It has been alleged in the SCN(s) that Sh. Rajkumar Menghani @ Raju Menghani @ Raju was one of the key associates of Sh. Natwar Lal Sharda and he established the said unregistered factory at village Balenga, Bastar on direction of Sh. Natwar Lal Sharda. He managed to purchase all the raw materials used for manufacturing of Pan Masala/Gutkha in the unregistered and sale as well as transportation of the same from the unregistered factory. Against the allegations, Sh. Rajkumar Menghani has contended that the entire case of the Department is based on the unsubstantiated and uncorroborated statements of a few persons. There is no evidence on record to allege that the noticee was an associate of Sh. Natwar Sharda in running the said unregistered unit. In the absence of the evidence, the allegation of connivance against the noticee is not sustainable and consequently, penalty is not imposable. I find from the impugned SCN(s) that he was controlling all the business activities of the said unregistered factory from Indore through