Delhi High Court Acquits Manufacturer Due to Lack of Solid Evidence for Allegedly Smuggling Goods to Avoid Taxes.

The Delhi High Court has dismissed charges against a manufacturer accused of secretly clearing goods to avoid taxes, stating that ‘tangible evidence’ is necessary to back such claims. The Court reviewed a case filed under Section 35G of the Central Excise Act, 1944, challenging a decision by the Customs Excise and Service Tax Appellate Tribunal that had cleared the manufacturer of the allegations. Justices Yashwant Verma and Ravinder Dudeja noted, “Without any tangible evidence showing clandestine manufacturing and clearance of goods from the respondent’s premises, we find that the order dated 08.06.2017 from CESTAT does not contain any serious errors and does not require intervention. Thus, the appeal is dismissed.”

The petitioner was represented by Advocate Jatin Kumar Gaur and SSC Harpreet Singh. The respondent, involved in making copper ingots, is registered with the Central Excise Department. Officers from the Directorate General of Central Excise Intelligence searched the appellant’s unit and the home of the proprietor’s father. During the home search, ₹6,20,000 in cash was found and seized. In the factory, officers discovered a shortage of 3,500 kg of copper scrap worth ₹3,85,000. Some records were also taken from the factory. Among the seized documents was a spiral notebook labeled “AUTHOR.” Various statements were recorded during the investigation, leading the Department to issue a Show Cause Notice in 2006, seeking to confiscate the cash, claiming it was from the sale of goods cleared secretly.

Based on documents found at the assessee’s factory and recorded statements, the assessee received another Show Cause Notice (SCN). This notice claimed that the assessee had been obtaining large amounts of copper scrap without any bills or documents and was not recording sales in the required records. It was stated that the scrap was used to make ingots, which were then processed into wire rods on a job-work basis, all without being documented or paying the necessary duties. The assessee was accused of clearing 3,62,515.90 kilograms of copper wire. Additionally, it was claimed that 19,52,267 kilograms of ingots and wire bars were produced according to the Bhatti register and were cleared without paying duties. It was also noted that 3,500 kilograms of scrap were found to be missing during a search, which the assessee admitted to converting into ingots and then wire rods. There were allegations of tampering with the electricity supply to support the recorded production. A demand for duty and education CESS totaling Rs. 1,21,42,057/- was made for the alleged clearance of copper wire rods, Rs. 2,93,17,554/- for the alleged clearance of copper ingots without duty payment, and Rs. 62,832/- for the alleged shortage of copper scrap.

Both SCNs were reviewed, and the charges were upheld, confirming the full duty demand. The case was examined again, and the duty on copper rods and the confiscation of seized currency were affirmed. The order removed the duty on copper wire rods, acknowledging that the assessee lacked the facility to manufacture copper wire. The appellant and the respondent both filed separate appeals to CESTAT. The respondent’s appeal was granted, while the Revenue’s appeal was denied by CESTAT. The respondent’s counsel argued that the Revenue did not prove its claims, and thus the demand for dues and penalties was unfounded. They stated that the statements taken under Section-14 were not given freely and were later retracted by the witnesses, suggesting that such retracted statements should not be accepted without further evidence. It was also claimed that the documents found did not belong to the respondent and there was no solid proof of secret removal of goods. The counsel maintained that there was no evidence, and the CESTAT’s decision was reasonable and lawful.

The Court noted that accusations of secret removal of goods are serious and require strong evidence for support, which must be carefully examined. The Court stated, “In criminal cases, the proof needed to establish charges is ‘proof beyond doubt.’ However, adjudication proceedings are civil in nature, so the standard of proof is based on the preponderance of probability.”

The Court stated that it is well established that in cases involving clandestine removal and undervaluation, the Revenue does not need to prove its case with exact precision. These charges should be proven based on the “preponderance of probabilities.” However, the Court emphasized that any conclusions must be logical and not based on mere assumptions. Strong suspicion cannot replace the need for actual proof. The Court also noted that using eye estimation for verification, if true, does not count as valid verification, and no demands can be made based on it. Regarding the value of a retracted confession, the Court referenced a Supreme Court ruling in Vinod Solanki vs Union of India.

The Court concluded that there is no ‘tangible evidence’ in this case to prove the manufacturer’s guilt. The fact that the respondent agreed to pay the duty to avoid litigation cannot be used as a basis for confirming the duty demand. CESTAT found that the claims of unaccounted manufacture and clearance were based on weak evidence without solid support, and the evidence presented by the Revenue did not meet the minimum standards for a credible case of clandestine removal. As a result, the Appeal was dismissed.

Cause Title: Commissioner of Central Tax, GST Delhi East vs. ASP Metal Industries (2024 :DHC: 9415-DB)