Penalty proceedings initiated under incorrect regulations and without supplying the underlying audit report are legally unsustainable.

The Petitioner, a precious metal importer, held a Special Warehouse license under Section 58A of the Customs Act, 1962, from June 2016 until its surrender was accepted on March 8, 2019.

Nearly five years post-cancellation, the Respondent issued a show-cause notice (SCN) dated February 1, 2024, alleging violations of Regulation 11 of the Warehouse (Custody and Handling of Goods) Regulations, 2016.

The SCN relied on an audit report dated December 16, 2022, which was never supplied to the Petitioner despite repeated requests.

On December 30, 2025, the Respondent passed an order imposing a penalty of ₹30,000 for failure to maintain digital records and insurance renewals.

The Petitioner challenged this order via a writ petition.

1. Whether the Respondent erred in law by invoking the Warehouse Regulations, 2016 instead of the Special Warehouse Regulations, 2016 for a license granted under Section 58A.

2. Whether the failure to supply the underlying audit report and the delay of five years in initiating proceedings vitiated the impugned penalty order.

The Court primarily applied Section 58A of the Customs Act, 1962, which governs "Special Warehouses," distinguishing them from Public (Sec. 57) and Private (Sec. 58) warehouses.

It applied the Special Warehouse (Custody and Handling of Goods) Regulations, 2016, noting they were specifically framed under Section 157 read with Section 58A to govern such entities.

The Court also relied on the principle of natural justice regarding the mandatory disclosure of adverse material (the audit report) used to adjudicate a penalty.

The Court also relied on the principle of finality, which discourages reopening settled matters after an inordinate delay (five years post-surrender of license).

The Court reasoned that since the Petitioner was specifically licensed under Section 58A, its activities were governed exclusively by the Special Warehouse Regulations.

The Respondent’s invocation of the general Warehouse Regulations was a fundamental legal error; even if certain provisions were similar, the proceedings could not be validated when premised on erroneous regulations.

The Court emphasized that the framers intended distinct categories for different warehouses.

Furthermore, the Court found a gross violation of natural justice as the Respondent failed to provide the 2022 audit report, which formed the entire basis of the SCN.

Finally, the Court noted that the Respondent had accepted the license surrender in 2019 without objection; initiating penalty proceedings five years later for record-keeping discrepancies was deemed arbitrary and unsustainable.

It held that the penalty was illegal due to the application of incorrect regulations and the non-supply of relevant documents.

The Court rejected the Respondent's request to remand the matter, citing the inequity of forcing the Petitioner to face renewed proceedings five years after the surrender of its license.

No order as to costs was made.