Rule 26 penalty cannot be imposed without tangible evidence of clandestine removal.

M/s Bhagwati Traders, a dealer in TMT/CTD bars and cement, was searched by Central Excise officers on 14 February 2013. A diary allegedly containing details of purchases of TMT/CTD bars was seized from the appellant’s premises, and statements of its proprietor, Krishna Kumar Sahu, and driver were recorded under Section 14 of the Central Excise Act, 1944.

On the basis of the seized records and statements, the Department alleged that 901.155 MT of CTD/TMT bars had been clandestinely cleared by M/s Swastik Steels to the appellant without invoices and payment of central excise duty. A show-cause notice proposed recovery of duty and penalties, including a penalty of ₹3 lakh on Bhagwati Traders under Rule 26 of the Central Excise Rules, 2002.

In an earlier round, the Tribunal had remanded the matter for de novo adjudication with directions to comply with Section 9D of the Central Excise Act or discard the statements recorded during investigation.

On remand, the adjudicating authority provided opportunities for appearance and examination/cross-examination of the deponents, but the appellant did not appear. The statements were consequently treated as admissible under Section 9D(1)(a), and the penalty was reconfirmed.

Whether the appellant had abetted the alleged clandestine removal of CTD/TMT bars by M/s Swastik Steels so as to attract penalty under Rule 26 of the Central Excise Rules, 2002?

Whether the statements recorded under Section 14 of the Central Excise Act could be relied upon after the adjudicating authority afforded an opportunity for examination and cross-examination under Section 9D?

Whether the seized diary and notebook, along with the statements, constituted sufficient corroborative evidence to establish that the goods acquired by the appellant were liable to confiscation?

Rule 26 of the Central Excise Rules, 2002 permits imposition of penalty on a person who acquires possession of, or otherwise physically deals with, excisable goods while knowing or having reason to believe that the goods are liable to confiscation.

Section 9D of the Central Excise Act, 1944 governs the admissibility of statements recorded during investigation and requires the prescribed procedure to be followed before such statements are relied upon in adjudication.

The Tribunal relied on Oudh Sugar Mills Ltd. v. Union of India, holding that clandestine production and removal cannot be sustained on assumptions, presumptions, theoretical calculations, or shortages unsupported by tangible evidence.

It also referred to Continental Cement Co. v. Union of India and M/s Arya Fibres Pvt. Ltd. v. CCE, which require affirmative evidence regarding the complete chain of clandestine manufacture and clearance, including procurement of raw materials, unaccounted production, transportation and clearance, identification of buyers, and the flow of financial consideration.

The Tribunal further relied on authorities including Devi Dayal v. Union of India for the proposition that a complaint regarding denial of cross-examination is generally unsustainable where the noticee was afforded an opportunity but did not specifically pursue it.

The Tribunal held that the remand directions concerning Section 9D had been complied with because the adjudicating authority granted repeated opportunities to the deponents and the appellant for examination and cross-examination, which were not utilised.

Accordingly, the appellant could not succeed merely on the ground of breach of natural justice. However, admissibility of the statements did not by itself establish the allegation of clandestine removal.

The Tribunal found that the surviving corroborative material consisted principally of the diary seized from the appellant and the notebook seized from Sai Deva Steels; the recovery of those documents was proved, but their contents and the transactions allegedly recorded therein were not independently established.

There was no adequate evidence of unaccounted raw-material procurement, actual clandestine manufacture, transportation, delivery, or financial flow from the appellant to the alleged manufacturer. Further, proceedings against M/s Swastik Steels in the connected investigation had already been set aside, weakening the foundation of the allegation against the appellant.

Since the Department failed to establish through tangible and affirmative evidence that the goods acquired by Bhagwati Traders were clandestinely removed or liable to confiscation, the statutory ingredients of Rule 26 were not satisfied.

Although the statements could be considered after compliance with Section 9D, they were insufficient, without reliable corroboration, to sustain the penalty.

The penalty imposed on the appellant under Rule 26 of the Central Excise Rules, 2002 was therefore held to be unsustainable. The impugned appellate order was set aside to that extent, and the appeal was allowed.