GST UPDATE

The onus to prove clandestine removal is on the department which should be substantiated by corroborative and cogent evidences.

Excise Appeal No.:52020 of 2024

Tribunal: CESTAT (New Delhi)

Case Title: M/s Ashish Enterprises v. Principal Commissioner, CGST & Central Excise, Bhopal

Outcome:Appeal was allowed

Judgement Date: 12.01.2026

BRIEF FACTS OF THE CASE:

M/s Ashish Enterprises (Appellant) engaged in the business of Pan masala, started trial production of Zarda for which registration was also obtained. However, due to unfruitful results, he dropped the manufacturing of Zarda (tobacco). Later, on DGGI conducted search and seized the documents at the premises of the appellant and distributors, sub-distributors and two transporters based on the intelligence that the appellant and its distributors are involved in the clandestine removal of manufactured. Furthermore, statements of employees, transporters and distributors were also recorded. However, the statements of the witness and the proprietor were subsequently retracted. Consequently, show cause notice (SCN) was issued to the appellant proposing demand of central excise duty along with interest and penalty. The appellant filed reply and moved a request for cross-examination of the witnesses and request was accepted. The allegations raised by impugned SCN were confirmed by adjudicating authority. Being aggrieved by the order of the adjudicating authority, the appellant preferred an appeal for quashing of the impugned order raising demand of central excise duty under Section 11A along with interest under Section 11AA and penalty under Section 11AC.

QUESTION BEFORE HON’BLE TRIBUNAL:

Whether clandestine removal can be alleged merely on the basis of third party documents and statements without corroborative evidence?

BRIEF ARGUMENTS BY APPELLANT:
Appellant submitted following contentions: -
Demand raised was based solely on third party statements and documents seized from third party premises

That the entire demand was raised on the basis of:
diaries recovered from the premises of transporters and other third parties which did not belonged to the appellant; and
Oral statements of various witnesses (which were denied in cross – examination) recorded under Section 14 of the Central Excise Act.

That the demand cannot sustain merely on the basis of third party documents and statements in the absence of any tangible or corroborative evidence.
Essential characteristics for proving clandestine removal not met:

In alignment with above it was contended that there are four essential ingredients required to prove the clandestine removal of goods:
Procurement of raw materials;
Manufacture of final products;
Clandestine removal of goods;
Receipt of consideration against such removal.

Cross examination conducted was not as prescribed under Central Excise Act:

That the cross examination conducted by adjudicating authority in a conventional and hasty manner without any questions related to clandestine removal of goods or the issues arising from the investigation. Consequently, examination of the witnesses cannot be regarded as proper examination which is specified as per Section 9(d) of the Central Excise Act.
Furthermore, the cross-examination of the witnesses were recorded under duress and coercive pressure. Hence, reliance cannot be placed upon such statements.

No documents proving appellant to be guilty were found during search:

Investigating authority did not found anything which proves that the appellant is guilty of misconduct;

Machinery installed at the premises of the appellant lacked the capacity to manufacture the alleged quantities:

That the machine lacked actual capacity as compared to alleged quantities on the basis of electricity consumption. Further, there is no additional evidence of any additional premises, or generators or other machines being used to achieve excess production. Thus, unaccounted production cannot be established.

Reliance was placed upon settled judicial pronouncements:
• That the machine lacked actual capacity as compared to alleged quantities on the basis of electricity consumption. Further, there is no additional evidence of any additional premises, or generators or other machines being used to achieve excess production. Thus, unaccounted production cannot be established. In this regard, Reliance was placed upon the Sulekhram Steels Pvt ltd. v. Commissioner of Central Excise [2011 (273) E.L.T. 140 (Tri-Ahm.)] and Kuber Tobacco Products Ltd v. Commissioner of Central Excise [2013 (290) E.L.T. 545 (Tri.-Del)].
Relevance of Statements recorded during the investigation under Section 14 of Central Excise Act

It was argued that the statements relied upon by the Revenue lacked evidentiary value, as several witnesses, during cross-examination, denied the allegations and stated that their earlier statements were obtained under duress or coercion, with some statements being immediately retracted. The proprietor and his brother also denied knowledge or involvement in the alleged transactions, buyers, transporters, suppliers and brokers. The transporter’s employees also denied knowledge of the ownership, contents of the consignments and specific vehicles, while the transporter’s proprietor clarified that the diaries contained entries relating to goods transported for various parties and were not attributable to the appellant alone. Most importantly, the alleged dealers/buyers categorically denied receiving any unaccounted goods from the appellant and confirmed that payments were made through banking channels, further denying that the diary entries pertained to the appellant. Thus, the cross-examination substantially contradicted the statements relied upon by the Revenue and failed to establish the alleged clandestine clearances.

Incriminating documents were not recovered or seized from the premises of the appellant:

Neither any unaccounted cash was recovered from the appellant nor has the department explained the alleged source or channel of funds for such large-scale clandestine operations. Further, there was no recovery from the premises of the appellant or the premises of the transporters. Neither consignment notes/bilties mentioning the names of the alleged buyers/dealers as consignees were recovered either from the premises of the appellant and that no parallel invoices, vouchers or challans for purchase of raw materials were not found, nor has the department explained the alleged source of procurement of raw materials necessary for such voluminous production.

Diaries recovered from the transporters do not pertain to the appellant

In this regard, it is argued that the diaries recovered from the premises of the transporters and the contents thereof do not pertain to the appellant. In all the entries, the name of the appellant is not mentioned. Even after the address, bill/challan number, name of alleged dealers were mentioned. However, no investigation was carried out to verify the consignee name.

Details contained in the diaries recovered from the premises of Sarco Roadlines were not corroborated/verified

It was argued that the diaries and registers recovered from Sarco Roadlines (A1, A2, A7, A8, etc.) cannot, by themselves, establish clandestine clearances. Although the Revenue attempted to correlate vehicle numbers, lorry receipts and destinations, there was no verification that the vehicles actually transported the appellant’s goods, no proof regarding the authorship of the diary entries, and none of the alleged drivers were confronted with the diaries. Further, there was no evidence of cash payment of freight, the inward-stock details did not tally with the receipt books, and no enquiry was conducted with persons whose mobile numbers appeared in the records. Significantly, the diaries did not mention the name of the appellant or the alleged consignees, and the persons/entities referred to therein were not independently verified. Thus, the reliance placed on the diaries to conclude clandestine supply was based on assumptions and unverified correlations, without independent corroborative evidence.

Diaries recovered from the premises of the distributor did not contained the name of the appellant

It was argued that the alleged clandestine clearances inferred from the distributor’s diaries are unreliable, as the relevant pages neither mentioned the appellant’s name nor accounted for the exceptional circumstances during the COVID-19 pandemic. The appellant also challenged the panchnamas and sought cross-examination of the panch witnesses, which was not granted. Further, the alleged quantity of clandestine production was not supported by the availability of sufficient empty jhals, as the stock required for such production was not found at the appellant’s premises. The entries in the transporters’ diaries were therefore wrongly attributed to the appellant. No cash was recovered and no independent financial trail or evidence of receipt of sale proceeds was established by the Department, making the allegation of clandestine removal unsustainable.

Therefore, impugned order should be set aside.

BRIEF ARGUMENTS BY REVENUE DEPARTMENT:

Revenue Department contended that:
Investigation authority observations during search at the premises of the appellant:

On the basis of findings related to search proceedings at the premises of the factory, the stock of raw materials, packing materials and finished goods were found in excess and no documents or stock records, invoices or payment of taxes were found in respect of the production and supply of Zarda, which clearly indicates that the appellant was engaged in the production with intention of clandestine removal of goods.
The appellant was found to be operating a manufacturing unit of tobacco without obtaining central excise registration thereby violating section 6 of the Central Excise Act;
Unaccounted raw material and packing material were found depicting illicit manufacture and clearance of pan masala and Zarda without invoices

On the basis of search conducted at the premises of transporter:

The Department alleged that substantial quantities of Zarda were found and seized without tax documentsfrom the premises of both transporters. The diaries and rough registers allegedly revealed anillicit supply chain from the appellant, including receipt and dispatch of goods without invoices, tax payments or e-way bills, with code words used to conceal the transactions. Further, employees of Sarco Roadlines and Data Goods Carrier allegedly admitted that goods received from the appellant were transported through specified tempos to Indore and Agra on the basis of kacha receipts/rough records without proper documentation. Thus, the Revenue relied upon the seized goods, transporter records and employee statements as corroborative evidence of clandestine clearances.

Search conducted at the premises of distributor and sub-distributor:

Proprietors of sub distributors confirmed that pan masala and zarda was received without invoices, and cash was paid against those undocumented goods.

Statement of the appellant (Properietor)

It was argued that the appellant himself accepted the fact of illicit manufacture of zarda and pan masala without invoices and confirmed that these were supplied without GST payment. Along with that, confirmed that transporters did not issued lorry receipts for unaccounted goods and accepted the contents of diaries which depicted clandestine dispatches.

Statement of brother of appellant:

He accepted that entire production of zarda was illicit supply without payment of tax/duty on it. Further, confirmed that cash payments were received from distributors against such supply without invoices and also verified the diaries detained from Sarco Roadlines

Registers detained from the premises of parties subject to the search

On scrutiny of the registers which were detained, depicts that appellant has shown very small quantity of raw material and finished goods both during the disputed period which does not matches with the huge quantity of Tobacco (Zarda) detained at the premises. Thus, it clearly indicates that there was clandestine supply of tobacco.
Further, reliance was placed upon the documents seized at the time of search conducted with respect to distributor in which adjudicating authority held that based on the summary contained in the file it clearly indicates that the distributor was involved in acquiring the Zarda from Appellant and then supplying the same clandestinely to sub distributors.
Along with that, it was argued that on the basis of examination of documents recovered from the Transporter-1 and its employee, reveals that these documents contain details of Zarda and pan masala clandestine transportation to various locations through different vehicles without any documents depicting duty has been paid on it.
With respect to the documents detained from the premises of the transporter -2 it was held that, code words were used for the Zarda for transportation. For further transport.
The adjudicating authority further held that the amount of Zarda clandestinely cleared on the basis of statement made by brother of the proprietor of the appellant that 1 jhal of zafrani zarda was continaing 33600 pouches and therefore, it was held that appellant removed clandestinely
At the premises of the transporters larger quantities of tobacco were found without legitimate tax documents;
Stock of distributor was found without legitimate tax documents along with there was some stock shortages;
Furthermore, rough registers recorded goods received from the appellant without bills, using code words like “Chhuara/Chhuari” in trip slips to conceal transactions;
Did not issue lorry receipts for undocumented goods. This fact was also confirmed by the employee of the transporter that rough registers for the goods of the appellant for transporting goods without bills or e-way bills., using code words;
Furthermore, sub distributors used to pay in cash for goods received through informal couriers for undocumented goods
Stock of raw materials, packing materials and finished goods were found in excess and no documents or stock records were found in respect of the production and supply of Zafrani Zarda. Thus, it was held that appellant suppressed his production with the intention to evade payment of tax.
Adjudicating authority argued that the distributor i.e. M/s Harikesh Agencies had procured illicit Tobacco and the same has been subsequently supplied.
On the basis of observation of the documents recovered from transporter, reveals that there was clandestine removal of goods through different vehicles.

FINDINGS & JUDGEMENT:

Following are the findings of the Tribunal in the instant case:
The tribunal accepted the contentions of the appellant based on the following:
Pre-Conditions to prove clandestine removal of goods

Reliance was placed upon decision in the case of Arya Fibres Pvt ltd. v. Commissioner of C.Ex, Ahmedabad – II [2014 (311) E.L.T. 529 (Tri.-Ahmd.)] that an allegation of clandestine manufacture and removal cannot be sustained merely on the basis of assumptions, presumptions or probability, but must be established through tangible, positive and corroborative evidence. The theory of probability can be applied only where the evidentiary clues are sufficiently strong and form a consistent chain of evidence. In the present case, the findings were primarily based upon diaries and rough records recovered from third-party premises and oral statements of certain persons, without any independent evidence linking such records to the appellant. There was also no evidence of procurement of unaccounted raw materials, excess consumption of inputs, receipt of sale consideration, or recovery of any incriminating material from the appellant’s premises establishing clandestine manufacture or transportation. Thus, the fundamental requirements for proving clandestine clearance were not satisfied and the demand, being based on uncorroborated third-party records and statements, was liable to be set aside.

Before establishing clandestine removal, clandestine manufacture of the goods must be established

Reliance was placed upon the judgement in the case of Kuber Tobacco Products Ltd. v. Commissioner of C.Ex. Delhi (supra) held that charge of clandestine removal cannot be sustained unless it is first established that there was clandestine manufacture of the goods and for this purpose and the burden of proof lies on the department to establish procurement of requisite quantity of raw materials and the actual manufacturing capacity and it was held that it can hardly be disputed that there cannot be any clandestine removal of the goods unless the assessee manufactures the same clandestinely and for such production raw material is procured clandestinely.

Following Discrepancies were pointed out

It was held that at the bottom of the register, only Arish is written. Therefore, it is not possible to attribute the register to the appellant, M/s Ashish Enterprises merely on the basis. Furthermore, it was held that vehicles and the drivers whose numbers were mentioned in diaries were used for transporting the goods of the appellant and the said vehicles belonged to kamal Kishore Sharma whose statement was not recorded. Furthermore, it was observed that the as the tempo drivers also stated that they used to transport goods for various parties on daily wage basis. Thus, it cannot be held that, entry in the diaries pertain to the appellant.

In continuation of above, it was observed that the name of the appellant is not mentioned in the diaries. Only vehicle numbers, name of consignee and bilties numbers were mentioned. In the absence, of such corroborative evidence, it cannot be said that diaries pertain to the appellant for transporting of Pan Masala in the guise of code words “Chhuara/Chhuari”. Furthermore, bilties/Lorry receipts or invoices or parallel records were not recovered from the premises of the appellant. Furthermore, in the cross-examination stated that the diaries were recovered by the department were used to maintain the details of all goods received during the day for further transportation.

Thus, it was held that the department is required to find out how the goods were transported to the particular place as mentioned in the diaries and recorded statements of the consignees to whom the goods were transported as per the entries. Furthermore, there is also no evidence of transfer of funds to the appellant against the said clandestine removal of goods.

Accordingly, the contentions of the appellant were accepted and the demand for the clandestine removal was set aisde.

Comments

GST update /2026-27/0077

GST UPDATE

BRIEF FACTS OF THE CASE:

QUESTION BEFORE HON’BLE TRIBUNAL:

BRIEF ARGUMENTS BY REVENUE DEPARTMENT:

FINDINGS & JUDGEMENT:

Opinion

Author’s Comment:

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