Allahabad HC Clarifies Cross-Examination Under Section 138B Is Not Mandatory Unless Specifically Requested in Customs Proceedings

Introduction

In a significant ruling that clarifies procedural obligations in customs adjudication matters, the Allahabad High Court has overturned a decision by the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) which had invalidated adjudication proceedings merely on the presumption that cross-examination rights were denied. The judgment in Commissioner of Customs (Preventive) Lucknow Vs Sarad Chand Agrahari establishes crucial principles regarding when cross-examination becomes obligatory under the Customs Act, 1962, and how principles of natural justice should be applied in such proceedings.

The Court categorically held that the opportunity for cross-examination does not operate automatically in every customs case. Rather, it transforms into a mandatory requirement only when two conditions are simultaneously satisfied: first, the assessee must specifically request such cross-examination, and second, the adjudicating authority must rely upon the statements of those witnesses in forming its decision. This ruling brings much-needed clarity to customs adjudication procedures and reinforces the principle that natural justice violations must be substantiated rather than presumed.

Background and Factual Matrix

The appeals before the Allahabad High Court arose from a unified order dated April 24, 2025, rendered by the CESTAT, Allahabad, Regional Bench. The Revenue department challenged this Tribunal order through multiple customs appeals under Section 130 of the Customs Act, 1962. Given the commonality of issues across all appeals, the Court chose to address the substantial questions of law primarily through Custom Appeal No. 19 of 2025, recognizing that the determination in this lead case would govern the outcome of all related appeals.

The Tribunal had concluded that the adjudication proceedings conducted by the customs authorities suffered from fatal procedural irregularities. Specifically, it held that because the respondents were not provided an opportunity to cross-examine certain witnesses whose statements had been recorded and examined by the adjudicating authority, the entire proceedings stood vitiated for non-compliance with Section 138B of the Customs Act, 1962. Based on this finding, the Tribunal had set aside the confiscation orders and penalties imposed upon the assessee.

The matter involved seizure of gold bars, with the adjudicating authority having imposed absolute confiscation under Section 111(b), (l) and (m) of the Customs Act, along with penalties amounting to Rs. 50,00,000/- under Section 112(b) and Section 114AA of the Customs Act. The authorities had relied upon statements of two individuals who were found carrying the gold in question.

Substantial Questions Formulated

The Revenue department formulated four substantial questions of law for the Court's consideration:

  1. Whether CESTAT correctly applied Section 138B provisions to adjudication proceedings to conclude that co-accused statements cannot be relied upon, thereby vitiating the proceedings for non-compliance with the prescribed procedure.

  2. Whether CESTAT's finding that retracted statements recorded under Section 108 cannot be relied upon (absent evidence of threat, inducement or promise) contradicts Supreme Court precedents in Union of India v. Padam Narain Agarwal (2008) 231 E.L.T. 397 (S.C.), Surjeet Singh Chhabra v. Union of India (1997) 89 E.L.T. 646 (S.C.), and KTMS Mohammed Vs UOI (AIR 1992 SC 1831), thereby violating judicial discipline principles.

  3. Whether CESTAT was justified in determining that goods were not of foreign origin and not smuggled based on absence of foreign markings, variation in gold purity, and the fact that seizure occurred outside areas specified under Section 6 of the Customs Act, while accepting the assessee's uncorroborated claims.

  4. Whether CESTAT correctly set aside both the absolute confiscation orders and the substantial penalty imposed under the circumstances of this case.

Shri Dheeraj Srivastava, learned counsel representing the appellants, mounted a comprehensive challenge to the Tribunal's reasoning. His primary submission centered on a critical factual assertion: at no stage during the adjudication proceedings did the assessees request cross-examination of the two individuals who were apprehended carrying the gold. He substantiated this claim by producing documentary evidence before the High Court demonstrating the absence of any such request in the record.

Counsel drew the Court's attention to the CBIC Master Circular on Show Cause Notice, Adjudication and Recovery, bearing Circular No. 1053/02/2017-CX dated March 10, 2017. Paragraph 14.9 of this authoritative circular explicitly states that the adjudicating officer becomes bound to provide cross-examination facilities only when the assessee makes a specific request to cross-examine persons whose statements form the basis of the show cause notice.

To fortify his legal position, counsel relied upon the Delhi High Court's decision in Devi Dayal Vs. Union of India reported in 2002 (144) ELT 502 (Del.). This precedent established that when a noticee fails to specifically request production of persons for cross-examination, despite materials being disclosed, grievances concerning violation of natural justice principles lose their foundation. Significantly, the Special Leave Petition challenging this Delhi High Court judgment was dismissed by the Hon'ble Supreme Court, thereby endorsing this legal position.

Additional judicial precedents cited by the Revenue included:

  • Kannungo & Co. Vs. Commissioner of Customs, Calcutta and others reported in 1983 (13) ELT 1486 (SC)
  • Lakshman Exports Limits Vs. Collector of Central Excise reported in 2002 (143) ELT 21 (SC)
  • Sushil Aggarwal Vs. Principal Commissioner of Customs reported in (2025) 30 Centax 482 (Del.)
  • Surjeet Singh Chhabra Vs. Union of India reported in 1997 (89) ELT 646 (SC)
  • Naresh J. Sukhwani Vs. Union of India reported in 1996 (83) ELT 258 (SC)

These authorities collectively established the principle that natural justice violation materializes only when the show cause noticee demands cross-examination and the adjudicating officer declines to provide the same.

Respondent's Counter-Arguments

Shri Jameel Ahmad, learned counsel appearing for the respondents, defended the Tribunal's order by relying upon several authoritative pronouncements. His submissions emphasized that the statutory framework and judicial interpretations mandate strict adherence to principles of natural justice in customs adjudication.

The respondents placed reliance upon: