Customs Act | “Reason To Believe” For Confiscation Of Goods Must Be Based On Credible Material: Allahabad High Court

The Allahabad High Court has held that for natural products that are also grown inside India, presumption cannot arise that they have been smuggled. The Court held for assuming jurisdiction in such cases, the custom authorities must show that credible material exists to give rise to “reason to believe” to empower them to confiscate the goods under the Customs Act, 1962.

“Curtailment of free trade has serious consequences. While the revenue authorities would be within their jurisdiction to exercise their power to seize and confiscate goods that may have been smuggled inside the customs frontiers, yet with respect to natural products, that are also grown inside the country, no presumption is available to presume or assume that such goods are smuggled unless the assessee or the citizen otherwise satisfies that they are of Indian origin.”

The bench comprising of Justice Saumitra Dayal Singh and Justice Manjive Shukla held

“For assumption of jurisdiction in such cases, credible material must be shown to exit in the hands of the authorities and objective consideration must be shown to have been made to such material - to record the “reason” that may have led to formation of the “belief” that the goods are of foreign origin. Whenever such exercise is completed successfully, the jurisdiction may arise to the revenue authorities to detain and seize the goods”

The Court held that after the “reason to believe” has been established, it falls upon the assesee to prove that the goods have not been imported illegally.

Factual Background

Petitioner's goods, i.e., 49,210 Kgs of Arecanuts was being transported on two trucks bearing was seized. However, confiscation proceedings had not started yet. Petitioner challenged the seizure order on grounds that for seizure of goods under Customs Act 1962, the Proper Officer must record 'reasons to believe' that such goods are liable to be confiscated under the Act. It was argued that goods cannot be confiscated without there being reasons to believe.

Counsel for petitioner argued that “reason to believe” under Customs Act would mean that the goods have been imported from outside the country without proper clearance and in such circumstances are liable to be confiscated. However, arecanut of Indian Origin cannot be confiscated under the Act. It was argued the claim of foreign origin of the goods must be based on objective material.

Further, it was argued that the report of the Arecanuts Research and Development Foundation, Mangalore was not valid is not an accredited laboratory and no reliance could have been placed on its report to draw up any “reason to believe”. Since there was no valid material on which the “reason to believe” could be based, it was urged that the confiscation was bad in law.

Lastly, it was argued that the alleged discrepancy in the valuation of goods was inconsequential as there was no “reason to believe” in terms of the Act to empower the authorities to seize the goods of the petitioner.

Counsel for respondent submitted that the seizure was made based on the opinions of two arecanut traders who stated that it was of foreign origin and also the report of Arecanuts Research and Development Foundation, Mangalore wherein it was stated that the arecanut was similar to that of Indonesian Origin.

It was submitted that when inquiries were made from the dealer of the petitioner, it was disputed that the goods were from within the country. On this, the Court observed that no material from such inquiry was placed on record.

Lastly, it was argued that the petitioner could contest all disputes at the stage of adjudication before the authority, and that such proceedings have not yet commenced.

High Court Verdict

The Court held that for confiscation under the Customs Act, it is essential that the goods belong to prohibited category on which either general prohibition exists, or they have not been validly imported.

The Court held that since Arecanuts are known to be grown in India, there has be some credible material to establish that the ones being transported by the petitioner were brought from outside the country.

“It not being a case of detention at the customs frontiers, the revenue was burdened to bring some objective material as may have led to formation of a “reason”, in that regard. While sufficiency of reasons is not an aspect to be examined or decided in these proceedings, the relevancy of material remains an essential test to be satisfied by the revenue.”

The Court observed that the test of “reason to believe” cannot be passed in a casual manner. The Court held that once a transaction is presumed to be legal based on tax invoices, such presumption can only be destoryed on the strength of valid “reason”.

The Court held that since the tax invoices of the purchaser were found with the goods, the Authorities presumed that the goods were being brought from outside the country. However, such “reason to believe” on part of the custom authorities was not founded on any cogent material. The Court held that “No scientific or established/recognised test was performed by the ARDF” on the samples of the seized arecanut and its conclusion regarding its alleged foreign nature was inconclusive.

“Unless there pre-existed objective/scientific test to determine the origin of goods and/or unless the ARDF report had arisen on such a test to ascertain the origin of goods, the report of the ARDF though described as one of a neutral third party, it may never be acknowledged as cogent or objective material that may lead to formation of a “reason to believe” that the goods were of foreign origin.”

The Court relied on Commissioner Customs, (Preventive) v. M/S Maa Gauri Traders where the Allahabad High Court had disregarded the report of ARDF on the origin of betel nuts. Similar reliance was placed on the decision of the Meghalaya High Court in C.C. (Preventive), NER Region, Shillong v. Laltanpuii where the Court had upheld the Tribunal's order disregarding the report of ARDF on grounds that it was not accredited.

The Court further held that the petitioner is not legally required to carry the documents regarding his purchase of goods. He was required to carry the tax invoices of his sale to the purchaser, and such tax invoices were present with the goods. The Court held that absence of purchase tax invoices cannot lead to a presumption that goods were imported from foreign.

“Before any “reason to believe” may have arisen, the revenue authorities were obligated to conduct an enquiry and/or verification if the goods had originated from outside the country. Here, no material existed to doubt the origin of Aeranuts from within the country. Thus, revenue has failed to discharge its burden.”

Relying on the decisions of the Supreme Court in CST v. Bhagwan Industries (P) Ltd., Phool Chand Bajrang Lal v. ITO, CIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd. and State of Uttar Pradesh & Others v. M/s Aryaverth Chawl Udyoug and Others, the Court held that

“where exercise of executive power and assumption of jurisdiction hinges on prior recording of “reason to believe” that true objective test in law must be satisfied by the authority wielding the power.”

The Court held that the initial burden to show “reason to believe” exists for confiscation is on the custom authorities. Once the burden has been discharged by the authorities, the burden shifts on the assesee to prove his case.

“At the same time, in absence of objective material and in absence of “reasons” the belief that the goods were of foreign origin may remain non-actionable. It may give rise to no jurisdiction either to seize or confiscate the goods or to undertake any proceedings to that effect.”

The Court held that the revenue authorities “hopelessly failed” to show that there was any cogent and credible material to show that the Arecanuts were imported.

Accordingly, the detention memo and seizure order were quashed.

Case Title: M/S Maa Kamakhya Trader v. Commissioner Of Customs (Preventive) And 2 Others [WRIT TAX No. - 1287 of 2023]

Counsel for Petitioner : Shubham Agrawal

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