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CASE NO.: Appeal (civil)  683 of 2008

PETITIONER: Union of India

RESPONDENT: Anil Chanana & Another

DATE OF JUDGMENT: 25/01/2008

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T (Arising out of S.L.P. (C) No.10058 of 2007) KAPADIA, J.         Leave granted. 2.      This appeal is directed against judgment and order dated  17.10.06 in Writ Petition (C) No.12912 of 2006 passed by the  Delhi High Court whereby the writ petition filed by Union of India  against the Order dated 25.5.06 of the Chief Commissioner of  Customs (DZ) in a Compounding Case stood dismissed.  By the  impugned judgment, High Court has upheld Order  No.2/CCC(DZ)/SCM/2006 passed by Chief Commissioner of  Customs (Compounding Authority) compounding the offences  under Sections 132 and 135(1)(a) of the Customs Act, 1962.

3.      On the basis of specific information Anil Chanana- respondent No. 1, who alighted from British Airways\022 flight from  London and walked through Green Channel, was intercepted by  DRI Officers at the exit gate of the arrival hall of IGI Airport on  11.8.04.  On personal search, two sets of diamond earrings were  recovered from his coat pocket along with US$1900.  Further, an  invoice dated 10.8.04 evidencing sale of such earrings to  respondent No.1-Anil Chanana along with VAT Declaration Form  filed by Anil bearing stamp of Customs Authority, London, was  also recovered.  Further, the search of his baggage resulted in  recovery of two empty plastic jewellery boxes kept inside two  cardboard boxes (containers). The value of two pair of diamond  earrings mentioned in invoice dated 10.8.04 was of #1,40,847.41  equivalent to Rs.1,16,90,300.  On 12.8.04 Anil\022s statement was  recorded under Section 108 of the Customs Act, 1962 in which  he stated that the said earrings were gifted to him by his friend in  London. The name of his friend was Bhupendra Kansagara whom  he had met for the first time three years earlier; that, he got VAT  Declaration Form from British Customs so that he could get  refund of VAT; that, on arrival he did not declare the value of  dutiable goods in the Customs Declaration Form; that though he  was a frequent traveller he was not fully aware of Customs Law.   On 12.8.04 Anil was placed under arrest for having committed  offences punishable under Sections 132 and 135 of the Customs  Act, 1962 (for short, \0231962 Act\024) for failure to declare dutiable  goods in Customs Declaration Form and for having walked  through the Green Channel with intent to evade the payment of  duty and for making willful mis-statements and suppression of  material facts.  On 16.8.04 Anil voluntarily deposited customs  duty amounting to Rs.47,72,521.  On 19.8.04 he was granted  bail after he had deposited the duty.

4.      It is important to note that in his first bail application Anil  stated that when he was approaching the Red Channel the DRI  Officers along with the Customs Officers forcibly took him to the

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Green Channel.   

5.      On 24.9.04 show cause notice was issued demanding duty  amounting to Rs.47,72,521 and for confiscation of seized earrings  and imposition of penalty.  On 30.9.04 proceedings for  prosecution of Anil was launched in the Court of Addl. Chief  Metropolitan Magistrate, Patiala House, New Delhi.

6.      On 18.1.06 Anil applied for compounding the offences in  which application he stated that the two pairs of diamond  earrings were gifted to him by his friend in United Kingdom on  the occasion of marriage; that the invoice stood issued in his  name which indicated the value of two pairs of diamond earrings  solely for claiming VAT refund at London Airport; and that, Anil  was not required to pay any money towards the value of the  invoice.  In his application Anil stated that his flight landed at  I.G.I. Airport, New Delhi, and since he was tired he entered the  Green Channel area due to oversight, though he wanted to make  a declaration about the two pairs of diamond earrings and seek  clarification regarding the duty liability.  This application was  made on 18.1.06 on which date Anil simultaneously also moved  an application for settlement of his case under Section 127B of  the 1962 Act.

7.      On receipt of his application for compounding the offences  under Sections 132 and 135(1)(a) of the 1962 Act, the  Compounding Authority called for a report from the Reporting  Authority, namely, from DRI and Customs Department under  Rule 4(1) of the Customs (Compounding of Offences) Rules, 2005  (hereinafter referred to as \0232005 Rules\024).  On 9.3.06 DRI  submitted its report under Rule 4(2) whereas on 21.2.06 the  Customs Commissioner (Ing.) also Reporting Authority submitted  its report under the said Rule.  Vide DRI report, it was pointed  out to the Compounding Authority that the invoice was in the  name of Anil and not of Kansagara; that refund was to be claimed  by Anil and not by Kansagara; that the earrings were recovered  after Anil\022s interception and subsequent search and, therefore,  Anil\022s claim of voluntarily inviting the Customs\022 Officers was  denied.  Similarly, the fact that Anil was carrying two pairs of  diamond earrings on his person; that there were empty boxes in  his baggage also clearly established his intent to smuggle the  diamond earrings into India.   

8.      By impugned order dated 25.5.06 the Compounding  Authority, however, compounded the offences punishable under  Section 132 and 135(1)(a) and imposed the fine of Rs.15 lakhs.   The Compounding Authority in its final order found that the  offence for which compounding has been applied was a  substantive offence as defined in the guidelines enumerated in   Circular dated 30.12.05 issued by the Central Government; that  the case was eligible for being compounded; that it was the first  offence and that the eligibility of Anil to make compounding  application stood verified.  Accordingly the Compounding  Authority came to the conclusion that the application fell within  the scope and eligibility of compounding offences under Rule 4 of  the 2005 Rules.

9.      Aggrieved by the decision of the Compounding Authority  dated 25.5.06 Union of India challenged the said order before the  Delhi High Court in Writ Petition (c) No.12912 of 2006 which has  been dismissed by the impugned judgment, hence this civil  appeal.

10.     To recap, Anil has been accused of attempting to smuggling  into India two pairs of diamond earrings, collectively valued at

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Rs.1,16,90,300 and to fraudulently evade customs duty  chargeable thereon which rendered the said goods liable to  confiscation under Section 111 of the 1962 Act.  According to  Department, Anil had knowingly made a false declaration under  Section 77 of the 1962 Act before the Customs Authorities at IGI  Airport, New Delhi, with regard to dutiable goods carried by him  in his baggage, with the sole intent of evading payment of  customs duty and has, therefore, committed offences punishable  under Sections 132 and 135(1)(a) of the said Act.

11.     In order to understand the concept of Compounding it is  necessary to quote the relevant portions of Section 137 of the  Customs Act, 1962 and Rules 3, 6 and 7 of the Customs  (Compounding of Offences) Rules, 2005 which read as under: \023Customs Act, 1962

SECTION 137. Cognizance of offences. \026

(1)     No court shall take cognizance of any offence  under section 132, section 133, section 134 or  section 135 or section 135A, except with the  previous sanction of the Commissioner of  Customs.

(2)     No court shall take cognizance of any offence  under section 136, -

(a)     where the offence is alleged to have been  committed by an officer of customs not  lower in rank than Assistant Commissioner  of Customs, except with the previous  sanction of the Central Government; (b)     where the offence is alleged to have been  committed by an officer of customs lower in  rank than Assistant Commissioner of  Customs except with the previous sanction  of the Commissioner of Customs.

(3)     Any offence under this Chapter may, either  before or after the institution of prosecution, be  compounded by the Chief Commissioner of  Customs on payment, by the person accused of  the offence to the Central Government, of such  compounding amount as may be specified by  rules.\024

\023Customs (Compounding of Offences) Rules, 2005

RULE 3. Form and manner of application. \026  

(1)     An applicant may, either before or after  institution of prosecution, make an application  under sub-section (3) of section 137 in the form  appended [See: Customs series Form No.124 in  Part 5] to these rules, to the compounding  authority for compounding of the offence.  

Explanation.- Where an offence has been committed  at more than one place falling under the jurisdiction  of more than one compounding authority, then the  Chief Commissioner of Customs having jurisdiction  over such place where the value of goods seized, or  the amount of duty evaded or attempted to be  evaded or amount of export incentives wrongly

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claimed or attempted to be claimed wrongly is more  than others shall be the competent authority.

RULE 6. Power of Compounding authority to  grant immunity from prosecution. -  The  compounding authority, if he is satisfied that any  person who has made the application for  compounding of offence under these rules has co- operated in the proceedings before him and has  made full and true disclosure of facts relating to the  case, grant to such person, subject to such  conditions as he may think fit to impose, immunity  from prosecution for any offence under the Customs  Act, 1962 with respect to the case covered by the  compounding of offence.

RULE 7.  Withdrawal of immunity from  Prosecution in certain conditions. \026  

(1)     An immunity granted to a person under rule 6  shall stand withdrawn if such person fails to pay  any sum specified in the order of compounding  passed by the Compounding authority, under  sub-rule (3) of rule 4 within the time specified in  such order or fails to comply with any other  condition subject to which the immunity was  granted and thereupon the provisions of the  Customs Act, 1962 shall apply as if no such  immunity had been granted.   

(2)     An immunity granted to a person under sub- rule (1) above may, at any time, be withdrawn by  the Compounding authority, if he is satisfied  that such person had, in the course of the  compounding proceedings, concealed any  particulars, material or had given false evidence,  and thereupon such person may be tried for the  offence with respect to which immunity was  granted or for any other offence that appears to  have been committed by him in connection with  the compounding proceedings and thereupon  the provisions of the Customs Act, 1962 shall  apply as if no such immunity had been granted.\024

12.     To begin with, it may be noted that Section 137(3) of the  1962 Act talks about compounding of any offence falling under  Chapter XVI which covers Sections 132 and 135.  Therefore,  \023compounding\024 falls under Section 137 which deals with  cognizance of offences.  Under Section 137 of the 1962 Act, no  Court shall take cognizance of any offence under Sections 132,  133, 134 and 135 of the 1962 Act except with the prior sanction  of the Commissioner of Customs.  Therefore, the machinery  created under the Act is not for the purpose of investigating the  crimes, but for enforcement of the provisions of the Act and the  prevention of evasion of duty under the Customs Act.

13.     Compounding of offences is based on the principle of  Disclosure.  For purposes of Section 137(3), that disclosure has  to be in relation to the facts of the case (See Rule 6 of the 2005  Rules).  Anil has been accused of the offence to the Central  Government.  There is a difference between \023Disclosure in  Judicial Review Proceedings\024 and \023Disclosure in cases relating to  Compounding of Offences\024.  In the case of disclosure in judicial  review proceedings, Courts are not concerned with factual  findings, however, in cases of compounding of offences it would

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be the duty of the Compounding Authority to find out existence of  material, outside the evidence, which suggests that disclosure is  inaccurate, misleading or incomplete, particularly, when there  are contradictions in the stand taken by the applicant earlier  when statements are recorded under Section 108 of the 1962 Act  and the averments made in the Application for Compounding of  Offences.  In compounding cases, we have Merit Review vis-‘-vis  Judicial Review.  In the present case, Anil has stated in his  Application under Section 137(3) that he had no intent to  smuggle as he had entered into Green Channel through oversight  whereas earlier in his first bail Application Anil has stated that he  was forcibly taken by DRI Officers to walk through Green  Channel.  The basic rule of \023disclosure\024, underlying Section  137(3), is that if there are demonstrable contradictions or  inconsistencies or incompleteness in the case of the applicant  then application for compounding cannot be entertained.   Applications for compounding ought to be disallowed if there are  such contradictions, inconsistencies or incompleteness.  The  reason is obvious.  If the applicant is trying to hoodwink the  Authority such applications would not be maintainable.  That  aspect is required to be kept in mind by the Compounding  Authority.  The test is as follows \026 Is the applicant candid in the  matter of placing of materials and facts before the Compounding  Authority without in any way trying to hoodwink the Authority to  escape his criminal liability?  Equally, the Compounding  Authority is bound to discharge the statutory duty of making  proper enquiry by examining with care and caution the materials  that have been made available.  The said Compounding Authority  must be satisfied that the applicant has done all he could or need  to do in the matter.  The applicant has to be One-Time Evader.   He has to make clean breast of his affairs.  He has to give  exhaustive account of the circumstances in which he came to  Delhi, how he came in possession of the diamond earrings,  whether he had knowledge of the said earrings to be smuggled  into India, he has to disclose the name, address and telephone  number of the person who gave him the diamond earrings,  whether the applicant knew that the earrings were meant to be  smuggled into India etc.  The applicant has also to explain the  circumstances in which he received the goods without knowing  that they were being illegally imported or smuggled.  In the  present case, none of the above tests stands fulfilled.  Therefore,  the Application for compounding the offences under Sections 132  and 135(1)(a), was not maintainable.  The contradictions in the  two versions given by Anil per se made the Application for  compounding liable to be rejected.  In our view, neither Anil has  fulfilled his obligations nor has the Compounding Authority  discharged its statutory duty of making proper enquiries.   

14.     Before concluding, it may be mentioned that the  compounding mechanism in Section 137(3) is to be allowed only  in cases of doubtful benefit to the Revenue and to prevent  needlessly proliferating litigation and holding up of collections.   Compounding cannot be allowed if there are apparent  contradictions, inconsistencies or incompleteness in the case of  the applicant before the Compounding Authority.  It is the duty of  the Compounding Authority to ascertain such contradictions  before compounding is ordered.  In the present case, different  versions given by Anil \026 in his statement under Section 108, in  his first bail Application and in his Application for compounding  \026 itself disqualifies Anil from claiming the benefit of compounding   under Section 137(3) of the 1962 Act.

15.     None of the above aspects have been examined by the  Compounding Authority in its order dated 25.5.06 as well as by  the High Court in the impugned judgment dated 17.10.06 and

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they are hereby set aside.  Consequently, the Department\022s civil  appeal stands accordingly allowed with no order as to costs.