Legal principle

A compounding application under Section 137(3) of the Customs Act may be filed at any stage — even before show cause notice or adjudication — and the Compounding Authority, being an 'adjudicating authority', must decide it after affording an opportunity of hearing in accordance with the principles of natural justice.

Court decision

The Tribunal (Single Member Bench) held the appeals maintainable, ruling that the Chief Commissioner deciding a compounding application under Section 137(3) acts as an 'adjudicating authority'. On merits, following the jurisdictional Bombay High Court in Imran Latif Shirgawkar, it held there is no bar to filing a compounding application before show cause notice or adjudication, and that an ex parte decision without affording a hearing is unsustainable. The impugned order was set aside and the compounding application restored to the Chief Commissioner for fresh decision after determination of demand, interest and penalty by the adjudicating authority, in accordance with law and the principles of natural justice. The decision was in favour of the appellants and the appeals were disposed of accordingly.

Facts

Four appellants (three members of the Kakadiya family and Dipak Trading Co.) filed a common compounding application dated 1.7.2025 under Section 137(3) of the Customs Act, 1962 read with the Customs (Compounding of Offences) Rules, 2005 before the Chief Commissioner of Customs, Nhava Sheva, during an ongoing DRI investigation. The allegations concerned mis-declaration of value of freely importable dry fruits — walnuts, almonds and pistachios — through manipulated invoices, with duty evasion of approximately Rs. 44 crores under investigation and offences punishable under Sections 132 and 135; one applicant had been arrested under Section 104, but no prosecution had been launched and no show cause notice issued. On 3.07.2025 the Chief Commissioner, acting as Compounding Authority, dismissed the application ex parte under Rule 4(3) of the Compounding Rules without any opportunity of personal hearing, one day before the appellants' anticipatory bail application was due before the Bombay High Court. The appellants filed these appeals before CESTAT, Mumbai.

Key provisions

• Section 137(3), Customs Act, 1962 — Cognizance of offences
• Section 129, Customs Act, 1962 — Appellate Tribunal
• Section 129C(4), Customs Act, 1962 — Procedure of Appellate Tribunal
• Section 129A, Customs Act, 1962 — Appeals to the Appellate Tribunal
• Rule 4(3), Customs (Compounding of Offences) Rules, 2005 — Procedure on receipt of application under rule 3
• Section 135, Customs Act, 1962 — Evasion of duty or prohibitions
• Section 132, Customs Act, 1962 —  False declaration, false documents,etc
• Section 127J, Customs Act, 1962 — Order of settlement to be conclusive