Negligence And Fraud And its Significance Under Customs Law

In our day to day life  we  often hear about two words i.e negligence and fraud, therefore concept and underlying principle is required to be understood behind these two terminology. As a Customs Officer, it become more important to understand the distinction between the two as fraud calls for greater degree of punishment whereas negligence is dealt with leniency and visited with lesser penalty or left unpunished considering bonafide error. Lets understand the Negligence and Fraud on the following lines:

Fraud And Negligence have to be Distinguished

If a customs officer or any enforcement authority fails to make a distinction between the two then it will result in unwarranted litigation/dispute and it will cause administrative inconvenience and also put burden on department whereas on the other hand it will increase of the transaction time and cost of the importer/exporter, which is contrary to the idea of ease of doing business. Therefore, it is in the interest of all stakeholders to lucidly comprehend the difference between the two.  During investigation and quasi- judicial proceedings under the Customs law, these two words are used frequently by customs authorities. Sometimes for  plain omission/commission word “fraud “ is used so often that  customs transaction/proceedings are  initiated on this notion, whereas in fact of the matter  pertains to simple breach of customs law due to negligence and no knowledge can be attributed to these transaction.

It can be broadly understood that for a transaction to be fraudulent existence of mens-rea is mandatory. Existence of mens-rea may not be necessary ingredient if  the contravention per se declared fraudulent by law.  To classify any act negligent or fraudulent, customs authorities should be circumspect and must not be in undue haste to consider any or particular act of importer/exporter/assessee to be fraudulent if it is not coupled with intention or not declared by fraudulent act by the statute per se. Before analyzing the fraud under customs act, it is prudent to have a look at Contract Act.

Fraud under Indian Contract Act, 1872

Fraud has been defined in Indian Contract Act, 1872 and discussed in detail.

The making of a representation which a party or agent knows to be untrue and which is intended  to induce another to act on it , so that he may suffers damage is fraud in law. Fraud is a willful act on the part of one, whereby another is sought to be deprived by unjustifiable means of what he is entitled to . Fraud is extensively defined in Section 17 of the Contract Act, 1872. Its main ingredients are as under;

  • The suggestion, as a fact which is not true by one who does not believe it to be true.
  • The active concealment of a fact by one who is having knowledge or belief of the fact;
  • The promise made without intention of performing it,
  • Any other act fitted to deceive,
  • Any such act or omission which is declared by the law to be fraudulent.

Active concealment is when party takes positive steps to prevent the information from reaching to other party. However, mere silence is not fraud but when there is duty to speak, then silence amounts to fraud.

Intended non-performance despite promise is held as fraud. When more no of tickets than seats are sold by the Airlines knowingly that they would not be any position to accommodate all the passengers, it amounts to fraud.

In case of fraud defendant cannot take a plea that plaintiff should have discovered it with due diligence. The defence of contributory negligence also cannot be set up in such case.

We have seen in the above discussion that fore-knowledge is an essential element of fraud and it has serious consequences  and requires stricter proof for proving. In absence of proof of knowledge, allegation/accusation of charges of fraud will fail  and cannot stand on its legs.

Fraud under Customs Act 1962

Under the provisions of customs act, fraud has not been defined but got oblique or direct mention in many sections for example under section 28(4), section 30(3), 41(3) and 46(5) of the Act. Though word fraud  has not been mentioned in some other sections viz 114AA and sections falling under chapter XVI which deals with offences and prosecution. But it is indisputable fact that the offences in these sections are fraudulent act as same are deliberately and knowingly committed to make loss to exchequer.

The sections pertaining to fraudulent transaction are spread over in Customs Act, 1962. Briefly some significant sections having fraudulent element or how fraudulent play by importer/exporter take away their right is discussed below;

Effect of fraud under Section 28 of C.A 1962

Section 28(4) deals with deliberate escape of duty due to collusion or misstatement or suppression of facts. All the three reasons accounting for duty evasion/escape are main elements of fraud. Limitation of 5 years is prescribed for recovery of duty. As the discovery of fraud cannot be made with naked eyes hence greater length of time is required to detect it therefore while demanding duty  making  recovery thereof lawmakers have provided with period of five years under Section 28(4) of the Act.

In recent union budget, pre-consultation before issuance of Notice has been proposed under Section 28(1) but there is no such proposal  for Section 28(4). This is a clear pointer that fraud extinguishes many of the right which are otherwise available to importer/exporter.

Consequence of fraud at the time of presentation of Import/Export General Manifest

Whereas  Section 30(3) and 41(3) deals with submission of  incomplete/incorrect Import General Manifest/Export General Manifest  and confer power to proper officer to amend/supplement if fraudulent intention is absent. Similarly section 46(5) lays down substitution of Bill of Entry from home consumption to warehouse bill of entry or vice versa subject to non-existence of fraudulent intention.  It can be seen that even in routine customs work presence of fraud hamper the right of assessee and necessitate adjudication otherwise matter could be resolved in a  peaceful and plain manner without raising controversy. 

Role of fraud for the offence under Chapter XVI

When the commission of wrong done with knowledge means fraudulent transaction  and exceeds the threshold monetary limit of Rs 1 Crore prescribed by Board Circular 27/2015 cus-dated 23.10.2015 in respect of duty evasion/drawback related to appraising cases/commercial fraud falling under chapter XVI of the Customs Act, stricter punishment such as arrest and prosecution is provided in addition to the any other action as prescribed by customs law. In other words, it can be said that fraudulent transaction of duty evasion/drawback claimed, exceeding monetary limit  attracts criminal liability.

Fraudulent Play by Importer/Exporter during Settlement Commissions Proceedings

During proceedings of Settlement Commission under Section 127A-N, exporter/importer are  required to make full and true disclosure of their duty liability before Commission(Section 127B) and if it is found that the order is obtained by importer/exporter from the Settlement Commission by the reason of misrepresentation or by fraud then the order would be void. It connotes that fraud vitiates the proceedings and render any transaction void ab initio.

Fraud by Other Stakeholders by Abetment

It is fact that customs transaction involves participation of many stakeholders other than importer/exporter viz Customs Broker( In short CB), S/Lines, Custodian (CFS/ICD/Port authorities etc). On behalf of importer/exporter, they give effect to import/export transaction. In other words any transaction of customs is not carried out independently by importer/exporter, but active assistance is provided by other stakeholders as discussed above. In case of any omission/commission when there is mere breach and intention/knowledge on the part of CB, S/Line etc is absent, they cannot be charged for fraud and penalized. In entire scheme of things they are acting as a subsidiary and assisting the principal offender i.e exporter/importer, therefore mere omission without existence of intention/ foreknowledge is not punishable and their act does not falls under offence of abetment and can be considered as fraudulent act.  If the simple omission of CB , S/Line will be made punishable without having knowledge then it will become difficult to carry out the work of customs and the whole transaction will come to standstill.

Effect of fraud

It makes the transaction void ab initio and it is a cause of action for damages. From the fraudulent transaction, no right flows. Fraud vitiates everything. Even in case of Caveat Emptor which is the basic principle of law in Sale of Goods Act, 1930, it is applicable  except in the case of fraud. It says that “Let the buyer be aware” when the sale is done in overt market but except in the case of fraud.

Negligence in all guise

Whereas negligence is omission or breach without intention to commit it. It is of lesser grade of guilt, therefore under the customs act bonafide default attracts lesser punishment or no punishment. However, it is reminded that civil wrong occasioned by negligence is always  not free from penal liability until and unless it is specifically excluded by the provisions of customs law.    

The jurisprudential concept of negligence has three main ingredients which are as follows;

(i) A state of mind, which is opposed to intention;

(ii) Careless Conduct,

(iii) the breach of a duty to take care that is imposed by either common or statute law,

Negligence is the breach of a duty caused by omission, which man of ordinary prudence guided upon those consideration, which regulate the conduct of human affairs would do or would not do. The law does not take cognizance of carelessness, it concerned itself when there is a duty to take care and failure to do so caused damage. There cannot be liability for negligence unless there is breach of some duty. Duty may arise from either from contract or statute or otherwise. Plaintiff has to satisfy the court regarding injury and existence of three  ingredients;

  1. Existence of duty to take care,
  2. Failure to maintain standard degree of care and
  3. Damaged suffered on account of breach of duty.

If an act is done by a person and is such that he does not reasonably foresee that thereby he will injure another, he will not be liable whether he does the act intentionally or inadvertently.

Existence of duty

The existence of a duty situation or a duty to take care is essential before a person to be held liable in case of negligence. It is also held that duty of care should not imposed intolerable burden on  authority and prevent it performing it from normal duties.

Breach of Duty

The plaintiff has to show that there is a breach of duty, which means failure to exercise standard degree of care. Negligence would only be determined by ascertaining how the man of ordinary prudence would behaved in such circumstances. The amount of care may vary from person to person but the degree of standard may remains the same. The degree of care which a prudent man exercise vary with the obviousness of risk/danger.  In a moment of peril and extremely difficult situation, perfect presence of mind, accurate judgment and promptitude should not be expected from a person.

In a proceedings for determining the liability for negligence, the plaintiff must establish, an existence of duty, secondly a breach  of duty, and thirdly that such breach was proximate cause of the loss or injury to the plaintiff.

Role of Negligence in Customs Proceedings

At the outset it is significant to state that it is visualized by many of us that non-observance arises out of negligence shall not be the reason for imposition of penalty on importers/exporter. This idea is not gospel truth. Apart from chapter XVI of the Customs Act, rest of the provisions of Act is majorly civil law. It is a undeniable fact that customs act is civil law and for the omission/commission of wrong regardless of the fact that it is out of negligence, penalty is proposed and it is imposed on the main offender which are exporter/importer. The defense is set up by the importer/exporter that it was done due to negligence and knowledge was absent. The reason for  penal liability is that scheme of customs act does not take care of intention when the wrong has been committed by the importer/exporter, as going by the doctrine of civil proceedings which says that when damage done penal liability automatically comes into reckoning. Therefore breach is punishable until and unless it is excluded by the provisions of the Act or rule made thereunder. It is evident in case of Section 30(3), 41(3) and 46(5) of the Act, which have been discussed under the heading of fraud that unintentional omission cannot be considered for penalty. In these sections omissions can be rectified/ amended/remedied by not visiting penal provisions. Breach of customs provisions by stakeholders due to negligence in absence of knowledge  does not attract penal clause. Under self assessment scheme bonafide error is also not liable for penalty. Looking broadly it can be said that negligence of importer/exporter is penalized but for other stakeholders penalty is not imposable when there is absence of knowledge. Further, when omission/commission is expressly excluded due to negligence, then it is also not punishable.

## More Worthwhile Reads on this Blog:

Scope of Penalty for Escape of Duty U/S 28(1) of C.A.1962

Mens Rea Under Customs Act,1962

Adjudication of offences Under Customs Act,1962

Repeal And Saving in Statutory Space

Recording of Statements U/s 108 of Customs Act


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