LLM Group 2 Business Law Law Relating to Customs and Foreign Exchange 2025-26 - Set 2 Question Paper with Solutions

For full marks, cover: the statement is a proposition and it must be proved, not described; the strongest plan is to show that the dual character is not a curiosity but has four operative consequences which decide real cases, and to organise the answer around those consequences; first establish the two characters briefly with their provisions; then take the four consequences, construction, burden of proof, choice of sanction, and the standard of proof, and show the Act deciding each; and close on which character is gaining, with the reasons.

The two characters, established

A fiscal statute exists to raise revenue. It identifies a taxable event, fixes a base, sets a rate and provides machinery to assess, collect, recover and refund. Article 265 governs it: no tax may be levied or collected except by authority of law.

Its preventive half: section 11 empowers the Central Government to prohibit imports or exports for the purposes listed in sub-section (2), which run from clause (a) to clause (s), of which only the conservation of foreign exchange is even remotely fiscal, the others including the security of India, public order and standards of decency or morality, the prevention of smuggling, the protection of human, animal or plant life or health, the protection of national treasures of artistic, historic or archaeological value and the conservation of exhaustible natural resources.

Section 2(39) defines smuggling by reference to liability to confiscation; sections 100 to 106 provide for search of persons, premises and conveyances, including the power in section 106 to fire upon a vessel or aircraft that will not stop; section 110 for seizure; sections 111 to 121 for confiscation of goods, conveyances, packages, concealing goods, transformed goods and sale proceeds; sections 112, 114, 114A and 114AA for penalties; sections 123, 138A and 139 for reversed burdens; and sections 104 and 132 to 137 for arrest, offences, sanction and compounding.

And an exemption provision is construed strictly against the claimant. In Commissioner of Customs v. Dilip Kumar and Company, (2018) 9 SCC 1, a Constitution Bench of five judges held that an exemption notification must be construed strictly, that the burden of establishing applicability lies on the assessee, and that where there is ambiguity in an exemption notification the benefit of doubt cannot be claimed by the subject and must be interpreted in favour of the revenue, expressly overruling the contrary line. The reason is precisely the dual character: an exemption is a departure from a charge, and a person seeking to escape a levy imposed for revenue must bring himself squarely within the words of his escape.

Classification is governed by a fourth and wholly separate body of rule, the General Rules for the Interpretation of the Import Tariff printed before the First Schedule to the Customs Tariff Act, applied in strict sequence, with the World Customs Organization's Explanatory Notes as persuasive material and the commercial or trade parlance test where the tariff uses a word with a settled trade meaning.

A candidate who applies a single canon throughout the Act will therefore misstate the law in at least two places, and that is the sharpest demonstration that the statement in the question is true.

The justification for the difference is exactly the difference between the two characters. A revenue claim is made against a person who has declared his transaction; a preventive proceeding is brought against a person whose conduct was designed to be invisible, and the facts lie peculiarly within his knowledge. What keeps the reversals lawful is that each has a precondition the department must first establish and a court can test: a reasonable belief at the moment of seizure for section 123, an offence requiring a culpable mental state for section 138A, and production or seizure under the Act for section 139.

Consequence three: the Act chooses its sanction by which character is engaged

Section 125 is the clearest instance in the statute of the two characters being weighed against each other, and it should be given in full. Whenever confiscation is authorised, the adjudicating officer may, in the case of goods the importation or exportation of which is prohibited, and shall, in the case of any other goods, give the owner an option to pay a fine in lieu of confiscation, the fine not exceeding the market price of the goods less the duty chargeable.

Consequence four: two standards of proof, and two proceedings on one set of facts

Because the Act performs both functions, a single consignment generates two proceedings that may run together.

The civil track is adjudication: seizure under section 110, notice under section 124, confiscation under sections 111 to 121 and penalty under sections 112, 114, 114A or 114AA, decided by a departmental officer under section 122 on the preponderance of probabilities.

The criminal track is prosecution: arrest under section 104 where available, sanction under section 137(1), and trial under sections 132 to 135A on proof beyond reasonable doubt, a standard section 138A(2) states in terms.

Both may proceed at once, because the objects differ, the standards differ, and departmental adjudication is not a prosecution before a court, so Article 20(2) and section 300 of the Code of Criminal Procedure, 1973, now section 337 of the Bharatiya Nagarik Suraksha Sanhita, 2023, are not attracted. The qualification is that an exoneration in adjudication on the merits, on the same facts and the same evidence, will not leave a prosecution standing, because the department has failed on the easier standard; an exoneration on a technicality or on limitation will.

One development runs the other way and should be conceded. The Finance Act 2025 abolished the Settlement Commission from 1 April 2025, transferring pending applications to an Interim Board for Settlement of three officers of Chief Commissioner rank with no judicial member, and thereby removed the only forum that could grant immunity from prosecution under section 127H. That is a hardening of the preventive side, not a softening; whereas sections 18(1B) and 18A, in force from 1 May 2025, are a softening of the fiscal side, imposing a two-year limit on finalising provisional assessments and permitting a voluntary post-clearance revision.

The dual character is not decorative: it has four operative consequences. The same Act is construed strictly in favour of the subject on the charge, purposively on machinery and prohibition, strictly in favour of the accused on penal provisions, and, since Dilip Kumar in 2018, strictly against the claimant on exemptions, with classification governed by a separate set of statutory rules altogether. The burden of proof sits normally in the fiscal half and is reversed three times in the preventive half, each reversal resting on a precondition a court can test.

The choice of sanction turns on which character is engaged, section 125 making redemption mandatory for goods that are not prohibited and discretionary for those that are, while section 104(4) makes an offence cognizable by the nature of the goods or by a figure exceeding fifty lakh rupees. And two proceedings may run on one set of facts at two different standards of proof, subject only to the rule that an exoneration on the merits ends the prosecution.