Income-tax assessment cannot rely on secret enquiries or undisclosed material without giving the assessee a chance to rebut it.

In income-tax assessment proceedings, the authority may rely on admissible surrounding circumstances and prior assessments where the assessee fails to produce satisfactory evidence, but it cannot base an assessment on conjecture or material obtained behind the assessee's back without disclosure. Private enquiries may be used only as an administrative check; once relied on in assessment, the assessee must be given an opportunity to meet the material. The assessment here was therefore sustainable only to the extent it rested on lawful material, while secret-enquiry material could not be used without rebuttal.

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Issues: (i) Whether the estimate of capital investment of 11 lakhs was based on such evidence as the Assistant Commissioner was in law empowered to act upon. (ii) Whether the Assistant Commissioner was authorised to make private enquiries and to take the result of such enquiries into account in making the assessment.

Issue (i): Whether the estimate of capital investment of 11 lakhs was based on such evidence as the Assistant Commissioner was in law empowered to act upon.

Analysis: The assessment could not rest on mere conjecture or on material obtained behind the assessee's back without giving him an opportunity to meet it. At the same time, the previous year's assessment and the surrounding circumstances, if otherwise admissible and supported by the record, could be taken into account when the assessee failed to produce satisfactory evidence. The estimate was therefore not wholly unsupported, but part of the material relied upon was outside the permissible evidentiary basis.

Conclusion: The estimate was based partly on evidence the Assistant Commissioner could lawfully act upon and partly on material he could not lawfully use.

Issue (ii): Whether the Assistant Commissioner was authorised to make private enquiries and to take the result of such enquiries into account in making the assessment.

Analysis: Private enquiries may be made as an administrative step to test the return, but once the assessment stage is reached and the assessee is entitled to meet the case against him, material gathered behind his back cannot be used without affording an opportunity to rebut it. The result of such secret enquiries, if relied upon in the assessment, offends the requirements of fair hearing.

Conclusion: The Assistant Commissioner was not authorised to use the result of private enquiries in the assessment without giving the assessee an opportunity to meet them.

Final Conclusion: The reference was answered in part for the assessee and in part for the department, with the assessment sustained only to the extent it rested on lawful material.

Ratio Decidendi: In income-tax assessment proceedings, the authority may reject an unreliable return and rely on admissible surrounding circumstances or prior assessments, but it cannot base the assessment on secret enquiries or other material not disclosed to the assessee for rebuttal.

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