Natural justice in income-tax assessment requires disclosure of adverse material and a fair chance to rebut it before enhancement stands.

New adverse material used to enhance an assessment cannot be relied on unless the assessee is given a fair opportunity to rebut it; an assessment based on undisclosed material offends natural justice and could not stand on those facts. On the second issue, where the inquiry was conducted at the appellate stage under the Assistant Commissioner's direction, the Income-tax Officer was not bound to record or take the evidence of the witnesses produced before him. The reference was answered in favour of the assessee, with the assessment matters remitted to be reconsidered after affording him an opportunity to meet the adverse material.

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Issues: (i) Whether the assessee was entitled to an opportunity to rebut the new material forming the basis of the assessment report and whether an assessment based on material not disclosed to him was invalid. (ii) Whether the Income-tax Officer was bound to record or take the evidence of witnesses produced before him in the circumstances of the appellate inquiry.

Issue (i): The report made by the Income-tax Officer introduced new adverse facts, including the alleged discovery of books and railway receipts said to relate to the assessee's business. Those matters went to the basis of the enhancement and could not fairly be used without giving the assessee an opportunity to deal with them. Principles of natural justice required that he be allowed to answer the new allegations before the assessment was sustained.

Conclusion: The assessee was entitled to an opportunity to rebut the new material, and the assessment could not be treated as valid without such opportunity.

Issue (ii): The statutory scheme required the Income-tax Officer, during assessment, to hear evidence produced by the assessee and such evidence as might be required on specified points. But where the inquiry was made at the appellate stage under the Assistant Commissioner's direction, there was no obligation in the circumstances to compel the Income-tax Officer to record the evidence of the witnesses cited and produced. The answer to the question was governed by the assessment procedure under the Income-tax Act, and on these facts no such duty arose.

Conclusion: The Income-tax Officer was not bound, on these facts, to record or take the evidence of the witnesses produced before him.

Final Conclusion: The reference was answered in a manner favourable to the assessee, and the assessment issues were remitted to be dealt with after affording him a fair opportunity to meet the adverse material.

Ratio Decidendi: Where the basis of an assessment is enlarged by new adverse material, the assessee must be given a fair opportunity to rebut it before the assessment is sustained; absent such opportunity, the assessment cannot stand consistently with natural justice.

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