Additional evidence must be considered on merits when appellate powers allow it and the finding depends on that material.

Appellate authorities may receive additional material and make further inquiry where the law permits, and a factual finding cannot stand if it is based on excluding a material document central to the assessee's explanation. An affidavit filed before the Appellate Assistant Commissioner was treated as admissible evidence because the relevant rule on additional evidence did not apply for that assessment year. The Tribunal was therefore required to consider the affidavit on merits and could not sustain an addition for undisclosed income after leaving it out of account.

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Issues: Whether the Tribunal was justified in upholding the addition of Rs. 50,000 as income from undisclosed sources after excluding an affidavit filed before the Appellate Assistant Commissioner as additional evidence.

Analysis: The matter turned on the scope of appellate powers and the admissibility of additional evidence. The appellate authority under section 250(4) of the Income-tax Act, 1961 had power to make further inquiry or receive additional material, and rule 46A of the Income-tax Rules, 1962 was not applicable to the relevant assessment year. The affidavit filed before the Appellate Assistant Commissioner was therefore a valid piece of evidence and could not be excluded merely because it was produced for the first time or had not been separately verified in the manner suggested by the Tribunal. The Tribunal was bound to consider all material evidence on record and could not sustain a factual finding reached after leaving out a material document central to the assessee's explanation of the cash credit.

Conclusion: The Tribunal was not justified in treating the cash credit of Rs. 50,000 as the assessee's undisclosed income, and the question referred was answered in the negative, against the department and in favour of the assessee.

Final Conclusion: The reference was answered by holding that the addition could not stand in law because a material piece of evidence had been wrongly excluded from consideration.

Ratio Decidendi: An appellate finding on facts is not legally sustainable if it is reached by excluding material evidence that the appellate authority was competent to receive and that had to be considered on merits.

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