The judgment establishes the principle that legal and admissible evidence is required to support findings in income tax assessments, and emphasizes the duty of the Income-tax Officer to collect evidence, disclose it to the assessee, and conduct independent inquiry to verify the truthfulness or reliability of the information.

1. The assessee-firm is a registered stock-holder of iron goods manufactured by the Tatas, It also purchases scrap iron for re-rolling it into bars and scraps. It had business transactions with M/s. Goel Iron Stores, Gobind-garh. In connection with the assessment of M/s. Goel Iron Stores to sales tax, the sales tax authorities found a book called Uchanti Bahi which purported to record transactions of M/s. Goel Iron Stores which had not been accounted for by them in their regular books of account produced before the sales tax authorities. While scrutinising the Uchanti Bahi of M/s. Goel Iron Stores, the following entries pertaining to the assessee were found: Debit Credit Rs. Rs. 1-11-55 15,388-3-0 3-11-55 19,388- 0-0 9-11-55 800-0-0 3-11-55 2.000- 0-0 5-12-55 400-0-0 23-11-55 4,137-10-9 6-12-55 700-0-0 3-11-55 3,000- 0-0 9-12-55 300-0-0 6-12-55 11,156- 3-0 10-12-55 4,000-0-0 21-12-55 579- 5-0 12-12-55 1,800-0-0 13-12-55 2,036-3-0 25,424-6-0 40,260-15-9

2. The Income-tax Officer found that in the books of account produced before him, the assessee had accounted for items aggregating to Rs. 26,306 as against the sum of Rs. 40,261 for which credit was given to the assessee in Uchanti Bahi of M/s. Goel Iron Stores. Similarly, it was found that as against the total sum of Rs. 25,424 debited to the assessee in the Uchanti Bahi of M/s. Goel Iron Stores, the assessees books showed credits corresponding to Rs. 15,388 only on November 1, 1955. The Income-tax Officer formed the opinion that all the transactions which were recorded in the Uchanti Bahi of M/s. Goel Iron Stores pertaining to the assessee in fact pertained to it, as some of the entries in the Uchanti Bahi were also recorded in the assessees books. On that plea, the Income-tax Officer held that the sum of Rs. 13,955, representing the difference between Rs. 40,261 and Rs. 26,306, represented the amount given by the assessee to M/s. Goel Iron Stores which was not recorded in the assessees books. This amount was accordingly treated as the assessees income from undisclosed sources by the Income-tax Officer and included in its income for the assessment year 1956-57. The matter was taked up before the Appellate Assistant Commissioner in appeal by the assessee. The Appellate Assistant Commissioner accepted the appeal and in support of his order dated October 27, 1961, gave the following reasons:

" M/s. Goel Iron Stores of Gobindgarh was a regular customer of the appellant for purchase of sheets. For purposes of sales tax assessment of this concern, it is said that a duplicate cash book called the Uchanti Bahi was discovered, which showed that all the transactions entered in the Uchanti Bahi were not entered in their cash book. Goel Iron Stores was, therefore, assessed to sales tax amounting to Rs. 18,000. That firm was dissolved on March 31, 1956, and it was only Shri Sagar Mal, partner, who was attending to the sales tax proceedings. Shri Sagar Mal filed an appeal and the Deputy Excise and Taxation Commissioner compromised the case for Rs. 3,100, to which Shri Sagar Mal agreed, because, (a) of the huge reduction offered, (b) no other partner was taking interest and it was he alone who was being pursued by the sales tax authorities for payment of demand and attending the innumerable proceedings. I am told that Shri Sagar Mal had vehemently denied maintaining any Uchanti Bahi and the said book shown to him by the sales tax authorities was denied by him to belong to his firm, but in order to finish the case, he admitted, as one of the terms If compromise, that the Uchanti Bahi belonged to him. Later on, the Income-tax Officer came to know of the Uchanti book through the sales tax authorities and obtained abstracts therefrom. The Uchanti book also contained transactions done with the appellant and the Income-tax Officer found that, as far as the appellant was concerned, the Uchanti book of M/s. Goel Iron Stores showed a total debit of Rs. 25,424 for cash payment to the appellant