Per M.K. Chaturvedi, JM - This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals), Central-IV, Bombay, and pertains to the assessment year 1985-86.

2. The assessment was completed under section 143(3), read with section 145(2) of the Income-tax Act, 1961. The accounting year of the assessee ended on 30-6-1984. The assessee is a company in which public are substantially interested. The assessee-company is following the mercantile system of accounting. It filed its return of income for the relevant year of assessment on 28-6-1985, reflecting therein income of Rs. 3,84,14,220. The Assessing Officer made an addition of Rs. 26,20,51,000 in the total income of the assessee under the head "Premium on sale of cigarettes". The Assessing Officer deducted the amount of commission and trading income alleged to be reintroduced by means of hawala entries, and advertisement expenses alleged to be used out of secret bank accounts. The assessee being aggrieved of the assessment order, preferred appeal thereagainst before the CIT(Appeals). The claim of the assessee was rejected by the CIT(Appeals). The assessee Preferred appeal against that order before the Tribunal. The validity of the order was assailed, inter alia, on the ground of natural justice. The assessee disputed the additions on merits also.

3. At the outset, both the parties requested that the first decision be rendered on the preliminary issue concerning the observance of the principles of natural justice while framing the order of assessment. On merits, it was requested that the case may be heard after the deliverance of decision on the preliminary issue. The appeal was, therefore, heard apropos the grounds concerning the canons of natural justice.

4. Briefly the facts —

The assessee is engaged in the business of manufacturing of cigarettes. The factories are situated at Bombay and Baroda. Tobacco processing units are at Guntur and Hyderabad. It also gets the cigarettes manufactured through a number of jobs working units. Its popular brands are sold under the trade names, Panama, Blue Bird, A-1, Golden Lion, Style, Taj Mahal, etc.

The selling arrangement of the cigarettes is through the Wholesale Buyers (hereinafter referred to as "WB"). The sale net work includes wholesale, dealers, semi-wholesale dealers and voluntary retailers. The company deliver the goods to the WBs.

In the month of September 1982, the office of the assessee-company along with the office of several WBs were searched by the Anti Evasion Wing of the Directorate of Revenue Intelligence (Central Excise). Another search took place by the said Anti Evasion Wing in January, 1986. The material gathered by the DRI in the course of search was passed on to the Income-tax Department.

5. Taking the clue from the Excise Authorities the Assessing Officer investigated the matter. The outcome of the investigation according to the assessee is based on the following four factors :—

(i) The assessee collected clandestine and unaccounted premium on the lower price brands of the cigarettes;

(ii) the premium so collected was deposited in secret bank accounts;

(iii) the assessee-company spent large amount for advertising its products. The amount so spent was alleged to be used out of deposits in the secret bank account;

(iv) such amounts withdrawn from these bank accounts alleged to be re-introduced in the assessee’s account by means of havala entries and reflected as commission and trading income which according to the revenue represents bogus entries.

6. The assessee is a leading manufacturer of cigarettes. To ascertain the profits from the tobacco business, Assessing Officer analysed the assessee’s financial results by scrutinizing the Profit & Loss Account. The following facts emerged :