Facts of the Case

The Revenue filed multiple appeals challenging a common order passed by the Income Tax Appellate Tribunal (ITAT) dated 20.12.2019 under Section 254(2) of the Income-tax Act, 1961. The dispute pertained to Assessment Years 2008–2009 to 2011–2012.

Earlier, the ITAT had remanded the issue relating to the alleged foreign bank account maintained by the assessee with HSBC, Geneva, Switzerland for fresh consideration by the Assessing Officer. However, the Tribunal had not adjudicated upon the issue of addition of 4% notional interest on credits in that account.

Subsequently, the assessee filed a rectification application under Section 254(2), contending that the issue of notional interest remained unaddressed. The Tribunal allowed the application and decided the issue on merits in favour of the assessee. 

Issues Involved

  1. Whether the ITAT exceeded its jurisdiction under Section 254(2) by recalling/modifying its earlier order.
  2. Whether the addition of notional interest on alleged foreign bank deposits was justified in absence of supporting material.

Petitioner’s (Revenue) Arguments

  • The ITAT wrongly exercised rectification powers under Section 254(2) by effectively reviewing its earlier order.
  • The issue had already been remanded to the Assessing Officer, and no further adjudication was permissible.
  • The Tribunal erred in treating interest income as “notional” despite the account being interest-bearing.

Respondent’s (Assessee) Arguments

  • The issue of notional interest was never adjudicated in the earlier ITAT order.
  • Rectification under Section 254(2) was valid as there was an apparent omission.
  • No evidence existed to establish actual receipt of interest; hence, no addition could be made on a notional basis.

Court’s Findings / Order

  • The Court held that the ITAT correctly exercised its powers under Section 254(2), as the issue of notional interest was not addressed in the earlier order.
  • Rectification was permissible since it involved correcting an omission apparent on record.
  • The Court noted that in connected proceedings (ITA 612/2017), it had already held that no incriminating material was found during the search.
  • Consequently, the Assessing Officer could not make additions or compute notional interest without such material.
  • The question of law was answered in favour of the assessee and against the Revenue, and all appeals were disposed of accordingly.

 

Important Clarifications

  • Section 254(2) allows rectification where an issue is not adjudicated, not merely for clerical errors.
  • Notional income cannot be taxed in absence of actual receipt or supporting evidence.
  • Additions under search assessments must be backed by incriminating material discovered during the search.

 

Sections Involved

  • Section 254(2) – Rectification of mistake by ITAT
  • Provisions relating to assessment and additions under the Income-tax Act, 1961

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/60813122023ITA1042021_173524.pdf

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