Facts of the Case

The Revenue filed appeals challenging a common order passed by the Income Tax Appellate Tribunal (ITAT) under Section 254(2) of the Income-tax Act for Assessment Years 2008–09 to 2011–12.

The case revolved around:

  • Alleged existence of a foreign bank account with HSBC, Geneva.
  • Addition made by the Assessing Officer (AO) towards notional interest (4%) on credits found in such account.
  • The ITAT, in an earlier round, had remanded certain issues but had not adjudicated the issue of notional interest.
  • Subsequently, the assessee filed a rectification application under Section 254(2), which was allowed by the Tribunal.
  • The Tribunal decided the issue on merits and deleted the notional interest addition, holding that there was no material evidence of actual interest earned.

Issues Involved

  1. Whether the ITAT exceeded its jurisdiction under Section 254(2) by revisiting the issue of notional interest.
  2. Whether the addition of notional interest by the Assessing Officer was justified in absence of supporting material.
  3. Whether notional interest can be taxed without evidence of actual accrual or receipt.

Petitioner’s (Revenue’s) Arguments

  • The ITAT exceeded its rectification powers under Section 254(2).
  • The earlier order had already remanded the issue, hence it could not be reconsidered.
  • The HSBC account was interest-bearing; therefore, interest income should be presumed and taxed.
  • The Tribunal wrongly treated such interest as “notional”.

Respondent’s (Assessee’s) Arguments

  • The issue of notional interest was never adjudicated in the earlier order, hence rectification was valid.
  • Section 254(2) allows correction of mistakes apparent on record.
  • No material evidence existed to prove that any interest income was actually earned.
  • Therefore, addition based purely on assumption was unsustainable. 

Court’s Findings / Order

The Delhi High Court held:

  • The ITAT rightly exercised powers under Section 254(2) since the issue of notional interest had not been previously decided.
  • Rectification was valid as it addressed an issue omitted earlier.
  • The Court relied on the outcome of connected appeal (ITA 612/2017), wherein:
    • No incriminating material was found during the search.
    • Hence, the original addition itself was unsustainable.
  • Consequently:
    • Notional interest could not be computed on an invalid addition.
    • The addition of notional interest was rightly deleted.

Final Decision:
The question of law was answered in favour of the assessee and against the Revenue, and all appeals were dismissed.

Important Clarification

  • Notional income cannot be taxed without evidence of actual accrual.
  • Section 254(2) permits rectification where an issue has not been adjudicated earlier.
  • Additions based on foreign bank accounts require incriminating material, especially in search cases.
  • If the base addition fails, derivative additions (like notional interest) automatically fail.

Sections Involved

  • Section 254(2) – Rectification of mistake by ITAT
  • Income-tax Act, 1961

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

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.