Facts of the Case

  • The assessee was alleged to have maintained a foreign bank account with HSBC, Geneva.
  • The Tribunal, in earlier proceedings, remanded the issue of existence of the bank account to the Assessing Officer.
  • However, the issue of addition of 4% notional interest on alleged deposits was not adjudicated.
  • The assessee filed a rectification application under Section 254(2) pointing out this omission.
  • The Tribunal allowed the rectification and decided the issue on merits in favour of the assessee, deleting the notional interest addition.
  • The Revenue challenged this order before the High Court.

Issues Involved

  1. Whether the ITAT exceeded its jurisdiction under Section 254(2) by rectifying its earlier order and deciding the issue of notional interest.
  2. Whether notional interest can be added to income in absence of concrete evidence.
  3. Whether additions can be sustained without incriminating material found during search proceedings.

Petitioner’s Arguments (Revenue)

  • The Tribunal exceeded its rectification powers under Section 254(2).
  • Rectification cannot be used to review or reverse earlier findings.
  • The HSBC account was interest-bearing; hence interest income should not be treated as notional.

Respondent’s Arguments (Assessee)

  • The issue of notional interest was never adjudicated earlier, thus rectification was valid.
  • No material existed on record to establish actual receipt of interest income.
  • Additions cannot be sustained without incriminating evidence found during search.

Court’s Findings / Order

  • The High Court upheld that:
    • The Tribunal rightly exercised powers under Section 254(2) since the issue was not previously adjudicated.
    • Rectification was valid as it addressed an omission apparent on record.
  • On merits:
    • The Court held that notional interest cannot be added without supporting evidence.
    • Since no incriminating material was found during search, the addition itself was unsustainable.
  • Final Outcome:
    • The issue was decided in favour of the assessee and against the Revenue.

Important Clarifications

  • Section 254(2) permits rectification where an issue is not adjudicated, not merely for clerical errors.
  • Notional income cannot be taxed unless supported by evidence.
  • In search cases, additions must be backed by incriminating material, reinforcing settled jurisprudence.

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

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