Facts of the Case

The Revenue filed appeals challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 20.12.2019 passed under Section 254(2) of the Income-tax Act.

The case involved assessment years 2008–2009 to 2011–2012. The dispute revolved around:

  • Alleged foreign bank account maintained by the assessee with HSBC, Geneva
  • Addition of 4% notional interest on alleged deposits in the said account
  • Earlier ITAT order dated 03.09.2019 remanding certain issues to the Assessing Officer

The assessee filed a rectification application stating that the issue of notional interest had not been adjudicated earlier, and therefore required correction.

Issues Involved

  1. Whether the ITAT exceeded its jurisdiction under Section 254(2) while rectifying its earlier order
  2. Whether notional interest could be added to taxable income without any supporting material evidence
  3. Whether addition can survive in absence of incriminating material found during search

Petitioner’s Arguments (Revenue)

  • ITAT wrongly exercised rectification powers under Section 254(2)
  • The Tribunal effectively reviewed its earlier decision, which is beyond the scope of rectification
  • The issue had already been remanded; hence, no fresh adjudication was permissible
  • Interest income should not be treated as notional since the bank account was interest-bearing

Respondent’s Arguments (Assessee)

  • The issue of notional interest was never adjudicated in the earlier order
  • Rectification was valid as it corrected an omission apparent on record
  • No evidence existed to prove actual receipt of interest
  • Addition based on pure presumption (notional basis) is unsustainable

Court Findings / Order

  • The ITAT rightly exercised powers under Section 254(2) since the issue of notional interest had not been considered earlier
  • Rectification was valid as it addressed an omission and did not amount to review
  • No material existed to establish that the assessee actually earned interest income
  • Addition of notional interest cannot be made without supporting evidence
  • Since no incriminating material was found during search, the addition itself was unsustainable
  • Consequently, notional interest addition also fails 

Important Clarifications

  • Section 254(2) allows rectification of mistakes apparent on record, including non-adjudication of an issue
  • Notional income cannot be taxed without real income or supporting evidence
  • Additions in search cases must be backed by incriminating material
  • Tribunal can recall/rectify its order where a ground remains unaddressed


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

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