ITAT Delhi: Notional Interest on Alleged HSBC Geneva Account Cannot Be Taxed Without Evidence.

Headnote:

The ITAT Delhi dismissed nine appeals filed by the Revenue challenging the deletion of additions made on account of ad-hoc/notional interest income allegedly earned on undisclosed deposits in the assessee’s purported HSBC, Geneva accounts. The Tribunal held that no notional income can be brought to tax without concrete evidence of actual accrual. Since the Assessing Officer had not added the principal amount and had computed interest arbitrarily @4% without corroborative material, the CIT(A)’s deletion of additions was upheld. The Tribunal emphasized that taxation of hypothetical income is impermissible in law.

Background:

1. The assessee, Shri Anurag Dalmia, faced assessments and penalty proceedings arising out of alleged foreign bank accounts in HSBC, Geneva.
2. Revenue filed nine appeals for different assessment years, challenging orders of the CIT(A) which deleted additions of notional interest.
3. For AY 2006–07 (lead case), the AO had added ₹4,88,816 as 4% notional interest on alleged deposits in HSBC Geneva.
4. The assessee argued before CIT(A) that:
5. No documentary evidence showed earning or accrual of interest.
6. The AO computed interest arbitrarily, without any basis.
7. Notional income cannot be taxed under settled judicial principles.
8. The CIT(A) accepted these arguments and deleted the additions across all years.

Tribunal’s Observations:

No Evidence of Actual Interest Income

The ITAT found that the Assessing Officer had not brought any material to prove:

existence of interest-bearing deposits,

rate of interest,

accrual of income to the assessee.

Arbitrary Ad-hoc Calculation

Computing interest at 4% was held to be purely notional, without any foundation.

Principle Against Taxing Hypothetical Income

The Tribunal relied on the Supreme Court judgment in

Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC),

which lays down that hypothetical or notional income cannot be taxed unless real income accrues to the assessee.

Principal Amount Not Added

The AO himself did not add the alleged principal deposit to income.

If the base deposit is unproved, interest thereon cannot be presumed.

CIT(A)’s Findings Affirmed

The CIT(A) correctly held that no corroborative evidence existed; hence, deletion was justified.

Decision:

1. The ITAT held that the Revenue’s appeals had no merit, as the additions were:
2. unsupported by evidence,
3. based on arbitrary notional computations,
4. contrary to established principles of real income taxation.
5. Therefore, all nine appeals filed by the Revenue were dismissed.

Legal Provisions Discussed:

1. Section 69, Income Tax Act, 1961 – Unexplained investments (relevant for notional interest additions).
2. Section 153A / 143(3) – Assessment in case of search or requisition.
3. Section 271(1)(c) – Penalty for concealment (penalty appeals were consequential).
4. Section 154 – Rectification of mistakes (for AYs under rectification).
5. Supreme Court Decision: Chainrup Sampatram v. CIT (1953) 24 ITR 481 – Real income doctrine.