ITAT Delhi on Notional Interest: Unsupported Ad-Hoc Additions Cannot Be Taxed.

Headnote:

The ITAT Delhi dismissed a batch of nine appeals filed by the Revenue, holding that ad-hoc or notional interest cannot be treated as taxable income without any supporting evidence. The Assessing Officer had added 4% notional interest on alleged balances in HSBC, Geneva, despite not adding any principal amount and despite the absence of corroborative material showing real accrual of interest. The Tribunal affirmed that under the principle of “real income” recognized in Chainrup Sampatram (SC), hypothetical interest cannot be taxed. With no material showing that any interest was earned or accrued, the deletion by the CIT(A) was upheld and all appeals were dismissed.

Background:

The case involved nine Revenue appeals concerning one assessee, Sh. Anurag Dalmia, across multiple assessment years between 2006-07 and 2011-12.

The additions were based on 4% notional interest computed on purported offshore bank balances in HSBC Bank, Geneva.

Crucially:

The Assessing Officer did not add the principal deposit amount at all.

The AO failed to produce any evidence that interest accrued, or that 4% reflected any real, contractual, or bank-specific interest rate.

The CIT(A) deleted the additions, holding:

The interest calculation was arbitrary and unsupported.

No document showed actual earning of interest.

Notional income cannot be taxed unless shown to have accrued with reasonable certainty.

Penalty appeals were also involved, but they were consequential to the quantum additions.

Tribunal’s Observations:

1. The Tribunal agreed that the entire addition was based on assumption, not evidence.
2. There was no material to indicate:
3. existence of the alleged bank deposits for the relevant period,
4. any real accrual of interest, or
5. that interest was earned at 4% or any rate.
6. Importantly, the Tribunal noted:
7. The AO himself had not added the principal amount, which made the interest-only addition even more untenable.
8. Relying on the Supreme Court decision in
9. Chainrup Sampatram v. CIT (1953) 24 ITR 481 (SC),
10. the ITAT reiterated the established principle that:

Only real income can be taxed. Hypothetical or notional income cannot form the basis for addition.

1. Since the Department failed to show any factual foundation for the alleged interest:
2. The lead appeal for AY 2006-07 was rejected.
3. All connected quantum appeals (AYs 2007-08 to 2011-12) were dismissed.
4. Penalty appeals were dismissed as consequential.

Legal Provisions Discussed:

1. Section 69, Income-tax Act, 1961 – Unexplained investments (basis used by AO).
2. Sections 153A & 143(3) – Assessment after search and scrutiny.
3. Section 154 – Rectification of mistake (for certain AYs).
4. Section 271(1)(c) – Penalty for concealment (linked appeals).
5. Real Income Doctrine – From Chainrup Sampatram (SC), holding that only real, not hypothetical, income is taxable.

Citation: 2025:ITAT-DEL:DALMIA-INTEREST

Case: DCIT, Central Circle-26, New Delhi v. Sh. Anurag Dalmia

Court/Tribunal: Income Tax Appellate Tribunal, Delhi Bench ‘A’

Coram: Shri Satbeer Singh Godara (Judicial Member) & Shri S. Rifaur Rahman (Accountant Member)

Date of Decision: 20 November 2025

ITA Nos.: 6516 to 6521/Del/2017 & 6539 to 6541/Del/2017

Assessment Years: 2006-07 to 2011-12