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by Admin
28 April 2026 1:00 PM
“When Market Reality Differs, AO Can Disregard 'Ridiculously Low' Rateable Value and Assess Fair Rent Independently” – In a significant judgment Bombay High Court upheld the assessment of annual letting value (ALV) at ₹22 lakhs for a property in Mumbai, rejecting the assessee’s plea that municipal rateable value (MRV) must be accepted under Section 23(1)(a) of the Income Tax Act, 1961.
The Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne held that “municipal rateable value cannot be uniformly applied as the measure of annual value under the Income Tax Act if it bears no proximity to the fair market rent”. The Court also affirmed that while notional interest on security deposits alone cannot determine ALV, it may be considered contextually where the transaction appears structured to suppress real income.
The appellant, Tivoli Investment & Trading Co. Pvt. Ltd., owned an office premises measuring 3275 sq. ft. on the 7th floor of Sakhar Bhavan, Nariman Point, Mumbai, which was licensed to Citi Bank for 10 years (1989–1999) under a Leave and Licence Agreement dated 29 November 1988.
The license fee was fixed at a nominal ₹9,825 per month — an amount equal to the municipal taxes and outgoings. Alongside, Citi Bank gave an interest-free security deposit of ₹1.54 crores, which the assessee could utilize for 10 years without interest.
For AYs 1990–91 and 1991–92, the assessee declared rental income of ₹1,17,900, claiming the income under "business" head. However, the Assessing Officer (AO) invoked Section 23(1)(a) and assessed gross annual value at ₹22,00,000, relying on comparable rents and the economic benefit of the massive deposit. The AO’s order was upheld by the CIT(A) and the ITAT, leading to the present appeal.
The central issue before the Court was:
"Whether the Assessing Officer was justified in determining the annual value at ₹22,00,000/- under Section 23(1)(a), ignoring the municipal rateable value and nominal licence fee?"
Municipal Rateable Value Is Not Binding
Rejecting the assessee’s primary contention, the Court ruled:
“Municipal rateable value cannot, in every case, be treated as the real value for which the property might reasonably be expected to be let under Section 23(1)(a) of the Act.” [Para 24]
The Court referred to the Full Bench decision of the Delhi High Court in CIT v. Moni Kumar Subba and its own decision in Tip Top Typography to reiterate:
“The rateable value, if correctly determined, under the municipal laws can be taken as annual letting value... However, rateable value is not binding on the Assessing Officer. If the AO finds that it does not represent correct fair rent, he may determine the same on the basis of relevant evidence.” [Para 23]
The developer's letter showing MRV as ₹10,200 (fixed in 1986) was found outdated and unreliable. The Court observed:
“Even if momentarily accepted that the said value was of some relevance, both the documents (from developer and society) cannot be treated as cogent evidence for fixation of municipal rateable value.” [Para 29]
Notional Interest on Security Deposit – Contextually Relevant but Not Determinative
The Court reaffirmed that notional interest on security deposit alone cannot be used to assess annual value, but in this case, the AO had only used it as a factor, not as a conclusive basis.
Referring to the Delhi Full Bench in Moni Kumar Subba, the Court noted:
“By no stretch of imagination, the notional interest on the interest-free security can be taken as determinative factor to arrive at a ‘fair rent’. The provisions of section 23(1)(a) do not mandate this.” [Para 17]
However, the Court held: “The Assessing Officer, though has taken into consideration 15% return on ₹1.54 crores, has not made it the sole basis... He conducted independent analysis using comparable instances and arrived at ₹22 lakhs.” [Para 36]
Comparable Instances Justify AO’s Valuation
The AO had relied on a 1983 rental agreement for the same building’s ground and first floor leased by Citi Bank at ₹43/sq.ft. The AO conservatively adjusted this to ₹50/sq.ft. for 1989 considering floor difference and inflation.
The Court upheld this method, stating:
“The AO’s assessment is on a conservative side… even if the annual increment is considered at 5%, the rent would have been ₹57/sq.ft. in 1989. The AO rightly considered ₹50/sq.ft.” [Para 35]
Standard Rent Argument Rejected – Rent Control Not Applicable
The assessee also claimed that ALV should be capped at standard rent, but the Court categorically held that:
“The concept of standard rent is wholly inapplicable in cases where no statutory tenancy under Rent Control legislation exists. In the present case, the licence in favour of Citi Bank does not attract such provisions.” [Para 34]
Key Observations
“The municipal rateable value may not always represent the true and fair market rent which the property actually fetches.” [Para 24]
“The AO is not expected to accept inflated or deflated rent resulting from extraneous circumstances like relationship or tax planning.” [Para 23]
“The real return for the assessee was the right to utilize ₹1.54 crores interest-free for 10 years—not the nominal license fee of ₹9,825 per month.” [Para 38]
The Bombay High Court concluded that the AO’s assessment of ₹22 lakhs as ALV under Section 23(1)(a) was not arbitrary but based on credible comparables and a realistic market-based analysis. The municipal valuation, being outdated and unsupported by evidence, was rightly ignored. The appeals were dismissed.
“We find no reason to interfere in the orders passed by the Assessing Officer, CIT(A) and the ITAT, which appear to us as unexceptionable. The question of law is accordingly answered against the assessee and in favour of the Revenue.” [Para 39]
Date of Decision: 18 August 2025
