Bombay High Court: AO Not Bound By Municipal Valuation | May Fix Higher Fair Rent Under Section 22 Income Tax Act
Isabella Mariam
The High Court of Judicature at Bombay Division Bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne held that the Assessing Officer is not bound to accept the municipal rateable value of a property for determination of annual value under the Income Tax Act, 1961. The Court stated that in appropriate circumstances, the Assessing Officer can independently assess the fair annual rent that the premises might reasonably fetch. The Bench dismissed the appeals and upheld the concurrent findings of the Assessing Officer, the Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal. The Court concluded that neither the municipal rateable value nor the nominal license fees in the case could be considered as the true measure of the annual value for taxation purposes. The appeals were accordingly dismissed.
The dispute arose concerning the determination of the annual value of office premises situated on the seventh floor of the building ‘Sakhar Bhavan’ at Nariman Point, Mumbai. The premises, measuring 3,275 sq. ft., were purchased by the assessee for Rs. 21,85,664 and reflected in the fixed asset schedule of its balance sheet. On 29 November 1988, the assessee entered into a Leave and License Agreement with Citi Bank for a period of ten years commencing from 1 April 1989 to 31 March 1999. The license fees agreed were Rs. 9,825 per month. Alongside, Citi Bank advanced an interest-free security deposit of Rs. 1,54,00,000.
For the year ending 31 March 1990, the assessee declared rental income of Rs. 1,17,900, representing the agreed license fees. The Assessing Officer, however, determined the gross annual letting value under Section 23(1)(a) of the Income Tax Act at Rs. 22,00,000, subjecting it to tax under Section 22. The officer based this determination on the rent paid by Citi Bank for ground and first-floor premises in the same building, and also noted that the assessee was simultaneously paying 15% interest on overdraft facilities obtained from Citi Bank.
The assessee challenged the assessment before the Commissioner of Income Tax (Appeals), which upheld the Assessing Officer’s findings. The Income Tax Appellate Tribunal also sustained the assessment by its order dated 30 June 2003. This led to the filing of the present appeals concerning Assessment Years 1990-91 and 1991-92.
The central question of law admitted by the Court was whether, on the facts and in law, the Tribunal was justified in holding that the assessee was assessable to the income of Rs. 22,00,000 as ‘income from house property’.
The assessee contended that the municipal rateable value should be considered the proper measure for determining annual letting value under Section 23(1)(a). It argued that the security deposit had no relevance to the computation of annual value and that the notional interest on the deposit could not be included. The assessee also relied on certificates purportedly issued by the developer and the cooperative society regarding municipal rateable values. It further argued that rent for seventh-floor premises should logically be lower than rent for ground or first-floor premises, yet the Assessing Officer adopted a higher figure of Rs. 50 per sq. ft.
The Revenue opposed these arguments, asserting that the assessee had structured the agreement to reflect minimal license fees and an abnormally high security deposit to reduce tax liability. It submitted that the municipal rateable value was unreasonably low and that the Assessing Officer was justified in relying on comparable instances from the same building. The Revenue also pointed out that the certificates relied upon by the assessee were never produced before the Assessing Officer or the Commissioner of Income Tax (Appeals) and were not pressed before the Tribunal.
The Court noted that Section 22 of the Income Tax Act brings to tax the annual value of property under the head “Income from house property.” Section 23(1)(a) stipulates that the annual value shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. Section 23(1)(b) provides that if the property is let and actual rent received or receivable exceeds the value under clause (a), the actual rent is to be considered.
The Bench recorded: “Under Section 23(1)(a) of the Act, the Assessing Officer needs to conduct an enquiry and determine the annual value for which the property might reasonably be expected to let, whether or not the same is actually let.” The Court observed that in cases where actual rent is depressed on account of abnormal arrangements, it is open to the Assessing Officer to determine a fair rent based on material available.
On the issue of including notional interest on security deposits, the Court referred to judgments of various High Courts and the Full Bench of the Delhi High Court in Moni Kumar Subba. It noted: “It is impermissible to take into consideration the notional interest on security deposit received while letting out the property for the purpose of determination of annual value either under Section 23(1)(a) or under Section 23(1)(b) of the Act.” However, the Court pointed out that in the present case, the Assessing Officer had not solely relied upon notional interest but had also considered comparable rental transactions within the same building.
Addressing the reliance on municipal rateable value, the Court referred to the principle enunciated in Tip Top Typography and Moni Kumar Subba, holding: “The rateable value, if correctly determined, under the municipal laws can be taken as annual letting value under section 23(1)(a) of the Act. To that extent we agree with the contention of the learned counsel of the assessee. However, we make it clear that rateable value is not binding on the Assessing Officer. If the Assessing Officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/evidence placed on record.”
The Court also dealt with the contention regarding standard rent under rent control laws, stating: “The concept of standard rent applies only where there is statutory tenant in the premises in question, who enjoys protection from rent escalation and eviction. In respect of the premises which are not governed by the provisions of the Rent Control Legislations, the concept of standard rent becomes wholly inapplicable.” The Bench noted that the tenancy created in favour of Citi Bank was under a leave and license arrangement and not under the Rent Act.
The Court recorded that the assessee had not produced any cogent evidence regarding municipal rateable value during assessment proceedings. It observed: “Production of letters from the Developer or Society cannot be treated as sufficient compliance with the requirement of proving municipal rateable value, even if it is momentarily accepted that the said value was of some relevance in the present case.”
The Bench held that the Assessing Officer was justified in undertaking independent analysis, considering comparable instances, and arriving at the figure of Rs. 22,00,000 as reasonable annual letting value. It found no perversity in the findings and noted that the assessment was on a conservative basis considering the rent trends.
The Court concluded that there was no valid ground to interfere with the concurrent findings of the lower authorities. It held: “Considering the overall conspectus of the case, we do not find any valid ground to interfere in the concurrent findings recorded by the Assessing Officer, CIT(A), ITAT.” The Bench stated that the structure of the transaction, involving minimal license fees and a substantial interest-free security deposit, reflected the true return to the assessee, and not the nominal license fees or municipal rateable value.
Accordingly, the Court directed: “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. Consequently, both the Appeals are dismissed.”
Advocates Representing the Parties
For the Petitioners: Mr. Nitesh Joshi i/b Mr. Atul K. Jasani
For the Respondents: Dr. Dhanalakshmi S. Krishnaiyer with Mr. P. A. Narayanan
Case Title: Tivoli Investment & Trading Co. Pvt. Ltd. v. The Assistant Commissioner of Income Tax and another
Neutral Citation: 2025: BHC-OS:13725-DB
Case Number: Income Tax Appeal Nos. 5 of 2004 and 62 of 2004
Bench: Chief Justice Alok Aradhe and Justice Sandeep V. Marne
