Bombay High Court
Tivoli Investment And Trading Co. Pvt. … vs Asst. Commissioner Of Income-Tax … on 18 August, 2025
2025:BHC-OS:13725-DB
Neeta Sawant ITXA-5-2004-62-2004-FC
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 5 OF 2004
WITH
INCOME TAX APPEAL NO. 62 OF 2004
Tivoli Investment & Trading Co. Pvt. Ltd. ....Appellant
: Versus :
The Assistant Commissioner of Income-tax
and another ....Respondents
Mr. Nitesh Joshi i/b Mr. Atul K. Jasani, for the Appellant-Assessee.
Dr. Dhanalakshmi S. KrishnaIyer with Mr. P. A. Narayanan, for the
Respondent-Revenue.
CORAM : ALOK ARADHE, CJ. &
SANDEEP V. MARNE, J.
RESERVED ON : 7 AUGUST 2025.
PRONOUNCED ON : 18 AUGUST 2025.
JUDGMENT:
(Per Sandeep V. Marne, J.)
1) The issue involved in these two Appeals is whether it is
permissible for the Assessing Officer to determine annual value of the
property for the purposes of taxation under Section 22 of the Income
Tax Act, 1960 (the Act) higher than the rateable value determined under
the Municipal laws. The issue arises in the light of challenge raised by
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the Assessee to the order dated 30 June 2003 passed by the Income Tax
Appellate Tribunal (ITAT) pertaining to the Assessment Years 1990-91
and 1991-92, by which the orders passed by the Commissioner of
Income Tax (Appeals) and Assessing Officer are upheld. The Assessing
Officer has determined the gross annual letting value of the property
under the provisions of Section 23(1)(a) of the Act at Rs.22,00,000/- and
has subjected the same to tax under Section 22 of the Act. The Assessee
insists that the annual rateable value determined under the municipal
laws could at best be treated as the sum for which the property might
have reasonably be expected to be let under the provisions of Section
23(1)(a) of the Act.
2) Brief factual background of the case is as under :
The Assessee purchased office premises bearing No.72
admeasuring 3275 sq.ft. on 7 th floor of the building ‘Sakhar Bhavan’ at
Nariman Point, Mumbai for consideration of Rs.21,85,664/-, which is the
value reflected in the Fixed Asset Schedule in the Assessee’s Balance
Sheet. On 29 November 1988, the Assessee entered into Leave and
License Agreement and other connected agreements with Citi Bank for
letting out the office premises for a period of 10 years from 1 April 1989
to 31 March 1999. The agreed license fees were Rs.9,825/- per month.
Citi Bank paid interest free security deposit of Rs.1,54,00,000/- to the
Assessee. For the year ending 31 March 1990 (Assessment Year 1990-91),
the Assessee offered rental income of Rs.1,17,900/- calculated on the
basis of license fees of Rs.9,825/- per month to be taxed under the head
‘Income from Business’. The Assessing Officer passed Assessment Order
dated 30 November 1992 determining the gross annual rateable value of
the property under Section 23(1)(b) of the Act at Rs.22,00,000/- treating
the same as the amount for which the property might have reasonably
be let out from year to year. This was done by taking into considerationPage No.2 of 27
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Neeta Sawant ITXA-5-2004-62-2004-FCthe rent received in respect of the first and ground floor premises in the
same building from the same licensee-Citi Bank as well as the factum of
Assessee paying 15% interest on overdraft facility secured from Citi
Bank.
3) The Assessee challenged the Assessment Order by filing
Appeal before the Commissioner of Income-Tax (Appeals) V, Bombay
[CIT(A)] which has upheld the order of the Assessing Officer by order
dated 29 March 1993. The Assessee preferred further Appeal before the
ITAT which has not interfered with the order of the Assessing Officer
qua income from house property by its order 30 June 2003. The Assessee
has accordingly filed Income Tax Appeal No.62/2004 challenging the
order of the ITAT dated 30 June 2003.
4) In respect of Assessment Year 1991-92, the Assessing
Officer adopted similar course of action by determining the gross
annual letting value of the property at Rs. 22,00,000/- vide Assessment
Order dated 30 March 1993. The assessment qua income from the said
property was confirmed by the CIT(A) by order dated 4 March 1994 and
by ITAT by order dated 30 June 2003. The Assessee has filed Income Tax
Appeal No.5/2004 challenging the order passed by the Assessing Officer,
CIT(A) and ITAT qua Assessment Year 1991-92.
5) Both the Appeals have been admitted by orders dated
2 December 2004 by formulating the following common question
of law :-
Whether on the facts and circumstances of the case 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’?
Page No.3 of 27 18 August 2025 ::: Uploaded on - 18/08/2025 ::: Downloaded on - 18/08/2025 21:27:20 ::: Neeta Sawant ITXA-5-2004-62-2004-FC 6) Mr. Joshi, the learned counsel appearing for the Assessee
would submit that the Revenue has grossly erred in considering the
gross annual letting value of the property at Rs.22,00,000/- by resorting
to the provisions of Section 23(1)(b) of the Act. That in the present case,
provisions of Section 23(1)(a) of the Act are relevant and the enquiry
into the sum for which the property might reasonably be expected to be
let out has to be determined with reference to the municipal rateable
value. That the amount of interest free security deposit received by the
Assessee has no relevance for determination of the gross annual letting
value either under Clauses (a) or (b) of sub-section (1) of Section 23 of
the Act. That the sum for which the property might reasonably be
expected to be let from year to year must be determined with reference
to the rateable value. That the issue is squarely covered by the judgment
of this Court in Commissioner of Income-tax-12 Versus. Tip Top
Typography1 which also holds that the sum to be determined under the
provisions of Section 23(1)(a) and cannot exceed the standard rent in
respect of the property determinable as per the Rent Control
Legislation. That the Income Tax Appellate Tribunal has grossly erred in
considering usufruct obtainable from security deposit as rent of the
property. The usufruct of deposit is nothing but an addition made under
Section 23(1)(b) which is impermissible in law. That in the present case
the funds have been invested in income generating assets which have
yielded income from the current or latter years. That the Assessing
Officer has erred in taking into consideration the rental transaction
pertaining to the year 1983 in respect of the first and ground floor
premises ignoring the position that the property concerned is located
on the seventh floor of the building. That if the rent for ground and first
floor of the premises was Rs.43/- per sq.ft., the rent in respect of the
seventh floor premises ought to have been lesser whereas the Assessing1 [2014] 368 ITR 330 (Bombay)
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Neeta Sawant ITXA-5-2004-62-2004-FCOfficer considered Rs.50/- per sq.ft. per month as the rent in respect of
the office premises, which is a perverse finding. That considering 15%
interest (notional) on security deposit of Rs.1.52 crores is nothing but
determination of fair rent by considering notional interest on security
deposit which is held to be impermissible in Tip Top Typography (supra).
7) Mr. Joshi would then take us through the Certificate dated
31 October 1992 issued by the Developer certifying that the monthly
rateable value of the office premises as on 1 April 1996 was Rs.10,200/-.
That the said value was updated as on 1995 at Rs.67,331/- by the Co-
operative Society of Sakhar Bhavan. That at the relevant time, the
municipal taxes were payable jointly by the Co-operative Society and
there was no concept of raising of individual bills qua each units. That
therefore since the municipal tax bills were being raised initially on
developer and later on the Society, they alone could certify the annual
rateable value of the office premises. That the said additional evidence
in the form of certificates dated 31 October 1992 and 28 November 1995
was relied upon by the Assessee before the ITAT and the same ought to
have been taken into consideration for the purpose of determining the
annual value of the property for the purpose of Section 23(1)(a) of the
Act. That the statement made by the learned counsel appearing on
behalf of the Assessee about ignorance of the said Certificates was made
in a spur of moment. He would also invite our attention to the Balance
Sheet of the Assessee as on 31 March 1990 in support of the contention
that the standard rent in respect of the premises ought to have been
determined on the basis of the value of fixed assets reflected in the said
Balance Sheet. On the above broad submissions, Mr. Joshi would pray
for setting aside the orders passed by the Assessing Officer, CIT(A) and
ITAT.
Page No.5 of 27 18 August 2025 ::: Uploaded on - 18/08/2025 ::: Downloaded on - 18/08/2025 21:27:20 ::: Neeta Sawant ITXA-5-2004-62-2004-FC 8) The Appeals are opposed by Dr. Krishnaiyer, the learned
counsel appearing for the Revenue. She would submit that the Assessee
had smartly divided the rental return receivable by fixing a nominal
amount towards license fees and hefty security deposit of Rs.1.54 crores.
That the license fees indicated in the agreement constituted only the
monthly outgoings in respect of the premises and the real return to the
Assessee was in the form of security deposit of Rs.1.54 crores. That the
Revenue is not bound to accept the municipal rateable value which is
the principle recognized by this Court in its judgment in Tip Top
Typography. That in the present case, as per the Asesseee’s own case,
the municipal rateable value was ridiculously low at Rs.10,200/- and
that therefore the Assessing Officer was entitled to consider the
comparable instances. That in the instant case, the Assessing Officer has
considered comparable instance of the same licencee (Citi Bank) paying
license fees in respect of the premises in the same building. That the
Assessing Officer has made a detailed analysis while determining that
the Assessee had failed to produce any cogent material even qua the
claim of municipal rateable value. That letters from developer and
society were sought to be produced directly before the ITAT and the
same were never produced before the Assessing Officer and CIT(A).
That the counsel for the Assessee himself urged before the ITAT to
ignore the said documents.
9) Dr. Krishnaiyer would further submit that the Assessee-
Company is formed only with the objective of earning rental return
from the office premises. That the company has been set up with capital
of only Rs.14,59,500/- and that the only asset that it possesses is the
office premises at Sakhar Bhavan. That therefore the income generated
through rent is the only source of income for the Assessee-Company.
That the assessee had attempted to indulge in tax evasion by
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deliberately dividing the rental return into minuscule amount of license
fees and hefty amount of security deposit. She would submit that the
three orders currently record findings against the Assessee and no case
is made out for interference by this Court in exercise of jurisdiction
under Section 260A of the Act. She would pray for dismissal of the
Appeals.
10) We have considered the submissions canvassed by the
learned counsel appearing for rival parties and have gone through the
orders passed by the Assessing Officer, CIT(A) and ITAT. We have also
perused the records of the case.
11) In the present case, the Assessee is the owner of the office
premises at the building ‘Sakhar Bhavan’ situated at prominent location
of Nariman Point in Mumbai City. The office premises are fairly large
admeasuring 3275 sq.ft. located on seventh floor of the building. The
license in respect of the office premises was granted by the Assessee in
favour of Citi Bank vide Leave and License Agreement dated 29
November 1988. The license was for a period of 10 years from 1 April
1989 to 31 March 1999. However, when it came to payment of license
fees, the parties agreed on a unique arrangement. Through the license
tenure of 10 years, the license fees or compensation was fixed at
Rs.9,825/- per month with no provision for annual increment. From
para-5 of the Leave & License Agreement, it appears that the municipal
taxes, ground rent, cesses, duties and other outgoings in respect of the
licensed premises were Rs.9,825/- per month at the relevant time and
the Licensor had agreed to bear the same only to the extent of Rs.9,825/-
per month. It was agreed that in the event of any increase of such taxes
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and income beyond Rs.9,825/-, the same was to be borne by the
Licensee. The arrangement therefore creates an impression that the
amount of Rs.9,825/- agreed to be paid as license fees by Citi Bank to
the Assessee was actually the amount of taxes and municipal outgoings.
Citi Bank paid to the Licensor an amount of Rs.1,54,00,000/- towards
interest free security deposit which the Assessee was entitled to retain
and enjoy during currency of license for 10 years and to refund the
same to Citi Bank without any interest. It however appears that the
transaction of payment of security deposit of Rs.1.54 crores was
recorded by way of separate agreement executed on the same day i.e.
29 November 1988. The case thus involves letting of premises on a
nominal amount of license fees while accepting hefty amount of
security deposit.
12) In the return of income for the relevant Assessment years,
the Assessee offered rental income of only Rs. 1,17,900/- calculated by
taking into consideration only the amount of license fees of Rs.9,825/-.
In the Assessment Order passed under the provisions of Section 143(3)
of the Act, the Assessing Officer refused to accept the amount of
Rs.1,17,900/- as the rental income in respect of the office premises. He
took into consideration, statement of Shri. Vaidyanathan, Assistant Vice
President of Citi Bank who had stated that the interest free security
deposit was given to the Assessee as a part of compensation towards
occupancy of premises by Citi Bank. The Assessing Officer however did
not determine notional interest on the amount of Rs.1.54 crores and
instead proceeded to work out the annual value of the property under
the provisions of Section 23(1) of the Act. It would be necessary to take
into consideration the provisions of Sections 22 and 23 of the Act which
provide thus :-
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22. Income from house property.
The annual value of property consisting of any buildings or lands
appurtenant thereto of which the assessee is the owner, other than
such portions of such property as he may occupy for the purposes of
any business or profession carried on by him the profits of which are
chargeable to income-tax, shall be chargeable to income-tax under
the head “Income from house property”.
23. Annual value how determined.
(1) For the purposes of section 22, the annual value of any property
shall be deemed to be-
(a) the sum for which the property might reasonably be expected to
let from year to year; or
(b) where the property is let and the annual rent received or
receivable by the owner in respect thereof is in excess of the sum
referred to in clause (a), the amount so received or receivable:
13) Thus, under Section 22 of the Act, the annual value of the
property consisting of building or lands appurtenant thereto becomes
chargeable to income tax under the head ‘Income from house property’.
Thus, whether the property is actually let out or not, the annual value of
the property still becomes chargeable to income tax under Section 22 of
the Act. Section 23 of the Act deals with the manner in which annual
value of the property can be determined for the purposes of Section 22.
Under clause-(a) of sub-section (1) of Section 23, the annual value of a
property is deemed to be the sum for which the property might
reasonably be expected to let from year to year. Thus, 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.
However, in a case where the property is actually let and the annual
rent received or receivable by the owner is in excess of the sum
determinable under clause-(a), the actual sum so received/receivable
becomes the annual value of the property for the purposes of Section 22
of the Act.
Page No.9 of 27 18 August 2025 ::: Uploaded on - 18/08/2025 ::: Downloaded on - 18/08/2025 21:27:20 ::: Neeta Sawant ITXA-5-2004-62-2004-FC 14) In the instant case, the Assessing Officer refused to accept
the license fees indicated in the licence agreement as the annual value
of the property for taxation under Sections 22 and 23 of the Act. Instead,
he embarked upon an enquiry for deciding the annual value of the
property. He adopted twin methods for such determination. Firstly, he
took into account the comparable instances and secondly, he also took
into consideration the interest which the assessee would have paid to
the bank if he was to take overdraft facility of Rs, 1.54 crores which it
accepted as security deposit. The Assessing Officer thereafter considered
the annual value of the property at Rs. 22,00,000/. It would be apposite
to exact the findings recorded by the Assessing Officer for facility of
reference :-
5. I have therefore worked out Annual Letting value of the property
given on rent to the Citibank as per the provisions of sec. 23(1) of the
I.T.Act, 1961. I have taken the basis of the annual letting value of the
said property as under-
(a) Aestithetic Builders has given 1st and ground floor of the said
building on rent/leave & licence to Citibank as per agreement dated
20.10.1983 as per details filed by them. They have given the premises
on leave & licence at Rs. 43/- per sq.ft. per month. Considering this I
propose to estimate leave & licence/rent charges receivable by the
assessee from Citibank at Rs.50/- per month and hence rent
receivable/compensation receivable to the assessee is worked out at
R. 19,65,000/-.
(b) Citibank has given interest free advance of Rs.1,54,00,000/-to the
assessee in lieu of compensation of the said premises. Citibank has
charged the interest on overdraft facility given by them to the
assessee of Rs.51 lakhs @ 15%, I, therefore, worked out the interest on
Rs.1,54,00,000/- 15% which comes to Rs.23, 10,000/-
In view of the above facts, I take the gross annual letting value
u/s.23(1)(b) at R.22,00,000/- which is the amount for which the
property might reasonably be expected to be let out from year to
year.
Page No.10 of 27 18 August 2025 ::: Uploaded on - 18/08/2025 ::: Downloaded on - 18/08/2025 21:27:20 ::: Neeta Sawant ITXA-5-2004-62-2004-FC 15) This is how the Assessing Officer determined the sum of Rs.
22,00,000/- as the amount for which the property might reasonably be
expected to be let out from year to year. However there appears to be
an error in quoting the provisions of Section 23(1)(b) of the Act by the
Assessing Officer, when in fact what is done by him is determination
under Section 23(1)(a).
16) The Assessing Officer thus took into consideration the
comparable instance where Citi Bank had taken on rent/license
premises in the same building on first and ground floor under the
agreement dated 20 October 1983 wherein license fees at the rate of Rs.
43/- per sq.ft was payable. However, since the said license fees were
agreed in the year 1983, the Assessing Officer took into consideration
slightly higher amount of Rs.50/- per sq.ft per month as
rent/compensation receivable by the Assessee and worked out the same
at Rs.19,65,000/-. Additionally, the Assessing Officer also took into
consideration the fact that interest free security deposit of Rs.1.54 crores
was maintained by Citi Bank with the Assessee and the Assessee had
contemporaneously availed overdraft facility from Citi Bank for which
it was paying to the Citi Bank, interest @ 15% p.a. The Assessing Officer
therefore worked out figure of Rs.23,10,000/- as 15% return of security
deposit of Rs.1.54 crores. After considering the two figures of
Rs.19,65,000/- (based on comparable instances) and Rs.23,10,000/- (based
on 15% return on security deposit), the Assessing Officer arrived at
figure of Rs.22,00,000/- by treating the same as gross annual letting
value of the property.
Page No.11 of 27 18 August 2025 ::: Uploaded on - 18/08/2025 ::: Downloaded on - 18/08/2025 21:27:20 ::: Neeta Sawant ITXA-5-2004-62-2004-FC 17) Mr. Joshi has strongly objected to the course of action
adopted by the Assessing Officer by determining 15% notional income
as the gross annual letting value of the property. It is submitted that the
practice of determining notional interest on security deposit as gross
annual letting value of the property has been repeatedly criticized by
several Courts. Our attention is invited to the relevant observations
made by the Division Bench of this Court in Tip Top Typography (supra)
wherein this Court has dealt with twin issues of (i) permissibility to
consider notional interest on security deposit as annual rateable value
and (ii) consideration of municipal annual rateable value to be the
annual rateable value determinable under the provisions of Section
23(1)(a) of the Act. As of now, we are only considering the findings
recorded by the Division Bench qua the first issue of consideration of
notional interest on security deposit for the purpose of determining the
annual value of the property under Section 23(1)(a) of the Act. This
Court took note of its Division Bench judgment in Commissioner of
Income-tax Versus. J. K. Investors (Bombay) Ltd.2 where the question
was about consideration of notional interest on security deposit
received by Assessee against letting of property for the purpose of
determination of annual rent under Section 23(1)(b) of the Act. In J. K.
Investors (Bombay) Ltd. it appears that the annual rent actually received
by the Assessee without taking into account the notional interest was
more than the annual rateable value determinable under Section 23(1)(a)
of the Act. The Division Bench concluded that the value of notional
advantage like notional interest cannot form part of actual rent received
as contemplated under Section 23(1)(b). The Division Bench however
kept open the question as to whether such notional interest can be a
part of ‘fair rent’ under Section 23(1)(a) of the Act. It however appears
that Division Bench of Calcutta High Court in Commissioner of Income-
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tax Versus. Satya Co. Ltd.3 had disapproved adding notional interest into
annual market rent received. The said view of the Calcutta High Court
was accepted by the Division Bench of Delhi High Court in CIT Versus.
Asian Hotels Ltd.4 holding that the notional interest on refundable
security deposit was neither taxable as profit nor gain from business or
profession nor as income from house property under Section 23(1)(a) of
the Act. The decision of this Court in J. K. Investors (Bombay) Ltd. of
Calcutta High Court in Satya Co. Ltd. and of Delhi High Court in CIT
Versus. Asian Hotels Ltd. has been considered by the Full Bench of the
Delhi High Court in Commissioner of Income-Tax Versus. Moni Kumar
Subba5 which has concluded as under :-
The Assessing Officer, having regard to the aforesaid provision is
expected to make an inquiry as to what would be the possible rent
that the property might fetch. Thus, if he finds that the actual rent
received is less than the ‘fair/market rent’ because of the reason that
the assessee has received abnormally high interest-free security
deposit and because of that reason, the actual rent received is less
than the rent which the property might fetch, he can undertake
necessary exercise in that behalf. However, 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. The Division Bench in Asian
Hotels Ltd. (2010) 323 ITR 490 (Delhi), thus, rightly observed that in a
taxing statute it would be unsafe for the court to go beyond the letter
of the law and try to read into the provision more than what is
already provided for. We may also record that even the Bombay High
Court in the case of CIT v. J. K. Investors (Bombay) Ltd. (2001) 248
ITR 723 (Bom) categorically rejected the formula of addition of
notional interest while determining the ‘fair rent’.. .
It is, thus, manifest that various courts have held a consistent view
that notional interest cannot form part of actual rent. Hence, there is
no justification to take a different view that what has been stated in
Asian Hotels Ltd. (2010) 323 ITR 490 (Delhi).
3 [1997] 140 CTR (Cal) 569 4 [2010] 323 ITR 490 (Delhi) 5 [2011] 333 ITR 38 Page No.13 of 27 18 August 2025 ::: Uploaded on - 18/08/2025 ::: Downloaded on - 18/08/2025 21:27:20 ::: Neeta Sawant ITXA-5-2004-62-2004-FC 18) The Division Bench of this Court Tip Top Typography
concurred with the above-mentioned decisions particularly with the
view expressed by the Full Bench of the Delhi High Court and held in
paras-45 and 46 as under :-
We would like to remark that still the question remains as to how to
determine the reasonable/fair rent. It has been indicated by the Supreme
Court that extraneous circumstances may inflate/deflate the ‘fair rent’. The
question would, therefore, be as to what would be circumstances which can
be taken into consideration by the Assessing Officer while determining the
fair rent. It is not necessary for us to give any opinion in this behalf, as we
are not called upon to do so in these appeals. However, we may observe that
no particular test can be laid down and it would depend on facts of each
case. We would do nothing more than to extract the following passage from
the Supreme Court judgment in the case of Motichand Hirachand v. Bombay
Municipal Corporation, AIR 1968 SC 441, 442:
‘It is well-recognized principle in rating that both gross value and
net annual value are estimated by reference to the rent at which the
property might reasonably be expected to let from year to year.
Various methods of valuation are applied in order to arrive at such
hypothetical rent, for instance, by reference to the actual rent paid for
the property or for others comparable to it or where there are no
rents by reference to the assessments of comparable properties or to
the profits carried from the property or to the cost of construction.'”
46. We have and after careful reading of the provision in question and the
conclusion of the Full Bench of the Delhi High Court concluded that a
different view cannot be taken. We respectfully concur with the view taken
in this Full Bench decision of the Delhi High Court.
19) Thus, the law appears to be fairly well settled that 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.
20) However, in the present case, the Assessing Officer has not
determined the gross annual rateable value of the property at
Rs.22,00,000/- only on the basis of notional interest on security deposit.
He has also taken into consideration the comparable instance of letting
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out property in the same building to the same licensee (Citi Bank) while
making an enquiry under the provisions of Section 23 of the Act. Here,
the second issue decided in Tip Top Typography comes into play as the
Assessee contends that the municipal annual ratable value alone can be
taken into consideration for the purpose of determining annual value of
the property under Section 23(1)(a) of the Act. Strenuous reliance here
is placed on judgment of Division Bench in Tip Top Typography. While
deciding the first issue of permissibility to consider notional interest on
security deposit, we have also made reference to the Full Bench decision
of the Delhi High Court in CIT Vs. Moni Kumar Subba which has also
decided the issue of consideration of rateable value determined under
municipal law for determining the annual rateable value under Section
23(1)(a) of the Act. Full Bench of the Delhi High Court formulated
following question for consideration:-
The next question would be as to whether the annual letting value
fixed by the Municipal Authorities under the Delhi Municipal
Corporation Act can be basis of adopting annual letting value for the
purposes of section 23 of the Act.
21) After taking into consideration the judgment of Calcutta
High Court in CIT Versus. Satya Co. Ltd. and of Apex Court in Mrs.
Shiela Kaushish Versus. Commissioner of Income-tax6, the Full Bench of
Delhi High Court held as under :-
It is on this basis that in the present case, the Commissioner of Income-tax
(Appeals) gave primacy to the rateable value of the property fixed by the
Municipal Corporation of Delhi, vide its assessment order dated December
31, 1996, and on this basis, opined that the actual rent was more than the
said rateable value and therefore, as per section 23(1)(b), the actual rent
would be the income from house property and there could not have been
any further additions.
Since the provisions of fixation of annual rent under the Delhi Municipal
Corporation Act are in pari materia of section 23 of the Act, we are inclined6 [1981] 131 ITR 435
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Neeta Sawant ITXA-5-2004-62-2004-FCto accept the aforesaid view of the Calcutta High Court in Satya Co. Ltd.
(1997) 140 CTR (Cal) 569 that in such circumstances, the annual value fixed
by the municipal authorities can be a rational yardstick. However, it would
be subject to the condition that the annual value fixed bears a close
proximity with the assessment year in question in respect of which the
assessment is to be made under the Income-tax laws. If there is a change in
circumstances because of passage of time, viz., the annual value was fixed by
the Municipal Authorities much earlier in point of time on the basis of rent
than received, this may not provide a safe yardstick if in the assessment year
in question when assessment is to be made under Income-tax Act. The
property is let-out at a much higher rent. Thus, the Assessing Officer in a
given case can ignore the municipal valuation for determining annual letting
value if he finds that the same is not based on relevant material for
determining the ‘fair rent’ in the market and there is sufficient material on
record for taking a different valuation. We may profitably reproduce the
following observations of the Supreme Court in the case of Corporation of
Calcutta v. Smt. Padma Debi, AIR 1962 SC 151, 153.
‘A bargain between a willing lessor and a willing lessee uninfluenced
by any extraneous circumstances may afford a guiding test of
reasonableness. An inflated or deflated rate of rent based upon fraud,
emergency, relationship and such other considerations may take it
out of the bounds of reasonableness.’
Thus, 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. This
view is fortified by the decision of the Patna High Court in the case of Kashi
Prasad Kataruka v. CIT (1975) 101 ITR 810 (Patna).
The above discussion leads to the following conclusions:
(i) Annual letting value would be the sum at which the property
may be reasonably let out by a willing lessor to a willing lessee
uninfluenced by any extraneous circumstances.
(ii) An inflated or deflated rent based on extraneous consideration
may take it out of the bounds of reasonableness.
(iii) Actual rent received, in normal circumstances, would be a
reliable evidence unless the rent is inflated/deflated by reason of
extraneous consideration.
(iv) Such annual letting value, however, cannot exceed the
standard rent as per the rent control legislation applicable to the
property.
(v) if standard rent has not been fixed by the Rent Controller, then
it is the duty of the Assessing Officer to determine the standard rent
as per the provisions of rent control enactment.
(vi) The standard rent is the upper limit, if the fair rent is less than
the standard rent, then it is the fair rent which shall be taken as ALV
and not the standard rent. ..
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22) As observed above, the Division Bench in Tip Top
Typography has agreed with the view taken by the Full Bench of Delhi
High Court as is apparent in findings recorded in para-46 of the
judgment. Additionally, the Division Bench in Tip Top Typography held
in para-52 as under :-
52. We have also noted the submissions of Shri Ahuja. We are of the
opinion that even in the cases and matters brought by him to our
notice, it is evident that the Assessing Officer cannot brush aside the
rent control legislation, in the event, it is applicable to the premises in
question. Then the Assessing Officer has to undertake the exercise
contemplated by the rent control legislation for fixation of standard
rent. The attempt by the Assessing Officer to override the rent control
legislation and when it balances the rights between the parties has
rightly been interfered with in the given case by the appellate
authority. The Assessing Officer either must undertake the exercise to
fix the standard rent himself and in terms of the Maharashtra Rent
Control Act, 1999, if the same is applicable or leave the parties to
have it determined by the court or tribunal under that Act. Until,
then, he may not be justified in applying any other formula or
method and determine the “fair rent” by abiding with the same. If he
desires to undertake the determination himself, he will have to go by
the Maharashtra Rent Control Act, 1999. Merely because the rent has
not been fixed under that Act does not mean that any other
determination and contrary thereto can be made by the Assessing
Officer. Once again having respectfully concurred with the judgment
of the Full Bench of the Delhi High Court, we need not say anything
23) In our view, both the Full Bench of the Delhi High Court in
CIT Versus. Moni Kumar Subba as well as the Division Bench of this
Court in Tip Top Typography have held that in ordinary circumstances,
the only value fixed by the municipal authorities can be a rational
yardstick and the rateable value so determined under the Municipal
laws can be taken as annual value of the property under Section 23(1)(a)
of the Act. However, this principle applies only when the annual value
so determined under the municipal laws has close proximity with the
assessment year in question in respect of which the assessment is to be
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made under the Income Tax laws. If there is a change in the
circumstance because of passage of time, for instance where the annual
value was fixed by the municipal authorities long back on account of
basis of rent then received, such municipal annual value does not
provide a safe yardstick for determining annual value of the property
under Section 23 of the Act. The Full Bench of the Delhi High Court
specifically recognizes the principle of ignorance of municipal valuation
for determining annual letting value if the Assessing Officer finds that
the same is not based on relevant material for determining the ‘fair rent’
in the market and that there is sufficient material on record for taking a
different valuation. The Full Bench of the Delhi High Court has referred
to the judgment of the Apex Court in Corporation of Calcutta Versus.
Smt. Padma Debi7 in which it is held that a bargain between a willing
lessor and willing lessee uninfluenced by any extraneous circumstances
may afford a guiding test of reasonableness. The Delhi High Court has
further held that the municipal rateable value is not binding on the
Assessing Officer and if the Assessing Officer can show that rateable
value under municipal laws does not represent the correct fair rent, he
can determine the same on the basis of material/evidence placed on
record. Similar view appears to have been taken by Patna High Court in
Kashi Prasad Kataruka Versus. Commissioner of Income-Tax8.
24) In addition to the observations made by the Full Bench of
Delhi High Court as confirmed by this Court in Tip Top Typography, we
have independent reasons to hold that 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. The
municipal rateable value may not always represent the true and fair
market rent which the property actually fetches. No doubt, the
7 AIR 1962 SC 151
8 [1975] 101 ITR 810
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Municipal Authorities do conduct a survey of rental returns in each
locality while determining the annual rateable value. However, such
municipal rateable value is not updated or in some cases, the same does
not represent the correct annual rent received qua a particular property.
In a given case, the rental value of premises in two adjoining buildings
in City of Mumbai can be different. Various factors such as condition of
building, accessibility, road frontage, interiors, amenities etc. can make a
substantial difference between the rental value of same properties
located in close proximity to each other. Therefore, the Assessing
Officer can make an enquiry under Section 23(1)(a) of the Act to find
out the sum which the property is reasonably expected to fetch for the
purpose of determining the annual value under Section 22. After the
Assessing Officer, on his own enquiry, finds out that the gap between
the municipal rateable value and the annual rent of the property is
likely to fetch in not too wide, the Assessing Officer can consider the
annual value of the property corresponding to the municipal rateable
value. However, the moment the Assessing Officer notices that the gap
between the two amounts is wide, he cannot be compelled to accept the
municipal rateable value for the purpose of Section 23 of the Act. Thus,
the principle of accepting municipal rateable value for the purpose of
Section 23 of the Act cannot be uniformly applied to every case and
there is no bar for the Assessing Officer from making an independent
enquiry under Section 23(1)(a) and determine the sum which he believes
is likely to be fetched as rent in respect of the property in question.
25) In the present case, the Assessee did not, in the first place,
present before the Assessing Officer the municipal rateable value right
till the proceedings were decided by the CIT(A). No document was
produced by the Assessee to indicate a particular amount being fixed as
municipal rateable value. In fact, it was never his case that the amount
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fixed towards municipal rateable value be taken as annual value of the
property under Section 23 of the Act. The Assessee always claimed that
the licence fees indicated in license agreement must be treated as the
annual letting value of the property. For the first time before ITAT, the
Assessee relied upon two documents being letter dated 31 October 1992
issued by the Developer-Aesthetic Builders Pvt. Ltd. and Certificate
dated 28 November 1995 issued by Sakhar Bhavan Premises Co-op.
Society Ltd. (Proposed). The developer’s letter dated 31 October 1992,
read thus :-
Dated 31st October 1992
M/s Tivoli Investment & Trading Co.P.Ltd.
7, Champaklal Udyog Bhuvan,
Sion (East),
Bombay 400 022.
———————
Dear Sirs,
Re: Rateable Value
Office No.72, Sakhar Bhavan.
—————————————-
In response to your letter No. TI/10107/92 dated 21.10.1992 we may
inform you that the Proposed Rateable Value in respect of Office
Premises No.72 in Sakhar Bhavan, Plot No.230, Nariman Point,
Bombay -21, owned by you, as notified by the Assessment
Department of the Municipal Corporation of Greater Bombay, with
effect from 1-4-1986, is as follows:-
Office Area. Rateable
No. Value @ Rate
---------- ----------- ---------------------
72 255.00 Sq.mtrs. Rs.10,200/-
A complaint against the proposed rateable value is still pending
finalisation with the Assessor & Collector, Municipal Corporation of
Greater Bombay.
Yours faithfully,
For AESTHETIC BUILDERS PVT. LTD.
Manager(Sales)
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26) Thus, in the developer's letter 'proposed rateable value' in
respect of the office premises w.e.f. 1 April 1986 was indicated as
Rs.10,200/-. The letter further stated that a complaint against proposed
rateable value was pending finalization before the Assessor and
Collector, MCGM. Thus, the letter dated 31 October 1992 itself made it
clear that what was fixed and what had continued to operate even till 31
October 1992 was merely proposed rateable value. Again, the figure of
Rs.10,200/- was as on 1 April 1986 and had no relevance to the
Assessment Years 1990-91 and 1991-92. Faced with this difficulty, the
Assessee relied on Certificate issued by Sakhar Bhavan Co-op. Society
Ltd. (Proposed) dated 28 November 1995 which certified that the
rateable value fixed by the Municipal Corporation in respect of the
office premises was Rs.67,331/- per year. The Certificate is silent about
the date of fixation of such rateable value. There is no underlying
material to indicate as to how the society had arrived at the said figure.
27) Though the Assessee attempted to rely upon developer’s
letter and Society’s Certificate before the ITAT, its Counsel ultimately
conceded that both documents be ignored. In this regard, para-8 of the
order of the ITAT reads thus :-
8. According to Shri Dastur, the rateable value of the premises, which
comprised area of 255 sq.mts, was only Rs. 10,200/-. So, as per section
23(1)(a) of the Act, its value is to be adopted at Rs. 10,200/-. This was
on the basis of a letter given by Aesthetic Builders Private Limited,
appended at Page 60 of the Paper Book. In the Paper Book at Page 59,
one certificate from Sakhar Bhavan Premises Co-operative Society
Limited (Proposed) dated 28.11.1995 was appended, wherein the
valuation of premises No.702 at Sakhar Bhavan was stated to be
Rs.67,331/- per year. In the certificate given along with the Paper
Book, it was stated that this evidence was available before the CIT(A).
The CIT (A) did pass the order on 29.03.1993. The learned
Departmental Representative submitted that the certificate of the
assessee is wrong. This evidence was not available before the CIT(A).
At this, Shri Dastur submitted that this evidence may be ignored.
Similarly, at Page 58 of the Paper Book, the assessee filed a letter from
Citibank dated 24.01.1994. In the certificate appended along with the
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Paper Book, it was stated that this evidence was before the CIT(A).
This evidence was obtained subsequent upon the order of the CIT(A),
which is dated 29.03.1993. As such, the learned DR made objection.
On that, Shri Dastur submitted that this evidence may also be
ignored. We just ignore these two papers without making any
comment on the falsity of the certificate appended along with the
Paper Book.
28) Thus, the Assessee itself did not press the developer’s letter
and Society’s Certificate in support of its claim before ITAT and cannot
be permitted to rely upon the same before this Court. Mr. Joshi’s
submission that the Counsel made a statement for ignorance of
evidence in a spur of moment cannot be accepted. It was a conscious
call taken by the Assessee.
29) Thus, the Assessee did not place any material before the
Assessing Officer to demonstrate that any particular sum was fixed as
municipal rateable value. Though some material was sought to be
produced before the ITAT, the same was not relied upon. Even
otherwise, both the documents cannot be treated as cogent evidence for
fixation of municipal rateable value in respect of the premises in
question.
30) Therefore, the Assessee’s contention of fixation of annual
value under Section 23 and of municipal rateable value cannot be
accepted in the facts of the present case.
31) Another contention raised on behalf of the Assessee is that
the standard rent in respect of the premises ought to have been taken
into consideration for the purpose of determining annual value under
Section 23. Reliance is placed on the findings recorded by the Division
Bench of this Court in Tip Top Typography in para-52, which are as
under :-
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52. We have also noted the submissions of Shri Ahuja. We are of the
opinion that even in the cases and matters brought by him to our
notice, it is evident that the Assessing Officer cannot brush aside the
rent control legislation, in the event, it is applicable to the premises in
question. Then the Assessing Officer has to undertake the exercise
contemplated by the rent control legislation for fixation of standard
rent. The attempt by the Assessing Officer to override the rent control
legislation and when it balances the rights between the parties has
rightly been interfered with in the given case by the appellate
authority. The Assessing Officer either must undertake the exercise to
fix the standard rent himself and in terms of the Maharashtra Rent
Control Act, 1999, if the same is applicable or leave the parties to
have it determined by the court or tribunal under that Act. Until,
then, he may not be justified in applying any other formula or
method and determine the “fair rent” by abiding with the same. If he
desires to undertake the determination himself, he will have to go by
the Maharashtra Rent Control Act, 1999. Merely because the rent has
not been fixed under that Act does not mean that any other
determination and contrary thereto can be made by the Assessing
Officer. Once again having respectfully concurred with the judgment
of the Full Bench of the Delhi High Court, we need not say anything
32) In our view, the contention of fixation of annual value of
the office premises of the Assessee under Section 23(1)(a) based on
standard rent is totally misconceived. The concept of standard rent is
referable to rent control legislations. In Maharashtra, Bombay Rents,
Hotel and Lodging House Rates Control Act, 1947 (Bombay Rent Act)
was applicable till the year 1999 which had frozen the rent in respect of
the premises as on 1st September 1940, which became the standard rent.
The Bombay Rent Act has been substituted by the Maharashtra Rent
Control Act, 1999 (MRC Act), which again freezes the standard rent as
on 1 October 1987, subject to annual increment @ only 4%.
33) 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 idea behind
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fixation of annual value of the property under Section 23 of the Act
corresponding to the standard rent is to ensure that the landlord is not
made to pay income-tax on actual market rent when he receives a
paltry sum towards standard rent. In City of Mumbai, premises which
are governed by the Bombay Rent Act and MRC Act fetch paltry sums
on account of freezing of rent. Thus, in a given case where landlord
receives rent of only Rs.500/- per month cannot be made to pay income-
tax on an assumption that the premises are actually worth fetching
market rent of Rs.50,000/-. Therefore, the annual value of premises
governed by the rent control legislations needs to be computed by
taking into consideration the annual standard rent received by the
landlord by ignoring the market rent which the premises are capable of
fetching. This is the reason why observations are made in paragraph-52
of the judgment in Tip Top Typography that ‘…..the Assessing Officer
cannot brush aside the rent control legislation, in the event, it is
applicable to the premises in question’. Those observations are relevant
only to premises which are governed by the rent control legislations.
34) It is not the case of the Assessee a tenancy was created in
favour of Citi Bank under the provisions of Bombay Rent Act, which
was in vogue at the time of execution of the licence agreement dated 29
November 1988. Therefore, the contention that annual value under
Section 23 needs to be determined on the basis of standard rent merits
outright rejection.
35) Once it is held that the Assessing Officer is not bound to
accept the municipal rateable value and that in a given case, he can take
into consideration the annual rent the premises are capable of fetching,
we do not see any error on the part of the Assessing Officer in
conducting enquiry and fixing Rs.22,00,000/- as the annual rental value
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of the premises. The Assessing Officer has taken into consideration the
license fees paid by Citi Bank in respect of the other premises in the
same building in the year 1983 and has marginally increased the rent of
Rs.43/- paid by Citi Bank in the year 1983 to Rs.50/- in respect of the
year 1989-90. The contention about impermissibility to consider rent of
ground floor premises for fixing the annual value of seventh floor
premises does not merit consideration. Even if it is assumed that ground
floor premises are likely to fetch more rent, there was also a long gap of
six to seven years between the instance taken into consideration by the
Assessing Officer and the license agreement executed between the
Assessee and Citi Bank. If yearly increment in the rent for ground and
first floor premises is taken into consideration, which was 10% at the
relevant time, the rent would have gone upto Rs. 76/- by the year 1989
and even if the annual increment is considered at 5% the rent would
have been Rs. 57/- in 1989. The Assessing Officer has rightly considered
the rent at Rs. 50/- considering that the premises are on the seventh
floor. In fact, we find that the Assessing Officer’s assessment is on a
conservative side.
36) So far as return of 15% on security deposit of Rs. 1.54 crores
is concerned, we have already held that notional interest receivable on
security deposit cannot be the sole factor for deciding the annual value
of the property under Section 23(1)(a) of the Act. The Assessing Officer
though has taken into consideration 15% return of Rs. 23,10,000/-, the
same has not been made the sole basis for determining annual value of
the property. He has conducted independent analysis by taking into
consideration the twin factors of comparable instance and return on
overdraft facility and instead of choosing either of the two figures, he
has arrived at independent sum of Rs.22 lakhs as reasonable rent which
office premises were likely to fetch at the relevant point of time. We do
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not find any element of perversity in the findings recorded by the
Assessing Officer.
37) The Assessee has raised a strong objection to invoke the
principle of usufruct of the security deposit for justifying the sum
determined by the Assessing Officer under Section 23 of the Act. From
the findings recorded in para-21 of the order of the ITAT, it appears that
the Tribunal has attempted to find out the fruits of exploitation of
premises at Sakhar Bhavan and has refused to believe that the amount
received towards reimbursement of taxes and outgoings could be taken
into consideration for use of the office premises. The Tribunal has
rightly justified Assessing Officer’s action in finding out the
consideration which the Assessee can receive from use of the property,
which is also the scheme of Clause-(a) of sub-section (1) of Section 23.
The Tribunal has also rejected the contention of the Assessee to
consider municipal rateable value of Rs.10,200/- by terming it to be
ridiculously low. In addition, the Tribunal has noted the submission of
counsel of Assessee for ignoring the said municipal rateable value. It
rightly took into consideration that the Assessee did not file any
documentary evidence from the Municipal Corporation. The contention
that the Municipal Corporation was levying taxes in respect of the
entire building on condominium/apartment association/co-operative
society does not cut any ice as it was possible for the Assessee to seek
information from the tax department of the Municipal Corporation
about the exact annual rateable value determined in respect of the office
premises. 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. As held above,
both the Full Bench of Delhi High Court in CIT Versus. Moni Kumar
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Subba as well as the Division Bench of this Court in Tip Top Typography
have held that if the municipal rateable value does not depict the
correct annual value of the property, the Assessing Officer is entitled to
make his own assessment, which is done in the present case.
38) 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 Assessee entered into a
transaction of license by showing the amount of taxes and outgoings as
license fees and hefty security deposit of Rs.1.54 crores, with right to
utilize the same without payment of any interest for 10 long years. The
fact that the Assessee had contemporaneously availed overdraft facility
of Rs. 51 lakh shows that it was in need of funds for business purposes.
Thus, the security deposit in the present case is the real return for the
Assessee and not the amount indicated as license fees. In such
circumstances, neither the ridiculously low amount of license fee of
Rs.9,825/- per month nor the municipal rateable value of Rs.10,200/-
could be taken into consideration as a sum under Section 23(1)(a) of the
Act.
39) 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.
[SANDEEP V. MARNE, J.] [CHIEF JUSTICE]
Digitally
signed by
NEETA
NEETA SHAILESH
SHAILESH SAWANT
SAWANT Date:
2025.08.18
15:04:42
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