AO Not Bound by Municipal Rateable Value, Can Fix Fair Rent Independently u/s 23(1)(a) Income Tax Act: Bombay HC [Read Order]

In a recent ruling, the Bombay High Court held that the Assessing Officer is not bound to accept the municipal rateable value while determining the annual letting value of a property under Section 23(1)(a) of the Income Tax Act, 1961, and may independently fix the fair rent if the municipal value does not reflect the real rental potential.

Tivoli Investment and Trading Company Pvt. Ltd., the assessee, had purchased an office premises at Sakhar Bhavan, Nariman Point, Mumbai, and let it out to Citi Bank under a leave and license agreement dated 29 November 1988.

The license fee was fixed at only Rs. 9,825 per month for ten years, while Citi Bank simultaneously advanced an interest-free security deposit of Rs. 1.54 crores. For assessment year 1990-91, the assessee offered Rs. 1,17,900 as rental income based on the license fee.

The assessee’s counsel argued that under Section 23(1)(a), the annual value must be determined with reference to the municipal rateable value, which in this case was Rs. 10,200. It was further argued that notional interest on security deposits could not be added to rental income and that the seventh-floor premises could not be compared with higher-rent ground-floor premises.

The revenue’s counsel argued that the assessee had deliberately structured the arrangement by fixing a nominal license fee and taking a disproportionately high security deposit to reduce taxable income.

They argued that the municipal rateable value was unreasonably low and not reliable, and that the Assessing Officer was justified in considering comparable rentals and other surrounding circumstances to arrive at a fair letting value.

The Division Bench comprising Justice K.R. Shriram and Justice Neela Gokhale observed that while notional interest on security deposits cannot be directly added to income, the Assessing Officer is not compelled to adopt the municipal rateable value where it does not represent fair rent.

The court explained that in this case the assessee had failed to produce proper municipal valuation evidence, and even before the Tribunal, its counsel conceded that documents relied upon earlier could be ignored.

The court pointed out that the arrangement clearly suggested that the true return from the property was concealed and that the Assessing Officer’s reliance on comparable rentals was both reasonable and conservative.

The court held that the Assessing Officer was correct in fixing Rs. 22,00,000 as the fair annual letting value of the premises, and that neither the nominal license fee of Rs. 9,825 per month nor the municipal rateable value of Rs. 10,200 could be accepted as reflecting the true rental value. The appeals were dismissed..

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