Municipal Value Not Binding for Tax Assessment: Bombay HC Upholds AO’s Higher Fair Rent Determination u/s 23(1)(a) of IT Act [Read Order]

The Bombay High Court has held that municipal rateable value is not binding on the Assessing Officer while determining the annual value of property under Section 23(1)(a) of the Income Tax Act.

The assessee, Tivoli Investment & Trading Co. Pvt. Ltd., owned an office premises measuring 3,275 sq. ft. on the 7th floor of “Sakhar Bhavan” at Nariman Point, Mumbai. In 1988, it entered into a leave and licence agreement with Citibank for ten years, stipulating a nominal licence fee of ₹9,825 per month while receiving an interest-free security deposit of ₹1.54 crore.

For Assessment Years (AY) 1990–91 and 1991–92, the assessee declared income of ₹1,17,900 based on the monthly licence fee. The Assessing Officer (AO), however, determined the annual letting value (ALV) of the property at ₹22 lakh under Section 23(1)(a), relying on comparable rent from Citibank’s occupancy of the same building’s lower floors and the market interest context of the large security deposit. The Commissioner (Appeals) and ITAT affirmed the assessment.

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The assessee contended before the High Court that (i) the municipal rateable value should alone determine the ALV, and (ii) notional interest on security deposits cannot be factored into rental value. It also argued that the AO’s approach violated settled law laid down in Commissioner of Income-tax V/s Tip Top Typography (2014).

Counsel argued that the AO had no basis to ignore the municipal rateable value and adopt a higher estimate. The ₹1.54 crore deposit, being refundable and interest-free, could not be treated as part of rent or yield any notional income.

It was urged that the principle in Tip Top Typography barred the inclusion of notional interest and restricted fair rent to the municipal valuation or standard rent where applicable.

The Department countered that the assessee structured the transaction to understate rental income by fixing an artificially low licence fee and taking a substantial deposit.

The municipal rateable value of ₹10,200 (proposed in 1986) was outdated and grossly understated. The AO was, therefore, justified in making an independent inquiry and adopting market-based rent derived from comparable Citibank premises in the same building.

The Court reaffirmed that municipal rateable value is not binding on tax authorities if it does not reflect the fair market rent.

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The AO may undertake an independent inquiry to ascertain what the property “might reasonably be expected to fetch” under Section 23(1)(a). Also, notional interest on security deposits cannot be directly added to rent, but the AO may consider the overall transaction structure and comparable market data to assess fair rent.

The concept of standard rent under rent control laws applies only to premises governed by those enactments, not to licensed commercial properties like the one in question. The assessee had produced no credible evidence of municipal valuation or standard rent; reliance on developer or society certificates was rightly rejected.

The Division Bench Justice Alok Aradhe and Justice Sandeep V. Marne dismissed the appeals and held that the AO’s determination of ₹22 lakh, based on comparable rents and conservative estimation, was reasonable and devoid of perversity.

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