The property is not under rent control. My tenant paid a huge interest-free deposit and a small rent, and the Assessing Officer has added notional interest on the deposit to the annual letting value. Is that permissible, and what should the annual value be instead?
Notional interest on an interest-free security deposit cannot be added to arrive at the annual letting value under s.23(1)(a) — the Full Bench held that view to be the consistent one across the High Courts and adopted it. What the Assessing Officer must do instead is determine the fair rent, for which the rateable value fixed under the municipal laws is a rational yardstick, though it is not binding on him and he may depart from it on material.
Decided by the High Court (Full Bench — Hon'ble the Chief Justice (not named in the coram line as printed), A.K. Sikri J and Manmohan J) on 2011-03-30, reported as ITA No. 499 of 2008 with ITA No. 803 of 2007, ITA No. 1113 of 2008, ITA No. 388 of 2010, ITA No. 516 of 2010, ITA No. 1034 of 2010 and ITA No. 1240 of 2010 (Delhi High Court); reserved 18 February 2011, pronounced 30 March 2011. It bears on section 22, section 23, section 23(1)(a), section 23(1)(b) of the Income Tax Act 1961, in House Property, Assessment & Scrutiny and How Tax Law Is Read matters.
This is the Full Bench that lays out the whole s.23(1)(a) framework in six numbered propositions, and tribunals across the country quote paragraph 17 verbatim — an exact-phrase search on Indian Kanoon returned some thirty-two documents reproducing conclusion (vi), including the Bombay High Court in Tivoli Investment and Trading Co. Pvt. Ltd. v. ACIT (18 August 2025). Two things in it cut both ways. For the taxpayer: notional interest is out, the actual rent is reliable evidence in normal circumstances, and the standard rent is an absolute upper limit where rent control applies. For the Revenue: the municipal rateable value is expressly not binding, and the Assessing Officer may ignore it where he shows it does not represent the correct fair rent or where it was fixed long before the assessment year in question. Note also the Court's own observation in paragraph 19 that the municipal yardstick has become redundant in Delhi since the 2003 amendment moved property tax to the unit area method — so an argument built on the Delhi rateable value needs to confront how that value is now arrived at.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee owned property No. 267, Masjid Moth, Uday Park, New Delhi and property No. 87, Adhichini, New Delhi. The contractual rent was Rs 90,000 per month, and the tenants had placed interest-free security deposits of Rs 8.58 crore and Rs 2.20 crore, some Rs 10.78 crore in all against annual rent of about Rs 10.8 lakh. For assessment year 2001-02 the Assessing Officer, relying on Municipal Corporation of Delhi bye-laws permitting interest to be computed on excess security deposits, added notional interest of about Rs 30.41 lakh in arriving at the annual letting value. The CIT (Appeals) and the Tribunal deleted the addition, noting that the actual rent already exceeded the municipal rateable value of Rs 2,02,240. The Revenue's appeals came before a Division Bench, which on 16 August 2010 held that the earlier decisions had not addressed the abnormal situation of a huge interest-free deposit alongside a nominal rent and referred the questions to a Larger Bench. The Delhi Rent Control Act did not apply, the rent being above Rs 3,500 per month.
The appeals were dismissed. Notional interest on an interest-free security deposit cannot be taken into account in determining the annual letting value under s.23(1)(a); since that was the very basis on which the Assessing Officer had fixed the annual letting value, the assessments were rightly set aside and no further factual exercise was called for. The rateable value determined under the municipal laws, if correctly determined, can be taken as the annual letting value under s.23(1)(a), but it is not binding on the Assessing Officer, who may determine the fair rent on other material if he can show that the rateable value does not represent the correct fair rent. The Court set out six conclusions in paragraph 17 governing determination of annual letting value, including that the annual letting value cannot exceed the standard rent under the applicable rent control legislation, that where no standard rent has been fixed it is the duty of the Assessing Officer to determine it, and that where the fair rent is less than the standard rent it is the fair rent that is taken.
The operative words of s.23(1)(a) — the sum for which the property might reasonably be expected to let from year to year — were held to give a specific direction to the Revenue to determine the fair rent, and the Court found that the High Courts had taken a consistent view that notional interest cannot form part of actual rent. On the municipal yardstick, the Court accepted the Calcutta High Court's view in Satya Co. Ltd. because the provisions for fixation of annual rent under the Delhi Municipal Corporation Act are pari materia with s.23, but subjected it to the condition that the municipal valuation bear a close proximity in time to the assessment year, since a value fixed much earlier on a lower rent may be no safe yardstick where the property is now let at a much higher rent. The Court drew on Corporation of Calcutta v. Smt. Padma Debi for the test of a bargain between a willing lessor and a willing lessee uninfluenced by extraneous circumstances, and on the Patna High Court in Kashi Prasad Kataruka v. CIT for the proposition that the rateable value is not binding on the Assessing Officer. It declined to lay down what circumstances may inflate or deflate the fair rent, saying it would depend on the facts of each case, and extracted from Motichand Hirachand v. Bombay Municipal Corporation the recognised methods of arriving at hypothetical rent — actual rent for the property or comparable properties, assessments of comparable properties, profits, or cost of construction — and from the Bombay High Court in J.K. Investors the direction that the Assessing Officer must decide the fair rent, and that where the actual rent received exceeds it, the actual rent constitutes the annual value under s.23(1)(b). The Court added that in Delhi the municipal exercise had in any event become redundant after the 2003 amendment moved property tax to the unit area method.
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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Handle my notice → Ask a CA on WhatsAppNotional interest on an interest-free security deposit cannot be added to arrive at the annual letting value under s.23(1)(a) — the Full Bench held that view to be the consistent one across the High Courts and adopted it. What the Assessing Officer must do instead is determine the fair rent, for which the rateable value fixed under the municipal laws is a rational yardstick, though it is not binding on him and he may depart from it on material. This was decided by the High Court (Full Bench — Hon'ble the Chief Justice (not named in the coram line as printed), A.K. Sikri J and Manmohan J) and bears on section 22, section 23, section 23(1)(a), section 23(1)(b) of the Income Tax Act 1961. It is reported as ITA No. 499 of 2008 with ITA No. 803 of 2007, ITA No. 1113 of 2008, ITA No. 388 of 2010, ITA No. 516 of 2010, ITA No. 1034 of 2010 and ITA No. 1240 of 2010 (Delhi High Court); reserved 18 February 2011, pronounced 30 March 2011. This is the Full Bench that lays out the whole s.23(1)(a) framework in six numbered propositions, and tribunals across the country quote paragraph 17 verbatim — an exact-phrase search on Indian Kanoon returned some thirty-two documents reproducing conclusion (vi), including the Bombay High Court in Tivoli Investment and Trading Co. Pvt. Ltd. v. ACIT (18 August 2025). Two things in it cut both ways. For the taxpayer: notional interest is out, the actual rent is reliable evidence in normal circumstances, and the standard rent is an absolute upper limit where rent control applies. For the Revenue: the municipal rateable value is expressly not binding, and the Assessing Officer may ignore it where he shows it does not represent the correct fair rent or where it was fixed long before the assessment year in question. Note also the Court's own observation in paragraph 19 that the municipal yardstick has become redundant in Delhi since the 2003 amendment moved property tax to the unit area method — so an argument built on the Delhi rateable value needs to confront how that value is now arrived at. If it applies to you, the first step is this: If the addition rests on notional interest on a deposit, take that ground first and alone — the Full Bench holds the addition impermissible, and once the basis of the computation falls, the assessment falls with it without any further factual exercise.
The assessee owned property No. 267, Masjid Moth, Uday Park, New Delhi and property No. 87, Adhichini, New Delhi. The contractual rent was Rs 90,000 per month, and the tenants had placed interest-free security deposits of Rs 8.58 crore and Rs 2.20 crore, some Rs 10.78 crore in all against annual rent of about Rs 10.8 lakh. For assessment year 2001-02 the Assessing Officer, relying on Municipal Corporation of Delhi bye-laws permitting interest to be computed on excess security deposits, added notional interest of about Rs 30.41 lakh in arriving at the annual letting value. The CIT (Appeals) and the Tribunal deleted the addition, noting that the actual rent already exceeded the municipal rateable value of Rs 2,02,240. The Revenue's appeals came before a Division Bench, which on 16 August 2010 held that the earlier decisions had not addressed the abnormal situation of a huge interest-free deposit alongside a nominal rent and referred the questions to a Larger Bench. The Delhi Rent Control Act did not apply, the rent being above Rs 3,500 per month. The matter was decided on 2011-03-30 by the High Court (Full Bench — Hon'ble the Chief Justice (not named in the coram line as printed), A.K. Sikri J and Manmohan J). On those facts the High Court held as follows. The appeals were dismissed. Notional interest on an interest-free security deposit cannot be taken into account in determining the annual letting value under s.23(1)(a); since that was the very basis on which the Assessing Officer had fixed the annual letting value, the assessments were rightly set aside and no further factual exercise was called for. The rateable value determined under the municipal laws, if correctly determined, can be taken as the annual letting value under s.23(1)(a), but it is not binding on the Assessing Officer, who may determine the fair rent on other material if he can show that the rateable value does not represent the correct fair rent. The Court set out six conclusions in paragraph 17 governing determination of annual letting value, including that the annual letting value cannot exceed the standard rent under the applicable rent control legislation, that where no standard rent has been fixed it is the duty of the Assessing Officer to determine it, and that where the fair rent is less than the standard rent it is the fair rent that is taken.
The operative words of s.23(1)(a) — the sum for which the property might reasonably be expected to let from year to year — were held to give a specific direction to the Revenue to determine the fair rent, and the Court found that the High Courts had taken a consistent view that notional interest cannot form part of actual rent. On the municipal yardstick, the Court accepted the Calcutta High Court's view in Satya Co. Ltd. because the provisions for fixation of annual rent under the Delhi Municipal Corporation Act are pari materia with s.23, but subjected it to the condition that the municipal valuation bear a close proximity in time to the assessment year, since a value fixed much earlier on a lower rent may be no safe yardstick where the property is now let at a much higher rent. The Court drew on Corporation of Calcutta v. Smt. Padma Debi for the test of a bargain between a willing lessor and a willing lessee uninfluenced by extraneous circumstances, and on the Patna High Court in Kashi Prasad Kataruka v. CIT for the proposition that the rateable value is not binding on the Assessing Officer. It declined to lay down what circumstances may inflate or deflate the fair rent, saying it would depend on the facts of each case, and extracted from Motichand Hirachand v. Bombay Municipal Corporation the recognised methods of arriving at hypothetical rent — actual rent for the property or comparable properties, assessments of comparable properties, profits, or cost of construction — and from the Bombay High Court in J.K. Investors the direction that the Assessing Officer must decide the fair rent, and that where the actual rent received exceeds it, the actual rent constitutes the annual value under s.23(1)(b). The Court added that in Delhi the municipal exercise had in any event become redundant after the 2003 amendment moved property tax to the unit area method. In the words reproduced by the source cited on this page: "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." The decision followed or applied Corporation of Calcutta v. Smt. Padma Debi, AIR 1962 SC 151 — relied on for the willing lessor and willing lessee test; Motichand Hirachand v. Bombay Municipal Corporation, AIR 1968 SC 441 — extracted on methods of valuation; CIT v. Satya Co. Ltd. (Calcutta High Court) — view on the municipal annual value accepted; Kashi Prasad Kataruka v. CIT [1975] 101 ITR 810 (Patna) — relied on for the rateable value not binding the Assessing Officer; CIT v. J.K. Investors (Bom.) Ltd. (Bombay High Court) — observations on determining fair rent extracted and applied.
It was decided by the High Court on 2011-03-30 and is reported as ITA No. 499 of 2008 with ITA No. 803 of 2007, ITA No. 1113 of 2008, ITA No. 388 of 2010, ITA No. 516 of 2010, ITA No. 1034 of 2010 and ITA No. 1240 of 2010 (Delhi High Court); reserved 18 February 2011, pronounced 30 March 2011. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 22, section 23, section 23(1)(a), section 23(1)(b), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were dismissed. Notional interest on an interest-free security deposit cannot be taken into account in determining the annual letting value under s.23(1)(a); since that was the very basis on which the Assessing Officer had fixed the annual letting value, the assessments were rightly set aside and no further factual exercise was called for. The rateable value determined under the municipal laws, if correctly determined, can be taken as the annual letting value under s.23(1)(a), but it is not binding on the Assessing Officer, who may determine the fair rent on other material if he can show that the rateable value does not represent the correct fair rent. The Court set out six conclusions in paragraph 17 governing determination of annual letting value, including that the annual letting value cannot exceed the standard rent under the applicable rent control legislation, that where no standard rent has been fixed it is the duty of the Assessing Officer to determine it, and that where the fair rent is less than the standard rent it is the fair rent that is taken. It arises in House Property, Assessment & Scrutiny and How Tax Law Is Read matters, on section 22, section 23, section 23(1)(a), section 23(1)(b) of the Income Tax Act 1961, and was decided by Full Bench — Hon'ble the Chief Justice (not named in the coram line as printed), A.K. Sikri J and Manmohan J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Ask the Assessing Officer to identify what he says the fair rent is and on what material, rather than arguing only about the deposit; the Full Bench faults assessments that never determine fair rent at all. Put the municipal rateable value on record together with proof of the year in which it was fixed — the closer in time to the assessment year, the harder it is to displace. Where rent control applies to the property, plead the standard rent as an absolute ceiling and, if it has not been fixed, work it out yourself on the statutory formula; the Full Bench places the duty of determining it on the Assessing Officer. If the Revenue attacks the rent as depressed, be ready with the comparables: the Full Bench, quoting Motichand Hirachand, accepts rents of comparable properties, assessments of comparable properties, profits, and cost of construction as recognised methods, and says no single test can be laid down.
Still good law. Conclusion (vi) of paragraph 17 was verified by exact-phrase retrieval on Indian Kanoon, which returned the Full Bench judgment together with the Bombay High Court in Tivoli Investment and Trading Co. Pvt. Ltd. v. ACIT (18 August 2025) and numerous Tribunal orders reproducing it, indicating the propositions are in current use. I did NOT check whether the Revenue carried the matter to the Supreme Court, and I did not trace any decision doubting it; treat the absence of contrary authority here as unchecked rather than established. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two things to flag about the retrieved text. First, the coram line as printed names only 'Hon'ble The Chief Justice' without giving his name, followed by A.K. Sikri J and Manmohan J; I have not independently established who the Chief Justice of the Delhi High Court was on 30 March 2011, so the bench field records the coram as printed. Second, the paragraph numbering in the print text is disordered — the passage on municipal rateable value being a rational yardstick is rendered as paragraph 18 but is followed by paragraphs numbered 16 and 17 and then 19, so the passage almost certainly bears a number lower than 16 in the original. I have anchored the key quote to the conclusions paragraph numbered 17, which is how tribunals cite it, and I confirmed conclusion (vi) by exact-phrase retrieval. The facts of the assessee's case are taken from the Division Bench reference order of 16 August 2010 (https://indiankanoon.org/doc/325769/?type=print), which I also read; the Full Bench judgment itself does not restate them at the same length. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were dismissed. Notional interest on an interest-free security deposit cannot be taken into account in determining the annual letting value under s.23(1)(a); since that was the very basis on which the Assessing Officer had fixed the annual letting value, the assessments were rightly set aside and no further factual exercise was called for. The rateable value determined under the municipal laws, if correctly determined, can be taken as the annual letting value under s.23(1)(a), but it is not binding on the Assessing Officer, who may determine the fair rent on other material if he can show that the rateable value does not represent the correct fair rent. The Court set out six conclusions in paragraph 17 governing determination of annual letting value, including that the annual letting value cannot exceed the standard rent under the applicable rent control legislation, that where no standard rent has been fixed it is the duty of the Assessing Officer to determine it, and that where the fair rent is less than the standard rent it is the fair rent that is taken.
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