The officer says my rent is too low, has collected instances of higher rents in the locality and has also added notional interest on my interest-free deposit. When can he displace the rent I actually receive?
Only on cogent material, and never by adding notional interest. The Bombay High Court held that the municipal rateable value is a safe guide and cannot be discarded in every case; to depart from it the officer needs cogent and reliable material. Market rate in the locality is an approved method for fixing fair rental value, but he may resort to it only where he is satisfied the case is suspicious and the parties' determination doubtful, and that satisfaction, that the bargain is inflated or deflated by fraud, emergency, relationship or the like, must come first. He must disclose the material to the assessee before using it. Notional interest on a refundable interest-free deposit cannot be treated as part of rent under section 23(1)(a).
Decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and B.P. Colabawalla J) on 2014-08-08, reported as Income Tax Appeal No. 1213 of 2011 with Income Tax Appeals Nos. 2447/2011, 5363/2010, 5489/2010, 673/2011, 732/2011, 1316/2011, 1468/2011, 2108/2011, 2115/2011, 2116/2011, 2161/2011, 411/2012, 753/2012, 754/2012, 974/2012, 819/2012, 820/2012, 821/2012, 827/2012, 1182/2012, 1472/2012, 106/2014, 195/2014, 342/2014, 343/2014, 657/2014, 676/2014 and 944/2014, Bombay High Court. It bears on section 23(1)(a), section 23, section 22, section 260A of the Income Tax Act 1961, in House Property and Assessment & Scrutiny matters.
This is the leading Bombay authority on how an Assessing Officer may fix annual letting value under section 23(1)(a), and it is the answer to the two things officers do most often: reject the municipal rateable value out of hand, and gross up the rent with imputed interest on the security deposit. It sets out a sequence the officer must follow, which is what makes it usable in a reply: form and record the satisfaction that the bargain is unreasonable, then enquire into comparable transactions, then test whether those comparables are genuinely comparable in nature, area, measurement, location, use, access and special advantages, then disclose the material and take the assessee's view. It also holds that where rent control legislation applies, the officer cannot bypass it: he must either fix the standard rent under the Maharashtra Rent Control Act, 1999 himself or leave the parties to have it fixed, and until then may not apply some other formula. And it endorses the Full Bench of the Delhi High Court on the whole subject, so a taxpayer can rely on a consistent line across two High Courts.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The lead facts were taken from Income Tax Appeal No. 1213 of 2011, for assessment year 2005-06. The assessee filed its return on 31 August 2005 declaring income of Rs 3,12,520, which was processed under section 143(1) and taken up for scrutiny. The Assessing Officer found that it had let out commercial premises of about 8,118 square feet of built-up office space with open car parking in the building 'Seth House' at Dr V.B. Gandhi Road, Mumbai, in a prime locality, to a related concern for Rs 3,60,000, taking Rs 5,25,00,000 as an interest-free security deposit. Finding the rent nominal and the circumstantial evidence indicating a higher fair market value, and having confirmed that the property was not covered by rent control, he obtained instances of rents prevailing in the area and determined the annual letting value under section 23(1)(a) at Rs 85,72,608 by order dated 24 December 2007. The Commissioner (Appeals) confirmed that on 11 December 2008. The Tribunal, by order dated 31 March 2010, remitted the matter with a direction to verify the rateable value fixed by the municipal authorities and, if it was less than Rs 3,60,000, to tax the actual rent received. The Revenue appealed under section 260A. Twenty-eight further appeals were heard with it, raising three recurring situations: properties outside rent control where the officer substituted a locality rate; properties within the Maharashtra Rent Control Act, 1999, where no standard rent had been fixed and the officer fixed a fair or standard rent himself; and leave and licence arrangements where a licence fee had been agreed together with a refundable interest-free security deposit, the question being whether the deposit could be used to show that the licence fee did not reflect the market rate.
The Revenue's appeals were dismissed. The Court held that the municipal rateable value cannot be discarded straightway in all cases and that there can be no blanket rejection of it: it is a safe guide, and cogent and reliable material is needed to displace it. Market rate in the locality is an approved method for determining fair rental value, but the officer may resort to enquiry into the prevailing rate only when he is convinced that the case before him is suspicious and the determination by the parties doubtful. Notional interest on a refundable interest-free security deposit cannot be taken into account in the determination; where the transaction does not disclose fraud or the like, the officer should not presume that the deposit, or interest on it at bank rate, is the assessee's income. Where rent control legislation applies, the officer cannot brush it aside: he must either himself undertake the exercise of fixing standard rent under the Maharashtra Rent Control Act, 1999, or leave the parties to have it determined under that Act, and until then he is not justified in applying any other formula; the mere fact that standard rent has not been fixed does not permit a contrary determination. The Court respectfully concurred with the Full Bench of the Delhi High Court and held that the determination of fair rental value, for properties whether covered by rent control or not, is to be undertaken in terms of that decision. It concluded that wherever the officer has not adhered to these principles and his conclusion has been interfered with by the appellate authorities, no substantial question of law arises, and the findings of the Tribunal as the last fact-finding authority must be upheld unless vitiated by perversity or an error of law apparent on the face of the record.
The Court accepted the parties' own bargain as the starting point: ordinarily the licence fee agreed between a willing licensor and a willing licensee, uninfluenced by extraneous circumstances, is reliable evidence of what the landlord might reasonably expect to get from a hypothetical tenant. It follows that the officer may go behind it only where the transaction is influenced by extraneous circumstances or vitiated by fraud, and then he may adopt a fair rent based on opinion obtained from reliable sources. The Court then set out, step by step, what that exercise requires. The satisfaction that the bargain reveals an inflated or deflated rate based on fraud, emergency, relationship or other considerations, making it unreasonable, must precede everything else. The officer must have cogent and satisfactory material indicating that the parties have concealed the real position, and must not make guesswork or act on conjecture and surmise; there must be definite and positive material that the prevailing rate has been suppressed. He may then ascertain the going rate by a comparative study of identical or similar transactions, but must guard against adopting the rate in those transactions straightway: he must ask whether the property is of a similar nature, commercial or residential, and whether a departure is called for because of area, measurement, location, use, access and special advantages, noting that in a high-rise an office on an upper floor may fetch more or less. There is no magic formula, and everything depends on the facts. Before fixing the rate he is bound to disclose the material in his possession to the parties and must not rely on it while disbelieving them, and after ascertaining the rate he must comply with fairness and justice by disclosing it to the assessee to obtain his view. On the deposit, the Court adopted the reasoning that section 23 does not permit conversion of a depression in the rate of rent into money value by assuming a market rate of interest on the deposit as further rent, contrasting Schedule III to the Wealth Tax Act, which expressly authorises presumptive interest at 15 per cent as an integral part of rent, and holding that the officer's act in presuming such notional interest to be an integral part of the rent is ultra vires section 23(1) and unauthorised, since the law itself falls short of tackling such a situation; it noted that this view had been accepted by a Division Bench in Asian Hotels Limited, where notional interest on a refundable security deposit was held taxable neither under section 28(iv) nor under section 23(1)(a). The Court also recognised the practical point that a leave and licence creates no interest in the property, that such agreements can be determined before the stated period and that the licensee can opt out, so it is not as if the deposit is necessarily refundable only at the end, and it declined to evolve any rigid test. Finally it adopted the propositions of the Delhi Full Bench, including that if standard rent has not been fixed by the Rent Controller it is the officer's duty to determine it as the rent control enactment provides, and that standard rent is the upper limit so that where fair rent is less than standard rent it is the fair rent that is taken as annual letting value; and it extracted from Motichand Hirachand v Bombay Municipal Corporation, AIR 1968 SC 441, the rating principle that hypothetical rent may be arrived at by reference to the actual rent paid for the property or for comparable properties, or to assessments of comparable properties, or to the profits carried from the property, or to the cost of construction.
market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious
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Handle my notice → Ask a CA on WhatsAppOnly on cogent material, and never by adding notional interest. The Bombay High Court held that the municipal rateable value is a safe guide and cannot be discarded in every case; to depart from it the officer needs cogent and reliable material. Market rate in the locality is an approved method for fixing fair rental value, but he may resort to it only where he is satisfied the case is suspicious and the parties' determination doubtful, and that satisfaction, that the bargain is inflated or deflated by fraud, emergency, relationship or the like, must come first. He must disclose the material to the assessee before using it. Notional interest on a refundable interest-free deposit cannot be treated as part of rent under section 23(1)(a). This was decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and B.P. Colabawalla J) and bears on section 23(1)(a), section 23, section 22, section 260A of the Income Tax Act 1961. It is reported as Income Tax Appeal No. 1213 of 2011 with Income Tax Appeals Nos. 2447/2011, 5363/2010, 5489/2010, 673/2011, 732/2011, 1316/2011, 1468/2011, 2108/2011, 2115/2011, 2116/2011, 2161/2011, 411/2012, 753/2012, 754/2012, 974/2012, 819/2012, 820/2012, 821/2012, 827/2012, 1182/2012, 1472/2012, 106/2014, 195/2014, 342/2014, 343/2014, 657/2014, 676/2014 and 944/2014, Bombay High Court. This is the leading Bombay authority on how an Assessing Officer may fix annual letting value under section 23(1)(a), and it is the answer to the two things officers do most often: reject the municipal rateable value out of hand, and gross up the rent with imputed interest on the security deposit. It sets out a sequence the officer must follow, which is what makes it usable in a reply: form and record the satisfaction that the bargain is unreasonable, then enquire into comparable transactions, then test whether those comparables are genuinely comparable in nature, area, measurement, location, use, access and special advantages, then disclose the material and take the assessee's view. It also holds that where rent control legislation applies, the officer cannot bypass it: he must either fix the standard rent under the Maharashtra Rent Control Act, 1999 himself or leave the parties to have it fixed, and until then may not apply some other formula. And it endorses the Full Bench of the Delhi High Court on the whole subject, so a taxpayer can rely on a consistent line across two High Courts. If it applies to you, the first step is this: Put the municipal rateable value on record and make the officer say what cogent and reliable material justifies departing from it; a blanket rejection is not open to him.
The lead facts were taken from Income Tax Appeal No. 1213 of 2011, for assessment year 2005-06. The assessee filed its return on 31 August 2005 declaring income of Rs 3,12,520, which was processed under section 143(1) and taken up for scrutiny. The Assessing Officer found that it had let out commercial premises of about 8,118 square feet of built-up office space with open car parking in the building 'Seth House' at Dr V.B. Gandhi Road, Mumbai, in a prime locality, to a related concern for Rs 3,60,000, taking Rs 5,25,00,000 as an interest-free security deposit. Finding the rent nominal and the circumstantial evidence indicating a higher fair market value, and having confirmed that the property was not covered by rent control, he obtained instances of rents prevailing in the area and determined the annual letting value under section 23(1)(a) at Rs 85,72,608 by order dated 24 December 2007. The Commissioner (Appeals) confirmed that on 11 December 2008. The Tribunal, by order dated 31 March 2010, remitted the matter with a direction to verify the rateable value fixed by the municipal authorities and, if it was less than Rs 3,60,000, to tax the actual rent received. The Revenue appealed under section 260A. Twenty-eight further appeals were heard with it, raising three recurring situations: properties outside rent control where the officer substituted a locality rate; properties within the Maharashtra Rent Control Act, 1999, where no standard rent had been fixed and the officer fixed a fair or standard rent himself; and leave and licence arrangements where a licence fee had been agreed together with a refundable interest-free security deposit, the question being whether the deposit could be used to show that the licence fee did not reflect the market rate. The matter was decided on 2014-08-08 by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and B.P. Colabawalla J). On those facts the High Court held as follows. The Revenue's appeals were dismissed. The Court held that the municipal rateable value cannot be discarded straightway in all cases and that there can be no blanket rejection of it: it is a safe guide, and cogent and reliable material is needed to displace it. Market rate in the locality is an approved method for determining fair rental value, but the officer may resort to enquiry into the prevailing rate only when he is convinced that the case before him is suspicious and the determination by the parties doubtful. Notional interest on a refundable interest-free security deposit cannot be taken into account in the determination; where the transaction does not disclose fraud or the like, the officer should not presume that the deposit, or interest on it at bank rate, is the assessee's income. Where rent control legislation applies, the officer cannot brush it aside: he must either himself undertake the exercise of fixing standard rent under the Maharashtra Rent Control Act, 1999, or leave the parties to have it determined under that Act, and until then he is not justified in applying any other formula; the mere fact that standard rent has not been fixed does not permit a contrary determination. The Court respectfully concurred with the Full Bench of the Delhi High Court and held that the determination of fair rental value, for properties whether covered by rent control or not, is to be undertaken in terms of that decision. It concluded that wherever the officer has not adhered to these principles and his conclusion has been interfered with by the appellate authorities, no substantial question of law arises, and the findings of the Tribunal as the last fact-finding authority must be upheld unless vitiated by perversity or an error of law apparent on the face of the record.
The Court accepted the parties' own bargain as the starting point: ordinarily the licence fee agreed between a willing licensor and a willing licensee, uninfluenced by extraneous circumstances, is reliable evidence of what the landlord might reasonably expect to get from a hypothetical tenant. It follows that the officer may go behind it only where the transaction is influenced by extraneous circumstances or vitiated by fraud, and then he may adopt a fair rent based on opinion obtained from reliable sources. The Court then set out, step by step, what that exercise requires. The satisfaction that the bargain reveals an inflated or deflated rate based on fraud, emergency, relationship or other considerations, making it unreasonable, must precede everything else. The officer must have cogent and satisfactory material indicating that the parties have concealed the real position, and must not make guesswork or act on conjecture and surmise; there must be definite and positive material that the prevailing rate has been suppressed. He may then ascertain the going rate by a comparative study of identical or similar transactions, but must guard against adopting the rate in those transactions straightway: he must ask whether the property is of a similar nature, commercial or residential, and whether a departure is called for because of area, measurement, location, use, access and special advantages, noting that in a high-rise an office on an upper floor may fetch more or less. There is no magic formula, and everything depends on the facts. Before fixing the rate he is bound to disclose the material in his possession to the parties and must not rely on it while disbelieving them, and after ascertaining the rate he must comply with fairness and justice by disclosing it to the assessee to obtain his view. On the deposit, the Court adopted the reasoning that section 23 does not permit conversion of a depression in the rate of rent into money value by assuming a market rate of interest on the deposit as further rent, contrasting Schedule III to the Wealth Tax Act, which expressly authorises presumptive interest at 15 per cent as an integral part of rent, and holding that the officer's act in presuming such notional interest to be an integral part of the rent is ultra vires section 23(1) and unauthorised, since the law itself falls short of tackling such a situation; it noted that this view had been accepted by a Division Bench in Asian Hotels Limited, where notional interest on a refundable security deposit was held taxable neither under section 28(iv) nor under section 23(1)(a). The Court also recognised the practical point that a leave and licence creates no interest in the property, that such agreements can be determined before the stated period and that the licensee can opt out, so it is not as if the deposit is necessarily refundable only at the end, and it declined to evolve any rigid test. Finally it adopted the propositions of the Delhi Full Bench, including that if standard rent has not been fixed by the Rent Controller it is the officer's duty to determine it as the rent control enactment provides, and that standard rent is the upper limit so that where fair rent is less than standard rent it is the fair rent that is taken as annual letting value; and it extracted from Motichand Hirachand v Bombay Municipal Corporation, AIR 1968 SC 441, the rating principle that hypothetical rent may be arrived at by reference to the actual rent paid for the property or for comparable properties, or to assessments of comparable properties, or to the profits carried from the property, or to the cost of construction. In the words reproduced by the source cited on this page: "market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious"
It was decided by the High Court on 2014-08-08 and is reported as Income Tax Appeal No. 1213 of 2011 with Income Tax Appeals Nos. 2447/2011, 5363/2010, 5489/2010, 673/2011, 732/2011, 1316/2011, 1468/2011, 2108/2011, 2115/2011, 2116/2011, 2161/2011, 411/2012, 753/2012, 754/2012, 974/2012, 819/2012, 820/2012, 821/2012, 827/2012, 1182/2012, 1472/2012, 106/2014, 195/2014, 342/2014, 343/2014, 657/2014, 676/2014 and 944/2014, Bombay High Court. 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 23(1)(a), section 23, section 22, section 260A, 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 Revenue's appeals were dismissed. The Court held that the municipal rateable value cannot be discarded straightway in all cases and that there can be no blanket rejection of it: it is a safe guide, and cogent and reliable material is needed to displace it. Market rate in the locality is an approved method for determining fair rental value, but the officer may resort to enquiry into the prevailing rate only when he is convinced that the case before him is suspicious and the determination by the parties doubtful. Notional interest on a refundable interest-free security deposit cannot be taken into account in the determination; where the transaction does not disclose fraud or the like, the officer should not presume that the deposit, or interest on it at bank rate, is the assessee's income. Where rent control legislation applies, the officer cannot brush it aside: he must either himself undertake the exercise of fixing standard rent under the Maharashtra Rent Control Act, 1999, or leave the parties to have it determined under that Act, and until then he is not justified in applying any other formula; the mere fact that standard rent has not been fixed does not permit a contrary determination. The Court respectfully concurred with the Full Bench of the Delhi High Court and held that the determination of fair rental value, for properties whether covered by rent control or not, is to be undertaken in terms of that decision. It concluded that wherever the officer has not adhered to these principles and his conclusion has been interfered with by the appellate authorities, no substantial question of law arises, and the findings of the Tribunal as the last fact-finding authority must be upheld unless vitiated by perversity or an error of law apparent on the face of the record. It arises in House Property and Assessment & Scrutiny matters, on section 23(1)(a), section 23, section 22, section 260A of the Income Tax Act 1961, and was decided by High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; S.C. Dharmadhikari J and B.P. Colabawalla 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 for the comparable instances he has collected and test each one on nature, area, measurement, location, floor, use, access and special advantages before conceding it is comparable. Insist that the material be disclosed to you before the rate is fixed, since the Court held he must not rely on material in his possession and disbelieve the parties without disclosure. Resist any grossing-up of rent by notional interest on a refundable interest-free deposit; the Court held section 23 does not permit it and that presuming such interest to be part of rent is unauthorised. Where rent control applies, require the standard rent to be fixed under that Act, and object to any other formula being used in the meantime.
Still good law. A Division Bench judgment of 8 August 2014 disposing of twenty-nine connected appeals, concurring with the Full Bench of the Delhi High Court on the determination of annual letting value and following the line that notional interest on an interest-free deposit is not part of rent. The source page records that it has been cited in 85 later matters, which were not read in this session, so what those decisions take from it is not known. Whether it has been carried to the Supreme Court was not checked. It construes section 23 as it stood for the years in question. 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.
The harvested page is clipped, with about 51,000 characters of the middle missing, so the whole of the parties' submissions after paragraph 7, the Court's survey of the authorities and the first five of the Full Bench propositions it adopts are not in the text read. What survives is the framing of the questions, the lead facts, the closing part of the Revenue's argument on security deposits, the last of the Full Bench propositions, the passage on notional interest, and the Court's own conclusions in paragraphs 46 to 54 together with the operative dismissal. The judgment does not name, in the portions read, the Full Bench decision of the Delhi High Court it concurs with or the Calcutta decision from which the notional interest passage is taken; the citation given for Asian Hotels Limited in the harvested text, (2008) 215 CTR (Del.) 84, was not independently verified. The Court expressly declines to say what circumstances may be taken into account in fixing fair rent, observing that no particular test can be laid down, and declines to evolve any rigid test on security deposits, so the judgment gives a method rather than an answer. It does not record the outcome appeal by appeal or what became of the lead matter on remand. The batch line gave the sections as 22, 23 and 23(1)(a), which matches. 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 Revenue's appeals were dismissed. The Court held that the municipal rateable value cannot be discarded straightway in all cases and that there can be no blanket rejection of it: it is a safe guide, and cogent and reliable material is needed to displace it. Market rate in the locality is an approved method for determining fair rental value, but the officer may resort to enquiry into the prevailing rate only when he is convinced that the case before him is suspicious and the determination by the parties doubtful. Notional interest on a refundable interest-free security deposit cannot be taken into account in the determination; where the transaction does not disclose fraud or the like, the officer should not presume that the deposit, or interest on it at bank rate, is the assessee's income. Where rent control legislation applies, the officer cannot brush it aside: he must either himself undertake the exercise of fixing standard rent under the Maharashtra Rent Control Act, 1999, or leave the parties to have it determined under that Act, and until then he is not justified in applying any other formula; the mere fact that standard rent has not been fixed does not permit a contrary determination. The Court respectfully concurred with the Full Bench of the Delhi High Court and held that the determination of fair rental value, for properties whether covered by rent control or not, is to be undertaken in terms of that decision. It concluded that wherever the officer has not adhered to these principles and his conclusion has been interfered with by the appellate authorities, no substantial question of law arises, and the findings of the Tribunal as the last fact-finding authority must be upheld unless vitiated by perversity or an error of law apparent on the face of the record.
TaxSphere, “Commissioner of Income Tax-12 v Tip Top Typography”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-tip-top-typography-displacing-declared-rent/ (validity last checked 2026-08-29)
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My client's shop is under rent control. The Assessing Officer has taken a notional market rent far above the standard rent as the annual value. Can he?
My unsold flats are stock in trade and were never let. Can the AO still tax notional rent?
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?
My client lets its shop to a group company at a low rent, and that company sub-lets to an outsider at many times the figure. Can the Assessing Officer assess my client on the sub-letting rent?
