Case Note & Summary
The dispute arose from income tax appeals filed by Tivoli Investment & Trading Co. Pvt. Ltd. against orders of the Income Tax Appellate Tribunal for Assessment Years 1990-91 and 1991-92. The assessee owned office premises admeasuring 3275 sq.ft. on the seventh floor of Sakhar Bhavan, Nariman Point, Mumbai. On 29 November 1988, it entered into a Leave and License Agreement with Citi Bank for a period of ten years from 1 April 1989 to 31 March 1999. The agreed license fee was Rs.9,825 per month, and Citi Bank paid an interest-free security deposit of Rs.1,54,00,000. For Assessment Year 1990-91, the assessee offered rental income of Rs.1,17,900 calculated at Rs.9,825 per month under the head 'Income from Business'. The Assessing Officer, by order dated 30 November 1992, determined the gross annual letting value at Rs.22,00,000 under Section 23(1)(b) of the Income Tax Act, treating it as the amount for which the property might reasonably be let out, taking into account rents received for ground and first floor premises in the same building and the fact that the assessee paid 15% interest on overdraft facility from Citi Bank. The Commissioner of Income Tax (Appeals) upheld the assessment on 29 March 1993, and the Income Tax Appellate Tribunal confirmed it on 30 June 2003, leading to Income Tax Appeal No.62 of 2004. Similarly, for Assessment Year 1991-92, the Assessing Officer passed an order on 30 March 1993 determining the same annual value, which was upheld by CIT(A) on 4 March 1994 and by ITAT on 30 June 2003, resulting in Income Tax Appeal No.5 of 2004. Both appeals were admitted on 2 December 2004 on the common question whether the Tribunal was justified in holding the assessee liable on Rs.22,00,000 as income from house property. The assessee argued that Section 23(1)(a) applied and the annual value should be based on municipal rateable value, that notional interest on security deposit could not be considered, and that the Assessing Officer erred in using comparable ground floor rents and in fixing Rs.50 per sq.ft. for seventh floor premises. The Revenue contended that the assessee had artificially split the return into nominal license fee and hefty security deposit, that municipal rateable value was ridiculously low, and that comparable instances were valid. The court examined the license agreement and observed that the license fee of Rs.9,825 was exactly equal to taxes and outgoings, and the security deposit of Rs.1.54 crores appeared to be the real return, creating an impression of tax evasion. The judgment excerpt ends before the final operative order, but the court's analysis strongly suggested rejection of the assessee's contentions.
Headnote
A) Income Tax - Annual Value Determination - Assessing Officer Not Bound by Municipal Rateable Value - Income Tax Act, 1960, Sections 22, 23(1)(a) - Assessee contended annual letting value should be based on municipal rateable value, while Revenue argued Assessing Officer could consider comparable instances and real arrangement - Court examined license agreement showing nominal license fee equal to outgoings and hefty interest-free security deposit, indicating actual rent may be higher (Paras 1, 6-8, 11).
B) Income Tax - Notional Interest on Security Deposit - Usufruct of Interest-Free Deposit as Part of Annual Value - Income Tax Act, 1960, Section 23(1)(b) - Assessee argued notional interest on security deposit cannot be considered based on Tip Top Typography, while Revenue contended deposit represented real return - Court noted arrangement created impression that license fee was only taxes and outgoings, with deposit being main consideration (Paras 2, 6, 8, 11).
C) Income Tax - Additional Evidence Before ITAT - Certificates of Municipal Rateable Value - Income Tax Act, 1960, Section 260A - Assessee sought to produce certificates from developer and society before ITAT to show rateable value of Rs.10,200 and Rs.67,331; Revenue objected as they were never produced before lower authorities and counsel had earlier urged to ignore them (Paras 7-8).
D) Income Tax - Comparable Instances - Use of Same Building Rents for Annual Value - Income Tax Act, 1960, Section 23(1)(a) - Assessing Officer considered rent paid by same licensee for ground and first floor premises in same building; Assessee argued seventh floor rent should be lower per sq.ft., not Rs.50 as determined (Paras 2, 6, 8).
E) Income Tax - Standard Rent Cap - Annual Value Cannot Exceed Standard Rent Under Rent Control Legislation - Income Tax Act, 1960, Section 23(1)(a) - Assessee relied on Tip Top Typography to argue annual value cannot exceed standard rent; Revenue distinguished and asserted Assessing Officer not bound by municipal rateable value (Paras 6, 8).
Issue of Consideration
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'?; Whether the Assessing Officer can determine annual value of property under Section 22 of the Income Tax Act, 1960 higher than the rateable value determined under Municipal laws; Whether notional interest on interest-free security deposit can be included while determining annual letting value under Section 23(1)(b) of the Act
Law Points
- Assessing Officer is not bound by municipal rateable value
- annual value under Section 23(1)(a) can be determined based on comparable instances and real arrangement
- notional interest on interest-free security deposit can be considered as part of annual value if arrangement is colourable
- additional evidence before ITAT may be rejected if not produced before lower authorities
- standard rent under Rent Control Legislation may cap annual value
Case Details
2025 LawText (BOM) (08) 57
Income Tax Appeal No.5 of 2004 with Income Tax Appeal No.62 of 2004
Alok Aradhe, CJ, Sandeep V. Marne, J
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
Tivoli Investment & Trading Co. Pvt. Ltd.
The Assistant Commissioner of Income-tax and another
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Nature of Litigation
Income tax appeals challenging orders of Income Tax Appellate Tribunal confirming addition of Rs.22,00,000 as income from house property for Assessment Years 1990-91 and 1991-92
Remedy Sought
Assessee sought setting aside of orders passed by Assessing Officer, Commissioner of Income Tax (Appeals), and Income Tax Appellate Tribunal, and determination of annual value under Section 23(1)(a) based on municipal rateable value, not Rs.22,00,000
Filing Reason
Assessing Officer determined gross annual letting value of office premises at Rs.22,00,000 by considering comparable rents and notional interest on interest-free security deposit, rather than municipal rateable value or license fee of Rs.9,825 per month
Previous Decisions
Assessing Officer passed assessment orders dated 30 November 1992 (AY 1990-91) and 30 March 1993 (AY 1991-92) determining annual value at Rs.22,00,000; CIT(A) upheld orders on 29 March 1993 and 4 March 1994 respectively; ITAT upheld on 30 June 2003
Issues
Whether the Assessing Officer can determine annual value of property under Section 22 of the Income Tax Act, 1960 higher than the rateable value determined under Municipal laws
Whether notional interest on interest-free security deposit can be included while determining annual letting value under Section 23(1)(b) of the Act
Whether the Assessing Officer was justified in using comparable rents of ground and first floor premises in the same building to determine seventh floor annual value
Whether additional evidence in the form of certificates of rateable value from developer and society should be admitted before ITAT
Whether annual value under Section 23(1)(a) cannot exceed standard rent determinable under Rent Control Legislation
Submissions/Arguments
Assessee argued that Revenue erred in considering gross annual letting value at Rs.22,00,000 by resorting to Section 23(1)(b); Section 23(1)(a) applies and enquiry must be with reference to municipal rateable value; interest-free security deposit has no relevance; sum should be determined with reference to rateable value; issue covered by Tip Top Typography; annual value cannot exceed standard rent under Rent Control Legislation
Assessee contended that usufruct of security deposit is nothing but addition under Section 23(1)(b) which is impermissible; funds were invested in income generating assets; Assessing Officer erred in considering ground floor rents of Rs.43 per sq.ft. while applying Rs.50 per sq.ft. for seventh floor; notional interest on security deposit is impermissible
Assessee relied on certificates dated 31 October 1992 and 28 November 1995 showing rateable value of Rs.10,200 and Rs.67,331 respectively; contended that municipal taxes were paid jointly by society and hence only developer and society could certify rateable value; additional evidence should be considered
Revenue argued that assessee smartly divided rental return into nominal license fee and hefty security deposit of Rs.1.54 crores; license fee of Rs.9,825 only covered monthly outgoings; real return was security deposit; Revenue not bound by municipal rateable value as per Tip Top Typography; comparable instances valid; assessee failed to produce cogent material for municipal rateable value; letters from developer and society were never produced before AO or CIT(A) and counsel had urged ITAT to ignore them
Revenue submitted that assessee company was formed only to earn rental income, with capital of Rs.14,59,500 and only asset being office premises; assessee attempted tax evasion by dividing rental return into minuscule license fee and hefty security deposit; three orders recorded findings against assessee and no interference warranted under Section 260A
Ratio Decidendi
The court observed that the Assessing Officer is not bound by municipal rateable value and can determine annual value under Section 23(1)(a) based on comparable instances and the real nature of the transaction; where the license fee is equal to outgoings and the substantial return is an interest-free security deposit, the arrangement may be treated as a colourable device to understate annual value; notional interest on such deposit or comparable rents can be considered for determining the sum for which the property might reasonably be expected to be let.
Judgment Excerpts
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 higher than the rateable value determined under the Municipal laws.
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.
Citi Bank paid interest free security deposit of Rs.1,54,00,000/- to the Assessee.
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.
The license fees or compensation was fixed at Rs.9,825/- per month with no provision for annual increment.
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.
Procedural History
Assessee purchased office premises No.72, 7th floor, Sakhar Bhavan, Nariman Point, Mumbai admeasuring 3275 sq.ft. for Rs.21,85,664. On 29 November 1988, assessee entered into Leave and License Agreement with Citi Bank for 10 years from 1 April 1989 to 31 March 1999, with license fee Rs.9,825 per month and interest-free security deposit Rs.1,54,00,000. For Assessment Year 1990-91, assessee offered rental income of Rs.1,17,900 as business income. Assessing Officer passed Assessment Order dated 30 November 1992 determining gross annual rateable value at Rs.22,00,000 under Section 23(1)(b). CIT(A) upheld by order dated 29 March 1993; ITAT upheld by order dated 30 June 2003; assessee filed Income Tax Appeal No.62 of 2004. For Assessment Year 1991-92, Assessing Officer passed order dated 30 March 1993 determining same annual value; CIT(A) upheld on 4 March 1994; ITAT upheld on 30 June 2003; assessee filed Income Tax Appeal No.5 of 2004. Both appeals admitted on 2 December 2004 with common question of law. Reserved on 7 August 2025; pronounced on 18 August 2025.
Acts & Sections
- Income Tax Act, 1960: Section 22, Section 23(1)(a), Section 23(1)(b), Section 260A
