INCOME FROM HOUSE PROPERTY - ANNUAL VALUE

SECTION 23 *
INCOME FROM HOUSE PROPERTY - ANNUAL VALUE [SEC. 23]
RELEVANT/IRRELEVANT FACTORS
Even property in utter disrepair has annual value - Even where a certain property is in utter disrepair, it
possesses annual value which has to be determined to consider the assessee's claim for deduction - Liquidator of
Mahamudabad Properties (P.) Ltd. v. CIT [1980] 124 ITR 31 (SC).
Standard rent must be the basis - Even if the standard rent of a building had not been fixed by the Controller
under section 9 of the Rent Act and the period of limitation prescribed by section 12 of the Rent Act for making
an application for fixation of the standard rent had expired, and it was no longer competent to the tenant to have
the standard rent of the building fixed, the annual value of the building according to the definition given in
section 23(1) must be held to be the standard rent determinable under the provisions of the Rent Act and not the
actual rent received by the landlord from the tenant - Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435 (SC).
Municipal value - There is unity of the Municipal Act, and the Income-tax Act on the question of annual value
and such annual value cannot exceed the standard or fair rent under the Rent Control Act and may in a given
case be even lower than the standard or fair rent. In a case where the annual municipal value is available, that
itself would be the annual letting value under the Act - CIT v. Bhaskar Mitter [1994] 73 Taxman 437 (Cal.).
For purposes of section 22, read with section 23, the revenue is bound to fix the annual letting value based on
the municipal valuation unless the same is lower than the actual rent received in respect of the period falling
after 1-4-1976 when the section was amended - CIT v. Satya & Co. Ltd. [1994] 75 Taxman 193 (Cal.).
Standard rent v. Municipal valuation - It is only in the case of buildings situate in places where there is a
prohibition against the charging of rent in excess of the standard rent that the standard rent determined in
accordance with the Rent Control Act can be adopted as annual value. It cannot always be assumed that the
figure adopted by the local authorities for the purpose of levy of property tax as the annual value will always
correspond to the standard rent determinable under the Rent Control Act which is in force in that area. Further,
the submission that the actual rent received can never be regarded as the amount which the landlord can
reasonably be expected to receive from his property for purposes of section 23(1)(a) cannot be accepted - CIT v.
Sampathammal Chordia [1999] 105 Taxman 128 (Mad.).
Rent control legislation - In order to determine annual letting value of a property subject to Rent Control
Legislation, Assessing Officer cannot ignore standard rent - Smt. Kokilaben D. Ambani v. C I T [2014] 49
taxmann.com 371/226 Taxman 208 (Mag.)(Bom.).
In order to determine annual value of property, municipal rateable value may not be binding on Assessing
Officer but that is only in cases where he is convinced that interest free security deposit and monthly
compensation do not reflect prevailing rate and, in such a case, Assessing Officer can himself resort to enquire
about prevailing rate in locality - CIT v. Tip Top Typography [2014] 48 taxmann.com 191 (Bom.).
Open market rent cannot be the basis - For determining the annual letting value of a self-occupied property it
is not the open market rent, which is to be considered but the standard rent as fixed under any Rent Control Act
- Tilak Raj v. CIT [1989] 178 ITR 327 (Punj. & Har.).
Market value adopted for wealth-tax purposes cannot be the basis - Under no circumstances, market value
of the property disclosed in the wealth-tax return of the assessee for the assessment under reference could have
been adopted as the basis for working out the annual letting value of the property - CIT v. M.K. Shivraj Singhji
[1991] 192 ITR 120 (Guj.).
Rate of interest on cost can be the basis if there is no other better way to estimate rent - In the absence of
any better way of estimating rent, the rate of interest on cost of building and land may provide a reasonable basis
for determining the annual letting value of property, and more particularly, when the property is occupied by the
owner - Sakarlal Balabhai v. ITO [1975] 100 ITR 97 (Guj.).
'Actual rent' does not mean net amount of money after taking deductions into account - The word 'actual'
occurring in section 23(1)(b) is in contradistinction to the hypothetical rent that may be receivable by the owner.
It cannot be construed to mean the rent actually coming into the hands of the owner after various deductions. If
it were so, section 24 would not have been there. While determining the annual value under section 23(1)(b), it
is wrong approach to say that the physical receipt of the rent being the basis for computation, one has to decide
what is the actual rent received. It is further erroneous to say that in determining the actual rent receipt, the net
amount of money received or receivable by the assessee would be relevant - CIT v. Premnath Motors (Raj.) (P.)
Ltd. [2008] 297 ITR 83 (Raj.).
Notional interest on interest-free security deposit cannot be added - The operative words in section 23(1)(a)
are 'the sum for which the property might reasonably be expected to let from year to year'. These words provide
a specific direction to the revenue for determining the 'fair rent'. The Assessing Officer, having regard to the
aforesaid provision is expected to make an inquiry as to what would be possible rent that the property might
fetch. Thus, if he finds that the actual rent received is less than the 'fair/market rent' because of the reason that
the assessee has received abnormally high interest-free security deposit and because of that reason, the actual
rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that
behalf. However, by no stretch of imagination, the notional interest on the interest-free security can be taken as
the determinative factor to arrive at a 'fair rent'. The provisions of section 23(1)(a) do not mandate this. - CIT v.
Moni Kumar Subba [2011] 199 Taxman 301/10 taxmann.com 195 (Delhi)(FB).
While determining annual letting value of a leasehold property, Assessing Officer cannot take into consideration
notional interest on lease rent deposit - CIT v. Shastha Pharma Laboratories (P.) Ltd. [2013] 34 taxmann.com
167/216 Taxman 73 (Kar.)
Interest on refundable advance deposit cannot be included - No addition can be made to annual letting value
of premises with respect to any notional interest on refundable deposit made by tenant with landlord - CIT v.
Satya Co. Ltd. [1994] 75 Taxman 193 (Cal.).
Where security deposit was disproportionate to the actual rent - Where assessee had taken interest-free
security deposits from two parties to whom certain assets were leased out by assessee and amount of such
security deposit was 140 times of monthly rent charged from those two parties, said security deposit was a sham
device to circumvent real rent and, hence, notional interest on such security deposit was to be assessed as
income from house property - CIT v. K. Streetlite Electric Corpn. [2011] 336 ITR 348/244 CTR 647 (Punj. &
Har.)
Interest on interest free deposit - Once interest on interest free security deposits received by assessee from
tenant was offered to tax as income from other sources, adding notional interest on interest free security deposit
to determine 'Annual letting value' of property under section 23(1)(b) would amount to double taxation -
Principal CIT v. Karia Can Co. Ltd. [2018] 96 taxmann.com 193/257 Taxman 189 (Bom.).
Vacancy allowance - Annual value of properties which are more than one, owned by assessee and which
admittedly remained vacant throughout previous year, would not be assessed under section 23(1)(c) but under
section 23(1)(a) and annual value would be determined notionally - Susham Singla v. C I T [2016] 76
taxmann.com 349/[2017] 244 Taxman 302 (Punj. & Har.) [SLP dismissed in Susham Singla v. CIT [2017] 81
taxmann.com 167/247 Taxman 312 (SC)].
Where flats constructed by assessee were held as stock-in-trade and same were not at all let out for any previous
years, there would be no question of availing vacancy allowance under section 23(1)(c); assessee would be
liable to pay tax on ALV of said flats under section 23(1)( a) - Ansal Housing & Construction Ltd. v. Asstt. CIT
[2018] 89 taxmann.com 238 (Delhi) [SLP granted in Ansal Housing & Construction Ltd. v. Asstt. CIT [2018] 95
taxmann.com 17/256 Taxman 294 (SC)].
Others - Where assessee was engaged in ginning and pressing of cotton for State Co-operative Cotton Market
Federation and rate fixed by agreement was a composite charge for ginning and pressing and godown rent, and
Department adopted an ad hoc measure of attributing fifty per cent of charges payable to assessee as rental
income, rule of fifty per cent could not be applied as across board principle and Department should take into
account various other factors; however, norm that how much should be allocated as rental income in said
composite charge would apply to future assessment years - CIT v. Baba Saheb Kedar G & P Co-operative
Society Ltd. [2010] 189 Taxman 197 (SC).
SELF-OCCUPIED PROPERTY
Occupation must be by owner and not by any relative - On a plain reading of sub-section (2) of section 23 it
is obvious that the property in question must be in the occupation of the owner for his own residence, and not by
his relative, to avail of the benefit of the said provision - Smt. Jashvidyaben C. Mehta v. CIT [1988] 172 ITR
680 (Guj.).
Where property is let out to employer and got reallotted, benefit of self-occupation is not available -
Where the assessee leased out his house to his employer and the employer allotted the house to the assessee as
rent-free quarters, the benefit of allowance for self-occupation would not be available to the assessee - D.R.
Sunder Raj v. CIT [1980] 123 ITR 471 (AP).
A firm cannot get benefit of self-occupation - The expression 'occupation of the owner for the purpose of his
own residence' would only refer to a human owner and not a fictional entity. A firm cannot physically reside
and so cannot claim the benefit of the provisions, which is available to an individual only - CIT v. Dewan Chand
Dholan Dass [1981] 132 ITR 790 (Delhi).
HUF - Benefit of section 23(2) is available to a HUF - CIT v. Hariprasad Bhojnagarwala [2012] 20
taxmann.com 316/206 Taxman 471 (Guj.) (FB).
Co-owners - In view of section 26, where house property is owned by two or more persons and their respective
shares are definite in respect of such property, deduction provided for by section 23(2) has to be allowed to each
co-owner separately from out of his share in annual value of house property - CIT v. Bijoy Kumar Almal [1995]
80 Taxman 76 (SC).
UNOCCUPIED PROPERTY
Relief to HUFs - Relief under section 23(3) of the Act is available only to an 'individual' and not to an HUF -
Deepak L. Banker v. CIT [1998] 145 CTR (Mad.) 489.
Benefit is available to dignitaries/officials - Section 23(3) would apply in all those cases where officials and
dignitaries, under the Constitution of India and even otherwise, had to reside in official residences instead of
their own residence by reason of their office - CIT/CWT v. Mr. Justice Avadh Behari Rohatgi [1986] 157 ITR
441 (Delhi).
There must be nexus between residence and employment, etc. - Some nexus between the fact of residing in a
building not belonging to the assessee and his employment, business or profession must be shown before the
benefit under section 23(3) can be claimed in respect of the residential house which is not occupied by the
assessee - Shikharchand Jain v. CIT [1986] 160 ITR 564 (MP).

*Section 23 was substituted by the Finance Act, 2001, w.e.f. 1-4-2002.