Fair Market rent on a house property u/s 23(1)(a) of Income Tax Act to be determined considering all relevant factors

I have found the following Judgment of Mumbai ITAT in the case namely Tivoli Investment & Trading Co. vs ACIT as a good one on determination of Annual Rental value u/s 23(1)(a) of Income Tax Act, 1961. As we know for determining annual value of a house property standard rent or municipal value, actual rent, Fair market rent all factors have to be considered. Where rent is reduced due to high security deposit by the tenant, then AO is not bound by standard rent or the municipal value.

In this case the AO determined fair market rent by taking it at 15% of the interest free security deposit. Although the tribunal held that notional interest on interest free security deposit may not be the determinative factor to find out the fair market rent, hence the case was remanded to determine the fair market rent. But one thing is very clear from the following decision that Fair market rent must be determined considering all facts and figures, where the actual rent received is less that Fair market rent.

Brief Facts: The assessee let out its property to Citibank under a leave & license agreement pursuant to which Citibank gave it an interest-free security deposit of Rs.1.54 crores. No rent was payable though Citbank reimbursed the actual maintenance charges of Rs.9825 pm levied by the society. This reimbursement was offered by the assessee as rent. The AO determined the ALV by taking it at 15% of the interest-free security deposit.

Held: (a) For determining the ALV u/s 23(1)(a), the AO has to determine the fair/ reasonable rent expected to be fetched by the property. If the property is governed by the Rent Control Act, the standard rent is one of the various factors to be taken into account by the AO. However, the municipal value or standard rent is not binding on the AO but is a guiding factor for determining the reasonable rent expected to be fetched by the property. If the AO finds that the Municipal Value is not based on relevant material for determining fair rent in the market and there is a sufficient material on record for taking different valuation, the AO can determine the fair rent by inflating or deflecting the Municipal Value or Standard Rent. If the AO finds that the actual rent received is less than the fair market rent because of the abnormally high interest-free security deposit, he can undertake necessary exercise in that behalf. However, the notional interest on interest free security cannot be taken as determinative factor to arrive at fair rent;

(b) On facts, as the AO had not made any inquiry to determine the fair rent u/s 23(1)(a), matter remanded.
The full judgment can be downloaded at below link

Tivoli Investment and Trading Co vs. ACIT (ITAT Mumbai)

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