Bombay High Court upholds annual letting value determined at average of comparable rent and notional interest on substantial security deposit

In the case of Tivoli Investment & Trading Co. Pvt. Ltd. ^[1]  (Taxpayer), the issue before the Bombay High Court (HC) was whether the determination of  annual letting value (ALV) by the tax authority, based on the consideration of notional interest on a substantial interest-free security deposit and comparable rent was justifiable, instead of accepting the municipal rateable value or the actual nominal license fee.

In the facts of the case, the Taxpayer entered into a 10-years leave and license agreement for commercial office premises with a bank stipulating a nominal monthly license fee equivalent to municipal tax paid and a substantial interest-free security deposit of INR 1.54 Cr which was refundable after a decade. The Taxpayer declared the actual nominal rent earned as income. The tax authority rejected the Taxpayer's computation and determined a higher ALV, considering the comparable rents in the same building and a notional return on the security deposit adjusted for the Taxpayer’s borrowing costs. The Taxpayer appealed before the first appellate authority (FAA) disagreeing to the tax authority’s contentions. The Taxpayer relied on CIT v. Tip Top Typography ^[2]   wherein the Bombay HC held that the ALV ought to be determined basis the municipal rateable value; that the ALV ought not to exceed the standard rent determinable under rent control legislation. Further, the Taxpayer also contended that the notional interest cannot be a determinative factor for ALV ^[3] . However, the FAA and the Tribunal, both upheld the determination of ALV made by the tax authority.

The HC followed the earlier jurisprudences ^[4]  to state that notional interest on security deposit cannot be considered as determinative factor to arrive at ALV of the house property. In the present case, the HC noted that the tax authority has not considered mere notional interest on security deposit but has also considered comparable rental value of other properties in the same building. The HC also stated that in ordinary circumstances, the value fixed by the municipal authorities alone can be a rational yardstick for determining ALV. However, this principle applies only when the municipal value has close proximity with the tax year. If the value fixed by municipal authorities are outdated due to efflux of time, it is not a correct yardstick for ALV. In the present case, the Taxpayer did not produce sufficient evidence to substantiate the contemporaneous municipal value of the property.

In the given case, the lease agreement was not covered within the rent control legislations, hence, the HC held that standard rent cannot be applied as such rent is applicable only to protected tenancies, not to license agreements where no statutory protection from rent escalation or eviction exists. 

The HC upheld the tax authority’s method to adopt comparable rent of similar properties to determine ALV. 

^[1] Tivoli Investment & Trading Co. Pvt. Ltd vs. ACIT (TS-1074-HC-2025(BOM))
^[2] (2014) (368 ITR 330) (Bombay)
^[3] CIT v. J.K. Investors (Bombay) Ltd. [2000] 112 Taxman 107 (Bom.); CIT v. Moni Kumar Subba [2011] 333 ITR 38 (Delhi, FB)
^[4] Those mentioned in footnotes 2 and 3 above.