Annual letting value cannot include notional interest on an interest-free security deposit for a let-out rent-controlled property.

Notional interest on an interest-free security deposit could not be added to the annual letting value of a let-out property under section 23. Where rent control applies, the property's reasonable expected rent is capped by standard rent, and municipal rateable value may only act as a guide. Because the property was already let and the actual rent received was lower than the notional figure, section 23(1)(b) applied to the actual rent. The security deposit did not change the rent received or justify importing a notional return into annual value, so the Revenue's addition was unsustainable.

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Issues: Whether notional interest on interest-free security deposit received from tenants can be included in the annual letting value of the let-out property under section 23 of the Income-tax Act, 1961.

Analysis: The property was already tenanted, and the actual rent received under the lease was low because the premises were subject to rent control legislation. The governing principle under section 23(1)(a) is that the sum for which the property may reasonably be expected to let cannot exceed the standard rent where rent control law applies. Where standard rent is relevant, municipal rateable value may serve as a guide, but the assessable figure remains bounded by the statutory ceiling. Since the property was let and the actual rent received was less than the notional figure proposed by the Revenue, section 23(1)(b) applied. In such a situation, the Revenue could not import a notional return on the security deposit into annual value merely because the deposit was interest-free and later invested by the owner. The existence of a security deposit did not alter the rent actually received or the statutory method for determining annual value.

Conclusion: Notional interest on the interest-free security deposit could not be added to the annual letting value of the property, and the addition was unsustainable.

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