Annual value under house property rules excludes notional interest on security deposit or advance rent when actual rent exceeds municipal value.

For computation of annual value under Section 23(1)(b) of the Income-tax Act, 1961, where actual rent exceeds municipal ratable value, notional interest on security deposit or advance rent cannot be added to house property income. The annual value must be determined on the basis of the actual rent position under Section 23(1)(b), and the presence of a refundable deposit does not justify a deemed interest adjustment. This position follows the earlier Bombay High Court view in Commissioner of Income Tax v. J.K. Investors (Bombay) Ltd., which rejected inclusion of notional interest in the house property computation.

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Issues: Whether notional interest on security deposit or advance rent is to be included in the annual value of house property while computing income from house property under Section 23 of the Income-tax Act, 1961.

Analysis: The actual rent received exceeded the municipal ratable value, so the annual value was required to be determined under Section 23(1)(b) of the Income-tax Act, 1961. In that situation, notional interest on the security deposit or advance rent could not be brought into computation as part of house property income. The conclusion was consistent with the earlier decision in Commissioner of Income Tax v. J.K. Investors (Bombay) Ltd., which had already rejected inclusion of notional interest for computation under Section 23(1)(b).

Conclusion: Notional interest on the security deposit or advance rent is not includible in the income from house property.

Ratio Decidendi: For computation of annual value under Section 23(1)(b) of the Income-tax Act, 1961, notional interest on security deposit or advance rent cannot be added to the house property income.

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