Annual value under section 23: municipal valuation is a guide, no notional interest on deposits, and rent control caps rent.

Annual value under section 23 is the rent the property might reasonably fetch in ordinary market conditions. A correctly determined municipal rateable value is a relevant safe guide, but it is not conclusive and may be departed from only on reliable material showing distortion or non-market influences. Notional interest on an interest-free refundable security deposit cannot be added to annual value, because the provision does not permit a deemed interest calculation. Where rent control legislation applies, annual letting value cannot exceed the applicable standard rent, and the Assessing Officer must work within that statutory ceiling.

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Issues: (i) whether the municipal rateable value can be treated as a safe guide for determining annual value under section 23(1)(a) and when it may be departed from; (ii) whether notional interest on an interest-free refundable security deposit can be added while determining fair rent or annual letting value; (iii) whether, where rent control legislation applies, the Assessing Officer can ignore the statutory regime and fix fair rent independently.

Issue (i): whether the municipal rateable value can be treated as a safe guide for determining annual value under section 23(1)(a) and when it may be departed from.

Analysis: Annual value under the house property provisions is the sum for which the property might reasonably be expected to let from year to year. A correctly determined municipal rateable value is relevant and may serve as a rational yardstick because it reflects the rent a willing lessor and willing lessee may agree upon in ordinary circumstances. However, it is not binding in every case. If the Assessing Officer has cogent material showing that the municipal valuation is distorted, outdated, or does not reflect the real market rent because of relationship, fraud, or other extraneous considerations, he may disregard it and determine fair rent on the basis of relevant material, comparable transactions, and a fair enquiry. The municipal figure cannot be discarded mechanically, but neither can it control the assessment as an absolute rule.

Conclusion: the municipal rateable value is a safe guide but not conclusive, and departure from it is permissible only on the basis of reliable material.

Issue (ii): whether notional interest on an interest-free refundable security deposit can be added while determining fair rent or annual letting value.

Analysis: Section 23(1)(a) speaks only of the rent that the property might reasonably fetch; it does not provide for addition of notional interest on a refundable deposit. The actual rent received may be examined to see whether it is depressed by extraneous circumstances, but the statute does not permit the Assessing Officer to convert the benefit of an interest-free deposit into rent by a deemed interest calculation. The annual value has to be determined from the rent fetchable in the market and not by importing a notional return on the deposit, which may be relevant for other heads of income but not for house property valuation under this provision.

Conclusion: notional interest on an interest-free security deposit cannot be added to determine annual value under section 23(1)(a).

Issue (iii): whether, where rent control legislation applies, the Assessing Officer can ignore the statutory regime and fix fair rent independently.

Analysis: Where the property is governed by rent control law, the annual letting value cannot exceed the standard rent permissible under that law. If standard rent has not been fixed by the competent authority, the Assessing Officer must proceed in accordance with the rent control enactment and cannot bypass it by adopting a different valuation formula inconsistent with that statute. The assessment under the Income-tax Act must respect the ceiling imposed by the applicable rent control law, while still allowing examination of whether the actual rent is genuine or artificially depressed.

Conclusion: the Assessing Officer cannot ignore rent control legislation, and the annual value is capped by standard rent under the applicable law.

Final Conclusion: the revenue appeals fail because the Tribunal's approach did not warrant interference on the stated legal principles governing annual value, municipal valuation, security deposits, and rent control.

Ratio Decidendi: annual value under section 23 must be fixed at the rent the property would reasonably fetch in ordinary market conditions, subject to the ceiling of standard rent where rent control law applies, and without adding notional interest on an interest-free refundable security deposit.

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