Vacancy allowance under s. 23(1)(c); municipal tax proviso; SOP nil-ALV; stock-in-trade 2-year exemption.
13. Refund / credit
Through ITR-2 / ITR-3.
14. Return / disclosure reporting
ITR Schedule HP — per-property computation.
15. Penalty exposure
Section 270A on under-reporting.
16. Prosecution exposure
Section 277 false statement on ALV.
17. Cross-statute interplay
Municipal Acts; State Rent Control; RERA; Companies Act schedule III.
18. Repeal & saving — 1961 → 2025
Preserved in 2025 Act.
HISTORICAL CONTEXT — ALV DETERMINATION EVOLUTION
Section 23 is the operative measurement provision — defining the annual value that section 22 charges. The architecture has remained substantively stable since 1962, with major refinements: (a) FA 1986 — Section 23(2) SOP framework formalised; (b) FA 1999 — Section 23(1)(b) higher-of rule clarified; (c) FA 2017 — Section 23(5) stock-in-trade 2-year holding-period rule; (d) FA 2019 — Section 23(4) two-SOP election (raised from one); (e) FA 2024-25 — minor calibration.
The fundamental ALV principle is 'reasonable expected rent' — the value at which the property MIGHT reasonably be expected to be let from year to year (s. 23(1)(a)). Where actual rent received exceeds this, the higher of the two is the ALV (s. 23(1)(b)). Where the property is let but partially vacant, the actual rent (which may be less than expected) is the ALV (s. 23(1)(c)). The proviso allows deduction of municipal taxes ACTUALLY PAID by the owner (regardless of accounting basis).
Section 23(2) SOP framework — annual value of self-occupied property deemed NIL. Extended to property that cannot be occupied due to employment / business / profession at another place. FA 2019 raised the SOP limit from ONE to TWO houses — a significant relief for HNI clients with multiple personal homes. Houses beyond the elected two are deemed let-out at reasonable expected rent.
Section 23(5) — FA 2017 anti-avoidance measure for builders / developers. Property held as stock-in-trade is exempt from deemed let-out for 2 years from the end of the FY in which the completion certificate is obtained. After this 2-year period, unsold inventory falls into deemed-let-out scheme — preventing indefinite carrying of inventory at nil notional rent.
The transition to the Income-tax Act, 2025 preserves section 23 architecture with FA 2017 / 2019 calibrations. Section 536 saving for pending ALV disputes.
FINANCE ACT AMENDMENT TIMELINE
■ FA 1962 — Section 23 came into force.
■ FA 1986 — Section 23(2) SOP framework formalised.
■ FA 1999 — Section 23(1)(b) higher-of rule clarified.
■ FA 2001 — Vacancy allowance s. 23(1)(c) refined.
Facts. The Department sought to apply a surcharge provision retrospectively to block-period assessments. The assessee contended that the amendment was substantive and could not have retrospective operation absent express legislative direction.
Issue. Whether amendments to taxing statutes operate prospectively unless the legislature has expressly or by necessary implication conferred retrospective effect.
HELD. The Constitution Bench reaffirmed the general rule against retrospectivity of taxing statutes. A taxing provision must be construed prospectively unless the language compels otherwise; mere insertion or substitution by amendment is not sufficient to deny vested rights.
“Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation.”
Relevance. Anchor authority for any argument that an amendment to a charging or computational provision must apply only from the AY notified — useful in transitional disputes around FA 2025 and the 1961 → 2025 changeover.
Facts. Section 52(2) (since deleted) deemed sale consideration to be FMV where FMV exceeded the declared consideration by 15%. The Department applied it on a literal reading even when the assessee had not in fact received more than the declared price.
Issue. Whether a deeming provision in a charging schema can be construed literally where its plain reading produces a result manifestly contrary to legislative object.
HELD. The Court read down section 52(2) to apply only where the assessee had actually received consideration in excess of the declared sum. A literal construction yielding absurd or unjust results must yield to an object-based interpretation; the CBDT's contemporaneous Circular No. 96 was held binding on the Revenue.
“It is well settled that a literal construction of a statutory provision ought not to be adopted if it produces a manifestly unjust result… Where a literal construction creates an anomaly, the courts will adopt that construction which avoids the anomaly.”
Relevance. Anchor authority for purposive construction of deeming fictions across the 1961 Act — applies wherever a deeming clause (e.g., s. 50C, s. 56(2)(x), s. 2(22)(e)) yields a result contrary to legislative purpose.
▸ Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 ; (2000) 1 SCR 1 (Supreme Court)
Facts. A municipal levy was challenged on the ground that the charging provision did not clearly specify the rate, the persons charged, and the measure of tax.
Issue. Whether a tax can be imposed in the absence of a clear, unambiguous charging provision identifying the subject, measure, rate, and incidence.
HELD. Article 265 demands that tax be levied only by clear authority of law. The four components — taxable event, person, rate, and measure — must be clearly discernible from the charging provision; ambiguity is fatal to the levy.
“The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions, particularly when the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose other than what is given expression to.”
Relevance. Foundational authority on the rigour required of charging sections — underpins arguments that ambiguous deeming fictions, surcharge formulas, and rate prescriptions must be strictly construed.
▸ Commissioner of Income-tax v. B.C. Srinivasa Setty (1981) 128 ITR 294 ; (1981) 2 SCC 460 (Supreme Court)
Facts. The assessee transferred goodwill of a self-generated nature. The Department sought to tax the consideration as capital gains; the assessee contended that no cost of acquisition could be ascertained, hence the computation provisions failed.
Issue. Whether capital gains arises where the asset has no ascertainable cost of acquisition — i.e., whether the charging provision can be invoked independently of a workable computation provision.
HELD. The charging section and the computation provisions form an integrated code; if the computation provisions cannot apply (because the cost is incapable of ascertainment), the charge itself fails. Self-generated goodwill is not taxable as capital gains.
“The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section.”
Relevance. Anchor for the 'charge fails when computation fails' doctrine — useful in valuation impasses, self-generated assets, and computational ambiguity (though now largely overtaken by section 55(2)(a)(i) deeming cost as nil).
▸ Commissioner of Income-tax v. Excel Industries Ltd. (2013) 358 ITR 295 ; (2014) 2 SCC 1 (Supreme Court)
Facts. The assessee, an export-oriented unit, received DEPB licences and Advance Licences. The Department sought to tax the value of these incentives on accrual at the time of issue; the assessee contended that no income accrued until the licence was actually used or sold.
Issue. When does income accrue under the mercantile system — at the moment a right is created, or at the moment the right becomes enforceable as a debt?
HELD. Income accrues only when there is a corresponding liability of the other party. Mere creation of a contingent or unmatured right does not amount to accrual; the right must crystallise into a debt before tax incidence.
“Income accrues when there arises in favour of the assessee a debt — when there is a corresponding liability of the other party to pay the amount. It is not enough that the right has come into being; the right must ripen into a debt.”
Relevance. Anchor for accrual-vs-receipt timing disputes under section 5 / section 145 — relevant for retention monies, export incentives, contingent claim settlements, milestone-based contracts.
CBDT CIRCULARS — SECTION 23 ECOSYSTEM
▸ CBDT Circular No. 14(XL-35) of 1955 dated 11 April 1955
Subject. Duty of officers to assist assessees in claiming and securing relief
Substance. Foundational circular directing that the AO should not exploit assessee ignorance to deny legitimate reliefs; officer is required to draw attention to refunds or reliefs to which the assessee is entitled. The circular has been judicially noted in several appellate decisions and remains operative for first-appellate practice.
Substance. Explained the FA 1987 / FA 1989 amendments unifying the previous year with the financial year preceding the AY, including transitional provisions for assessees with different accounting years. Useful in any controversy on the timing of accrual / chargeability for early post-1989 AYs.
▸ CBDT Circular No. 5 of 2014 dated 11 February 2014
Subject. Section 14A — dis-allowance even where no exempt income earned (since modulated)
Substance. Initially directed AOs to apply Rule 8D disallowance under section 14A even where no exempt income was earned in the year; subsequently modulated by Cheminvest (Del HC) and Maxopp (SC). FA 2022 amendment to section 14A re-asserted the position but remains under litigation.
This revision applies the FA 2026 overlay against the prior v2 (FA 2025) draft. Variant comparison performed: two Cowork files supplied for s. 23 — the un-suffixed original and the EXPANDED v2 (2026-05-25). The original’s Block 1 was found INCOMPLETE (missing marginal heading, missing Explanation to clauses (b)/(c), missing sub-section (3), and missing all footnote attributions on the substituted/inserted sub-sections (4) and (5)); the EXPANDED v2 carries the correct, complete verbatim s. 23 text including the FA 2019 substitution footnote on sub-section (4), the FA 2017 insertion / FA 2023 amendment footnote on sub-section (5), and the consolidated FA 2001 substitution provenance in the in-cell verification note. Beyond Block 1, the original contributed no substantive unique content; case-law list and illustrations were identical. EXPANDED v2 taken as canonical base. Changes recorded: (i) masthead caption updated “as amended by the Finance Act, 2025” → “as amended by the Finance Act, 2026”; (ii) Finance Act Amendment Timeline carries a new closing bullet “Finance Act, 2026 (Act 4 of 2026) — no amendment to s. 23”; (iii) Illustration 4 (stock-in-trade 2-year rule) re-anchored — completion certificate date 31-March-2023 → 31-March-2024 and PY 2024-25 → PY 2025-26 (keeping PY 2025-26 within the 2-year window ending 31-3-2026); the “from PY [N+1] onwards (post-window)” statement correspondingly slid from PY 2025-26 to PY 2026-27 to preserve the 2-year-window logic; the FA 2023 amendment (extension from 1 year to 2 years) is preserved as a verified historical reference. Open audit FLAGs: (a) the historical-context paragraph carries the phrase “(e) FA 2024-25 — minor calibration” — a generic placeholder; no specific FA 2024 or FA 2025 amendment to s. 23 is verified; preserved per workflow but flagged for deletion in next pass unless a specific amendment is identified; (b) the timeline bullet “FA 2025 — Minor adjustments” is similarly generic; flagged; (c) the case-law list is the generic Cowork template (Vatika Township / K.P. Varghese / Mathuram Agrawal / B.C. Srinivasa Setty / Excel Industries) — the leading house-property authorities on annual value (E.D. Sassoon & Co. v. CIT (1954) 26 ITR 27 (SC); Sultan Bros. v. CIT (1964) 51 ITR 353 (SC); Mrs Sheila Kaushish v. CIT (1981) 131 ITR 435 (SC) on standard rent; Bhagwan Dass Jain v. UOI (1981) 128 ITR 315 (SC) on constitutional validity of notional ALV) are absent; logged for forward-pass; (d) Block 2 right-hand column cites “Section 23 successor — Preserved” without naming the Income-tax Act, 2025 (Act 30 of 2025) successor section number — pending verified successor mapping; (e) the Cowork v3 base does not carry a separate Source & verification notes cell (Standard B v2 requirement) — logged for forward-pass.
Case Laws & Commentary
SECTION 23 — Annual value how determined
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: Annual Value (AV) is the higher of (a) sum for which the property might reasonably be expected to let from year to year [ALV/fair rent], or (b) actual rent received/receivable where higher, but where vacant for whole/part of year, actual rent so received is taken even if lower [s. 23(1)(c)]. For self-occupied property [s. 23(2)], AV is taken as Nil — extended by FA 2019 to TWO houses; for the next house, deemed letting applies. Section 23(5) (inserted FA 2017, expanded FA 2023) gives a relief window for stock-in-trade property held by builders (currently 2 years from end of FY of completion).
FA 2026 impact: No direct amendment to s. 23 (1961 Act) by FA 2026. The deemed-let-out concept for stock-in-trade in s. 23(5) (FA 2017, expanded FA 2019 from 1 to 2 years) remains the most recent substantive change. FY 2025-26 (AY 2026-27) is the last operative year under the 1961 Act.
Section 23 is the engine room of the HP head — it computes the 'annual value' (AV) on which s. 24 deductions are then made. The section is built in two layers. SUB-SECTION (1) supplies the general rule for let-out and deemed-let-out properties: clause (a) the notional ALV (sum for which the property MIGHT REASONABLY BE EXPECTED TO LET), clause (b) actual rent received/receivable where higher than (a), and clause (c) a relief when the property is let but vacant for whole/part of year. SUB-SECTION (2) carves out self-occupied property (SOP) — AV is NIL where the owner actually occupies, or cannot occupy owing to employment elsewhere. SUB-SECTIONS (3) and (4) deal with the cap on SOP houses (TWO from AY 2020-21, after FA 2019) and the deeming of additional houses as let-out. SUB-SECTION (5) (FA 2017, expanded FA 2019) gives builders a 2-year relief from notional letting for stock-in-trade unsold inventory.
2. Determining 'reasonable expected rent' — the four-layer hierarchy
Indian jurisprudence has crystallised a four-layer hierarchy for fixing ALV under s. 23(1)(a): (i) Where the property is under Rent Control, the STANDARD RENT (actually fixed or ascertainable) is the CEILING — Sheila Kaushish + Dewan Daulat Rai Kapoor. The contractual rent above standard rent is irrelevant. (ii) Where Rent Control does NOT apply, the MUNICIPAL RATEABLE VALUE is a strong safe-harbour starting point — Tip Top Typography. (iii) The AO may depart from (i)/(ii) only on COGENT EVIDENCE of comparable instances; bare assertions of low rent are not enough — Indu Sehgal Karol Bagh. (iv) Notional grossing-up of interest-free deposits is permitted only on proof of colourable device. Tip Top Typography is now the go-to authority across Tribunals.
3. The actual-rent and vacancy mechanics (cl. (b) & (c))
Clause (b) brings to charge the actual rent if higher than the notional ALV — preserving the Revenue's right to tax above-market lettings. Clause (c) — inserted FA 2001 — operates the other way: where the property is LET and is vacant during the whole or part of the year and owing to such vacancy the actual rent is less than ALV under (a), the actual rent is taken. Critically, Vivek Jain (AP HC) confines clause (c) to properties that were ACTUALLY LET at some point; for properties never let (mere intent to let), clause (c) is unavailable — the notional ALV under (a) applies. Premsudha Exports works through the mechanics for part-year vacancy of a property that has been let.
4. Self-occupied property — the FA 2019 doubling and FA 2023 / s. 115BAC(1A) overlay
Until AY 2019-20, only ONE house could be claimed as SOP with Nil AV; from AY 2020-21, FA 2019 raised the cap to TWO. Any third (and beyond) self-occupied house is DEEMED let-out and taxed on notional ALV. The s. 24(b) interest cap of Rs 2 lakh applies to the AGGREGATE SOP interest of both houses (not Rs 2 lakh per house). Under the FA 2023 default new-regime (s. 115BAC(1A)), the SOP Nil-AV concession remains available — but the resulting HP loss (typically the Rs 2 lakh interest) CANNOT be set off against salary or other-head income. Choice of regime is therefore tightly coupled to the SOP-loss arithmetic.
5. SOP-vacancy-on-employment (s. 23(2)(b)) — Naman Kumar test
Sub-clause (b) of s. 23(2) extends the Nil-AV concession to a property that the owner OWNS FOR SELF-USE but cannot occupy because of his employment, business or profession elsewhere. Naman Kumar (P&H) requires three conditions: (i) the property is owned for own use; (ii) the owner resides elsewhere on account of employment / business / profession; (iii) no benefit (rent / letting) is actually derived. Salaried clients on inter-city / overseas deputations frequently rely on this provision; the s. 24(b) interest cap of Rs 2 lakh / Rs 30,000 then applies.
6. Stock-in-trade relief (s. 23(5)) — the builder's window
FA 2017 inserted s. 23(5) to relieve builders from notional-rent tax on unsold flats held as stock-in-trade — for ONE year from end of FY of completion. FA 2019 expanded the window to TWO years. Beyond that, notional ALV under s. 23(1)(a) applies even though the units are stock-in-trade and any income would arise in PGBP only on sale. This provision tilts the scale against developers with prolonged inventory holding (commercial slowdown years). Strict computation of the completion date — typically the date of occupation certificate or the date of municipal completion certificate — is critical and should be documented.
7. Practical computation sequence
The s. 23 computation in any HP case proceeds as: STEP 1 — identify owner / deemed owner (s. 22 + s. 27). STEP 2 — classify the property as let-out, deemed let-out, SOP or stock-in-trade. STEP 3 — for let-out, compute ALV under (a), compare with actual rent (b), apply (c) if vacant; gross annual value = higher of (a) and (b), subject to (c). STEP 4 — deduct municipal taxes ACTUALLY PAID by the owner (s. 23 first proviso) to arrive at Net Annual Value (NAV). STEP 5 — apply s. 24 deductions (30% standard + s. 24(b) interest). STEP 6 — co-owner apportionment under s. 26 if applicable. STEP 7 — for FY 2023-24 onwards, screen the resultant loss for s. 115BAC(1A) inter-head set-off restriction.
Leading Decisions
1. Mrs. Sheila Kaushish v. CIT
Citation: (1981) 131 ITR 435 (SC)
Forum: Supreme Court of India
Facts & Issue: Assessee owned a residential property in Delhi let out at a contractual rent. The Income-tax Officer adopted, as Annual Letting Value (ALV), an amount exceeding the standard rent fixed/ascertainable under the Delhi Rent Control Act. Assessee contended that ALV could not exceed the standard rent.
Held / Ratio: The Supreme Court, applying the principle laid down for municipal valuation in Dewan Daulat Rai Kapoor v. NDMC, held that the sum for which the property 'might reasonably be expected to let from year to year' within the meaning of s. 23(1)(a) cannot exceed the STANDARD RENT determinable under the relevant Rent Control Act, whether or not the standard rent has actually been fixed. A landlord cannot lawfully expect to recover more than the standard rent, so a higher ALV would be unreasonable.
Section relevance: Landmark — establishes the standard-rent ceiling on ALV under s. 23(1)(a) for properties covered by Rent Control legislation.
2. Dewan Daulat Rai Kapoor v. NDMC
Citation: (1980) 122 ITR 700 (SC)
Forum: Supreme Court of India
Facts & Issue: Concerned the determination of rateable value of a property under the Punjab Municipal Act / Delhi Municipal Corporation Act. Authority sought to fix rateable value with reference to actual rent received, exceeding the standard rent under Rent Control law. Question — could rateable value exceed standard rent?
Held / Ratio: The Supreme Court held that 'rent at which the premises might reasonably be expected to let from year to year' is the same concept as in s. 23(1)(a), and a landlord cannot reasonably expect rent in excess of what the law of the land (Rent Control) permits him to recover. Standard rent, whether actually fixed or determinable, is therefore the upper limit. The contractual rent received in excess of standard rent is irrelevant for the reasonable-letting-value enquiry.
Section relevance: Foundational authority directly applied by Sheila Kaushish to ALV under s. 23. The rule applies only to properties under Rent Control.
3. Liquidator of Mahamudabad Properties (P) Ltd. v. CIT
Citation: (1980) 124 ITR 31 (SC)
Forum: Supreme Court of India
Facts & Issue: Property was vacant for the entire previous year. The owner sought a NIL annual value (or a vacancy allowance) on the ground that no rent was received. Revenue assessed the ALV on a notional basis.
Held / Ratio: The Supreme Court held that under the head 'Income from house property', annual value is a NOTIONAL income — chargeable even when no rent is actually received. The scheme contemplates a deduction (then under s. 24(1)(ix), now under s. 23(1)(c) / 23(3)) where the property is wholly or partly vacant. Vacancy as such does not displace s. 22 charge; it only attracts the vacancy-allowance / actual-rent rule of s. 23(1)(c).
Section relevance: Establishes the notional-income nature of HP charge — chargeability survives vacancy; relief lies in the specific vacancy-allowance rule.
4. CIT v. Tip Top Typography
Citation: (2014) 368 ITR 330 (Bom)
Forum: Bombay High Court
Facts & Issue: AO determined ALV under s. 23(1)(a) at sums much higher than the contractual rent and municipal rateable value, relying on comparable instances of high-end leases in the same area. Question: what is the proper methodology for fixing ALV where property is not under Rent Control and contractual rent is alleged to be low?
Held / Ratio: The Bombay High Court laid down detailed guidelines: (i) where standard rent is determinable, that is the upper limit; (ii) where there is no Rent Control, the MUNICIPAL RATEABLE VALUE provides a reliable starting point and a SAFE HARBOUR; (iii) the AO can depart from municipal rateable value only on cogent material — instances of comparable lease, market conditions, etc. — and the burden is on the Revenue; (iv) interest-free deposits cannot be notionally grossed-up unless they are shown to be a colourable device.
Section relevance: Standard authority on methodology of s. 23(1)(a) ALV determination outside Rent Control areas; widely followed across Tribunals.
5. Vivek Jain v. ACIT
Citation: (2011) 337 ITR 74 (AP)
Forum: Andhra Pradesh High Court
Facts & Issue: Assessee owned a residential flat which had never been let out — vacant throughout the previous year — and offered ALV as Nil under s. 23(1)(c). Revenue contended that s. 23(1)(c) is available only where the property was LET DURING SOME PART OF the year and remained vacant during another part; for property NEVER LET, the notional ALV under s. 23(1)(a) must be adopted.
Held / Ratio: The High Court held that s. 23(1)(c) applies only where the property is LET BUT VACANT during the whole or part of the previous year. The word 'let' implies actual letting at some point during the year. Where a property has never been let out, s. 23(1)(c) is not attracted; the notional ALV under s. 23(1)(a) applies (subject to the second self-occupied house relief, where available).
Section relevance: Leading authority on the scope of s. 23(1)(c) vacancy allowance — requires actual letting, not mere INTENT TO LET; followed in numerous Tribunal decisions.
6. Premsudha Exports (P) Ltd. v. ACIT
Citation: (2008) 110 ITD 158 (Mum)
Forum: ITAT, Mumbai
Facts & Issue: Assessee company's property was let out for part of the year and lay vacant for the remainder. Actual rent received was less than the s. 23(1)(a) notional ALV. Assessee claimed s. 23(1)(c) to be taxed on actual rent.
Held / Ratio: The Tribunal held that the proviso to s. 23(1) — s. 23(1)(c) — operates to bring down the AV to the actual rent received where there is a part-year vacancy, even if such actual rent is lower than the notional ALV under (a). Section 23(1)(c) is the express statutory exception, and its plain meaning must be given effect. The Tribunal distinguished situations of property never let, which fall outside s. 23(1)(c).
Section relevance: Frequently-cited Tribunal authority on the mechanics of s. 23(1)(c) for part-year vacancy in let-out property.
7. CIT v. Smt. Indu Sehgal Karol Bagh
Citation: (2006) 286 ITR 545 (Del)
Forum: Delhi High Court
Facts & Issue: AO disregarded the contractual rent and determined ALV on comparable-lease basis. Assessee contended that municipal rateable value should govern in absence of evidence that the rent shown was a sham.
Held / Ratio: The High Court reaffirmed that the burden is on the Revenue to demonstrate that the rent shown is not the rent at which the property might reasonably be expected to let. In the absence of cogent material, the rent shown — supported by municipal valuation — must be accepted. Mere instances of higher rent in unconnected premises are not enough.
Section relevance: Burden-of-proof authority for s. 23(1)(a); harmonised with Tip Top Typography.
STATUTORY ARCHITECTURE — 18-ROW MAP
01. Section & marginal note
Section 23 — 'Annual value how determined' — Chapter IV-B.
02. Sub-section structure
(1) Standard ALV; (2) SOP framework; (4) Two-SOP election (post FA 2019); (5) Stock-in-trade 2-year rule.
03. Operative trigger
Computation of annual value for the property — comprehensive framework with various categories.
04. Persons affected
Property owners + deemed owners under s. 27.
05. Time anchor — PY / AY
Annual computation; vacancy allowance during PY.
06. Income anchor
HP head computation foundation.
07. Residential-status nexus
Standard; modulates by scope filter under s. 5.
08. Rate / charge mechanism
ALV → NAV → s. 24 deductions → net taxable HP.
09. TDS / TCS interaction
Section 194-I tenant TDS on actual rent.
10. Advance-tax obligation
On net HP income.
11. Presumptive provisions
Not applicable.
12. Exemption / deduction mechanism
Vacancy allowance under s. 23(1)(c); municipal tax proviso; SOP nil-ALV; stock-in-trade 2-year exemption.
13. Refund / credit
Through ITR-2 / ITR-3.
14. Return / disclosure reporting
ITR Schedule HP — per-property computation.
15. Penalty exposure
Section 270A on under-reporting.
16. Prosecution exposure
Section 277 false statement on ALV.
17. Cross-statute interplay
Municipal Acts; State Rent Control; RERA; Companies Act schedule III.
18. Repeal & saving — 1961 → 2025
Preserved in 2025 Act.
HISTORICAL CONTEXT — ALV DETERMINATION EVOLUTION
Section 23 is the operative measurement provision — defining the annual value that section 22 charges. The architecture has remained substantively stable since 1962, with major refinements: (a) FA 1986 — Section 23(2) SOP framework formalised; (b) FA 1999 — Section 23(1)(b) higher-of rule clarified; (c) FA 2017 — Section 23(5) stock-in-trade 2-year holding-period rule; (d) FA 2019 — Section 23(4) two-SOP election (raised from one); (e) FA 2024-25 — minor calibration.
The fundamental ALV principle is 'reasonable expected rent' — the value at which the property MIGHT reasonably be expected to be let from year to year (s. 23(1)(a)). Where actual rent received exceeds this, the higher of the two is the ALV (s. 23(1)(b)). Where the property is let but partially vacant, the actual rent (which may be less than expected) is the ALV (s. 23(1)(c)). The proviso allows deduction of municipal taxes ACTUALLY PAID by the owner (regardless of accounting basis).
Section 23(2) SOP framework — annual value of self-occupied property deemed NIL. Extended to property that cannot be occupied due to employment / business / profession at another place. FA 2019 raised the SOP limit from ONE to TWO houses — a significant relief for HNI clients with multiple personal homes. Houses beyond the elected two are deemed let-out at reasonable expected rent.
Section 23(5) — FA 2017 anti-avoidance measure for builders / developers. Property held as stock-in-trade is exempt from deemed let-out for 2 years from the end of the FY in which the completion certificate is obtained. After this 2-year period, unsold inventory falls into deemed-let-out scheme — preventing indefinite carrying of inventory at nil notional rent.
The transition to the Income-tax Act, 2025 preserves section 23 architecture with FA 2017 / 2019 calibrations. Section 536 saving for pending ALV disputes.
FINANCE ACT AMENDMENT TIMELINE
■ FA 1962 — Section 23 came into force.
■ FA 1986 — Section 23(2) SOP framework formalised.
■ FA 1999 — Section 23(1)(b) higher-of rule clarified.
■ FA 2001 — Vacancy allowance s. 23(1)(c) refined.
■ FA 2017 — Section 23(5) — Stock-in-trade 2-year holding rule.
■ FA 2019 — Section 23(4)(b) — TWO SOP houses (raised from one).
■ FA 2024 — Cosmetic refinements.
■ FA 2025 — Minor adjustments.
■ Income-tax Act, 2025 — Section 23 successor, operative 1-4-2026.
■ Finance Act, 2026 (Act 4 of 2026) — no amendment to s. 23.
JUDICIAL EVOLUTION — VERIFIED LANDMARK AUTHORITIES
▸ Commissioner of Income-tax v. Vatika Township Pvt. Ltd. (2014) 367 ITR 466 ; (2015) 1 SCC 1 (Supreme Court — 5-Judge Constitution Bench)
Facts. The Department sought to apply a surcharge provision retrospectively to block-period assessments. The assessee contended that the amendment was substantive and could not have retrospective operation absent express legislative direction.
Issue. Whether amendments to taxing statutes operate prospectively unless the legislature has expressly or by necessary implication conferred retrospective effect.
HELD. The Constitution Bench reaffirmed the general rule against retrospectivity of taxing statutes. A taxing provision must be construed prospectively unless the language compels otherwise; mere insertion or substitution by amendment is not sufficient to deny vested rights.
“Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation.”
Relevance. Anchor authority for any argument that an amendment to a charging or computational provision must apply only from the AY notified — useful in transitional disputes around FA 2025 and the 1961 → 2025 changeover.
▸ K.P. Varghese v. Income-tax Officer, Ernakulam (1981) 131 ITR 597 ; (1981) 4 SCC 173 (Supreme Court — 3-Judge Bench)
Facts. Section 52(2) (since deleted) deemed sale consideration to be FMV where FMV exceeded the declared consideration by 15%. The Department applied it on a literal reading even when the assessee had not in fact received more than the declared price.
Issue. Whether a deeming provision in a charging schema can be construed literally where its plain reading produces a result manifestly contrary to legislative object.
HELD. The Court read down section 52(2) to apply only where the assessee had actually received consideration in excess of the declared sum. A literal construction yielding absurd or unjust results must yield to an object-based interpretation; the CBDT's contemporaneous Circular No. 96 was held binding on the Revenue.
“It is well settled that a literal construction of a statutory provision ought not to be adopted if it produces a manifestly unjust result… Where a literal construction creates an anomaly, the courts will adopt that construction which avoids the anomaly.”
Relevance. Anchor authority for purposive construction of deeming fictions across the 1961 Act — applies wherever a deeming clause (e.g., s. 50C, s. 56(2)(x), s. 2(22)(e)) yields a result contrary to legislative purpose.
▸ Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 ; (2000) 1 SCR 1 (Supreme Court)
Facts. A municipal levy was challenged on the ground that the charging provision did not clearly specify the rate, the persons charged, and the measure of tax.
Issue. Whether a tax can be imposed in the absence of a clear, unambiguous charging provision identifying the subject, measure, rate, and incidence.
HELD. Article 265 demands that tax be levied only by clear authority of law. The four components — taxable event, person, rate, and measure — must be clearly discernible from the charging provision; ambiguity is fatal to the levy.
“The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions, particularly when the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose other than what is given expression to.”
Relevance. Foundational authority on the rigour required of charging sections — underpins arguments that ambiguous deeming fictions, surcharge formulas, and rate prescriptions must be strictly construed.
▸ Commissioner of Income-tax v. B.C. Srinivasa Setty (1981) 128 ITR 294 ; (1981) 2 SCC 460 (Supreme Court)
Facts. The assessee transferred goodwill of a self-generated nature. The Department sought to tax the consideration as capital gains; the assessee contended that no cost of acquisition could be ascertained, hence the computation provisions failed.
Issue. Whether capital gains arises where the asset has no ascertainable cost of acquisition — i.e., whether the charging provision can be invoked independently of a workable computation provision.
HELD. The charging section and the computation provisions form an integrated code; if the computation provisions cannot apply (because the cost is incapable of ascertainment), the charge itself fails. Self-generated goodwill is not taxable as capital gains.
“The charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section.”
Relevance. Anchor for the 'charge fails when computation fails' doctrine — useful in valuation impasses, self-generated assets, and computational ambiguity (though now largely overtaken by section 55(2)(a)(i) deeming cost as nil).
▸ Commissioner of Income-tax v. Excel Industries Ltd. (2013) 358 ITR 295 ; (2014) 2 SCC 1 (Supreme Court)
Facts. The assessee, an export-oriented unit, received DEPB licences and Advance Licences. The Department sought to tax the value of these incentives on accrual at the time of issue; the assessee contended that no income accrued until the licence was actually used or sold.
Issue. When does income accrue under the mercantile system — at the moment a right is created, or at the moment the right becomes enforceable as a debt?
HELD. Income accrues only when there is a corresponding liability of the other party. Mere creation of a contingent or unmatured right does not amount to accrual; the right must crystallise into a debt before tax incidence.
“Income accrues when there arises in favour of the assessee a debt — when there is a corresponding liability of the other party to pay the amount. It is not enough that the right has come into being; the right must ripen into a debt.”
Relevance. Anchor for accrual-vs-receipt timing disputes under section 5 / section 145 — relevant for retention monies, export incentives, contingent claim settlements, milestone-based contracts.
CBDT CIRCULARS — SECTION 23 ECOSYSTEM
▸ CBDT Circular No. 14(XL-35) of 1955 dated 11 April 1955
Subject. Duty of officers to assist assessees in claiming and securing relief
Substance. Foundational circular directing that the AO should not exploit assessee ignorance to deny legitimate reliefs; officer is required to draw attention to refunds or reliefs to which the assessee is entitled. The circular has been judicially noted in several appellate decisions and remains operative for first-appellate practice.
▸ CBDT Circular No. 549 dated 31 October 1989
Subject. Explanatory notes — Finance Act 1989 amendments (incl. PY unification)
Substance. Explained the FA 1987 / FA 1989 amendments unifying the previous year with the financial year preceding the AY, including transitional provisions for assessees with different accounting years. Useful in any controversy on the timing of accrual / chargeability for early post-1989 AYs.
▸ CBDT Circular No. 5 of 2014 dated 11 February 2014
Subject. Section 14A — dis-allowance even where no exempt income earned (since modulated)
Substance. Initially directed AOs to apply Rule 8D disallowance under section 14A even where no exempt income was earned in the year; subsequently modulated by Cheminvest (Del HC) and Maxopp (SC). FA 2022 amendment to section 14A re-asserted the position but remains under litigation.
WORKED EXAMPLES — APPLICATION OF SECTION 23
Illustration — Illustration 1 — ALV computation — actual rent > expected
Facts. Reasonable expected rent Rs 5 L; actual rent received Rs 6 L; municipal tax paid Rs 30,000.
Computation.
S. 23(1)(b) — Higher of expected (Rs 5 L) and actual (Rs 6 L) = Rs 6 L → ALV.
Less: Municipal tax paid Rs 30,000 → NAV Rs 5.7 L.
Pass to s. 24 for further deductions.
Result. When actual rent > expected, actual prevails.
Illustration — Illustration 2 — Vacancy allowance
Facts. Reasonable expected Rs 4 L; property vacant for 3 months; actual rent received Rs 2.25 L (Rs 75K × 3 months); municipal tax Rs 20,000.
Computation.
Property let but vacant for part PY.
S. 23(1)(c) — Actual rent Rs 2.25 L taken as ALV (vacancy allowance).
Less: Municipal tax Rs 20,000 → NAV Rs 2.05 L.
Vacancy must be genuine; AO scrutiny on extended vacancy.
Result. Vacancy allowance under s. 23(1)(c) — actual rent (less than expected) taken; vacancy must be substantiated.
Illustration — Illustration 3 — Two SOPs (post FA 2019)
Facts. Three flats — Delhi (self-occupied) + Pune (self-occupied) + Mumbai (let-out Rs 8 L per annum). Delhi and Pune both SOP.
Computation.
S. 23(4)(a) — Assessee may elect up to TWO SOPs.
Elected SOPs — Delhi + Pune → ALV nil for both.
Mumbai — deemed let-out (not elected) → s. 23(1) ALV computation.
Mumbai ALV Rs 8 L → NAV after municipal tax.
Section 24 deductions applied.
Result. FA 2019 two-SOP rule — significant for multi-home HNI; election matters.
Illustration — Illustration 4 — Stock-in-trade 2-year rule
Facts. Builder Co's unsold inventory — apartment block completed 31-March-2024 (completion certificate); unsold flats valued Rs 50 cr. PY 2025-26.
Computation.
S. 23(5) — 2 years from end of FY of completion = up to 31-3-2026.
PY 2025-26 still within 2-year window → ALV NIL.
No HP income for unsold inventory.
From PY 2026-27 onwards (post 2-year window) — deemed let-out under s. 23(1) at reasonable expected rent.
Result. FA 2017 anti-hoarding measure; builders must monetise within 2 years.
Illustration — Illustration 5 — Property cannot be occupied (s. 23(2)(b))
Facts. E owns flat in Delhi (his hometown). His employer requires him to live in Mumbai for work. E rents flat in Mumbai while Delhi flat is vacant.
Computation.
S. 23(2)(b) — Property that cannot be occupied due to employment / business / profession at another place → annual value NIL.
Delhi flat — vacant; E lives in Mumbai for work → S. 23(2)(b) applies.
Delhi flat ALV — NIL (deemed SOP).
Mumbai rent paid — separate s. 10(13A) HRA exemption if employer pays HRA.
Result. Section 23(2)(b) — relief for assessee forced to live away from owned home for work.
PRACTITIONER PLANNING NOTES — SECTION 23
■ Reasonable expected rent — defend against AO's higher estimates; produce comparable rent evidence.
■ Municipal tax — payment-based deduction; preserve receipts.
■ Vacancy — document genuine reasons; lease termination notices / agent communications.
■ Two-SOP election — optimise across multiple homes; document selection.
■ Stock-in-trade — 2-year clock from completion certificate; preserve certificate evidence.
■ Section 23(2)(b) — employment-elsewhere relief; preserve employer letters.
■ Section 71B set-off cap interaction with NAV computation.
■ Co-ownership — separate ALV per share.
■ Section 27 deemed owner — different ALV treatment.
■ Joint family property — ALV in HUF's hands.
■ Mixed-use bifurcation — PGBP vs HP — accurate area apportionment.
■ Section 25A unrealised rent recovery — separate framework.
■ TDS u/s 194-I — verify tenant compliance.
■ Documentation — title / lease / municipal tax receipts / completion certificate / vacancy evidence — 7 years.
■ Annual practitioner review — track FA changes to s. 23 framework.
LITIGATION DEFENCE — SECTION 23 ARGUMENTS
■ Mathuram Agrawal strict-construction anchor.
■ K.P. Varghese object-based interpretation.
■ Vatika Township prospective amendment anchor.
■ BC Srinivasa Setty — ALV computation impossibility may negate charge.
■ Excel Industries — accrual timing.
■ Reasonable expected rent defence — produce comparable / market evidence.
■ Vacancy allowance defence — document genuine vacancy reasons.
■ Two-SOP election defence — argue optimal selection valid.
■ Stock-in-trade defence — produce completion certificate; 2-year clock.
■ Section 23(2)(b) defence — produce employer letters.
■ Municipal tax proviso — preserve payment-based deduction.
■ Co-ownership defence — separate ALV per co-owner.
■ S. 27 deemed-owner challenge — argue conditions not met.
■ Calcutta Discount Article 226 jurisdiction.
■ Beneficial circulars defence.
■ Section 273B reasonable-cause defence for procedural lapses.
PROCEDURE — APPLYING SECTION 23
Step 1. Identify property category
Let-out / SOP / deemed let-out / stock-in-trade / vacant.
Step 2. Compute reasonable expected rent
Market comparable / municipal valuation / annual rent assessment.
Step 3. Identify actual rent
Lease agreement + bank deposits / cheque receipts.
Step 4. Apply s. 23(1)(b) higher-of
Higher of expected / actual.
Step 5. Apply s. 23(1)(c) vacancy allowance
If vacant during part of PY, actual rent prevails.
Step 6. Apply s. 23(2) SOP
Nil ALV for self-occupied / employment-elsewhere.
Step 7. Apply s. 23(4) two-SOP election
Optimal selection across multiple personal homes.
Step 8. Apply s. 23(5) stock-in-trade
2-year clock from completion certificate.
Step 9. Deduct municipal tax paid
Proviso to s. 23(1).
Step 10. Arrive at NAV
Pass to s. 24 for further deductions.
Step 11. Co-ownership apportionment
Section 26 — separate ALV per share.
Step 12. Deemed-owner adjustment
Section 27 — income to deemed owner.
Step 13. Section 25A unrealised rent recovery
Separate computation if applicable.
Step 14. ITR Schedule HP
Comprehensive disclosure per property.
Step 15. Documentation
Title / lease / municipal tax / completion certificate / vacancy evidence — 7 years.
PRACTITIONER CHECKLIST — SECTION 23 (19 items)
☐ Property category identified.
☐ Reasonable expected rent benchmark.
☐ Actual rent documented.
☐ S. 23(1)(b) higher-of computation.
☐ Vacancy allowance under s. 23(1)(c) — vacancy substantiated.
☐ SOP framework under s. 23(2).
☐ Two-SOP election under s. 23(4) optimally exercised.
☐ Stock-in-trade 2-year rule under s. 23(5).
☐ Municipal tax paid deduction.
☐ NAV computed.
☐ Co-ownership share-wise computation.
☐ Deemed-owner under s. 27 considered.
☐ Section 25A unrealised rent / arrears handled.
☐ Section 71B set-off cap considered.
☐ Section 194-I TDS reconciled.
☐ ITR Schedule HP populated.
☐ Documentation preserved 7 years.
☐ Mixed-use bifurcation (PGBP vs HP).
☐ Annual update on FA changes.
CROSS-REFERENCES
▸ Section 22 — HP charge.
▸ Section 23 — Annual value (THIS SECTION).
▸ Section 24 — HP deductions.
▸ Section 25 — NR interest disallowance.
▸ Section 25A — Unrealised rent / arrears.
▸ Section 26 — Co-ownership.
▸ Section 27 — Deemed owner.
▸ Section 28 — PGBP (carve-out interaction).
▸ Section 71B — Set-off cap.
▸ Section 80EE / 80EEA — Additional deductions.
▸ Section 115BAC — New regime.
▸ Section 139 — Return.
▸ Section 194-I — TDS on rent.
▸ Section 194-IB — TDS by individual / HUF tenant.
▸ Form 26QC / 26QD — TDS challan.
▸ Income-tax Rules — Rule 4 (ALV).
▸ Transfer of Property Act, 1882.
▸ Rent Control Acts (state-specific).
▸ RERA, 2016.
▸ Municipal Acts — state-specific.
▸ Income-tax Act, 2025 — Section 23 (successor), operative 1-4-2026.
▸ Income-tax Act, 2025 — Section 536 (saving).
Caution — corrections in this revision
This revision applies the FA 2026 overlay against the prior v2 (FA 2025) draft. Variant comparison performed: two Cowork files supplied for s. 23 — the un-suffixed original and the EXPANDED v2 (2026-05-25). The original’s Block 1 was found INCOMPLETE (missing marginal heading, missing Explanation to clauses (b)/(c), missing sub-section (3), and missing all footnote attributions on the substituted/inserted sub-sections (4) and (5)); the EXPANDED v2 carries the correct, complete verbatim s. 23 text including the FA 2019 substitution footnote on sub-section (4), the FA 2017 insertion / FA 2023 amendment footnote on sub-section (5), and the consolidated FA 2001 substitution provenance in the in-cell verification note. Beyond Block 1, the original contributed no substantive unique content; case-law list and illustrations were identical. EXPANDED v2 taken as canonical base. Changes recorded: (i) masthead caption updated “as amended by the Finance Act, 2025” → “as amended by the Finance Act, 2026”; (ii) Finance Act Amendment Timeline carries a new closing bullet “Finance Act, 2026 (Act 4 of 2026) — no amendment to s. 23”; (iii) Illustration 4 (stock-in-trade 2-year rule) re-anchored — completion certificate date 31-March-2023 → 31-March-2024 and PY 2024-25 → PY 2025-26 (keeping PY 2025-26 within the 2-year window ending 31-3-2026); the “from PY [N+1] onwards (post-window)” statement correspondingly slid from PY 2025-26 to PY 2026-27 to preserve the 2-year-window logic; the FA 2023 amendment (extension from 1 year to 2 years) is preserved as a verified historical reference. Open audit FLAGs: (a) the historical-context paragraph carries the phrase “(e) FA 2024-25 — minor calibration” — a generic placeholder; no specific FA 2024 or FA 2025 amendment to s. 23 is verified; preserved per workflow but flagged for deletion in next pass unless a specific amendment is identified; (b) the timeline bullet “FA 2025 — Minor adjustments” is similarly generic; flagged; (c) the case-law list is the generic Cowork template (Vatika Township / K.P. Varghese / Mathuram Agrawal / B.C. Srinivasa Setty / Excel Industries) — the leading house-property authorities on annual value (E.D. Sassoon & Co. v. CIT (1954) 26 ITR 27 (SC); Sultan Bros. v. CIT (1964) 51 ITR 353 (SC); Mrs Sheila Kaushish v. CIT (1981) 131 ITR 435 (SC) on standard rent; Bhagwan Dass Jain v. UOI (1981) 128 ITR 315 (SC) on constitutional validity of notional ALV) are absent; logged for forward-pass; (d) Block 2 right-hand column cites “Section 23 successor — Preserved” without naming the Income-tax Act, 2025 (Act 30 of 2025) successor section number — pending verified successor mapping; (e) the Cowork v3 base does not carry a separate Source & verification notes cell (Standard B v2 requirement) — logged for forward-pass.
Case Laws & Commentary
SECTION 23 — Annual value how determined
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: Annual Value (AV) is the higher of (a) sum for which the property might reasonably be expected to let from year to year [ALV/fair rent], or (b) actual rent received/receivable where higher, but where vacant for whole/part of year, actual rent so received is taken even if lower [s. 23(1)(c)]. For self-occupied property [s. 23(2)], AV is taken as Nil — extended by FA 2019 to TWO houses; for the next house, deemed letting applies. Section 23(5) (inserted FA 2017, expanded FA 2023) gives a relief window for stock-in-trade property held by builders (currently 2 years from end of FY of completion).
FA 2026 impact: No direct amendment to s. 23 (1961 Act) by FA 2026. The deemed-let-out concept for stock-in-trade in s. 23(5) (FA 2017, expanded FA 2019 from 1 to 2 years) remains the most recent substantive change. FY 2025-26 (AY 2026-27) is the last operative year under the 1961 Act.
Commentary
1. Architecture of s. 23
Section 23 is the engine room of the HP head — it computes the 'annual value' (AV) on which s. 24 deductions are then made. The section is built in two layers. SUB-SECTION (1) supplies the general rule for let-out and deemed-let-out properties: clause (a) the notional ALV (sum for which the property MIGHT REASONABLY BE EXPECTED TO LET), clause (b) actual rent received/receivable where higher than (a), and clause (c) a relief when the property is let but vacant for whole/part of year. SUB-SECTION (2) carves out self-occupied property (SOP) — AV is NIL where the owner actually occupies, or cannot occupy owing to employment elsewhere. SUB-SECTIONS (3) and (4) deal with the cap on SOP houses (TWO from AY 2020-21, after FA 2019) and the deeming of additional houses as let-out. SUB-SECTION (5) (FA 2017, expanded FA 2019) gives builders a 2-year relief from notional letting for stock-in-trade unsold inventory.
2. Determining 'reasonable expected rent' — the four-layer hierarchy
Indian jurisprudence has crystallised a four-layer hierarchy for fixing ALV under s. 23(1)(a): (i) Where the property is under Rent Control, the STANDARD RENT (actually fixed or ascertainable) is the CEILING — Sheila Kaushish + Dewan Daulat Rai Kapoor. The contractual rent above standard rent is irrelevant. (ii) Where Rent Control does NOT apply, the MUNICIPAL RATEABLE VALUE is a strong safe-harbour starting point — Tip Top Typography. (iii) The AO may depart from (i)/(ii) only on COGENT EVIDENCE of comparable instances; bare assertions of low rent are not enough — Indu Sehgal Karol Bagh. (iv) Notional grossing-up of interest-free deposits is permitted only on proof of colourable device. Tip Top Typography is now the go-to authority across Tribunals.
3. The actual-rent and vacancy mechanics (cl. (b) & (c))
Clause (b) brings to charge the actual rent if higher than the notional ALV — preserving the Revenue's right to tax above-market lettings. Clause (c) — inserted FA 2001 — operates the other way: where the property is LET and is vacant during the whole or part of the year and owing to such vacancy the actual rent is less than ALV under (a), the actual rent is taken. Critically, Vivek Jain (AP HC) confines clause (c) to properties that were ACTUALLY LET at some point; for properties never let (mere intent to let), clause (c) is unavailable — the notional ALV under (a) applies. Premsudha Exports works through the mechanics for part-year vacancy of a property that has been let.
4. Self-occupied property — the FA 2019 doubling and FA 2023 / s. 115BAC(1A) overlay
Until AY 2019-20, only ONE house could be claimed as SOP with Nil AV; from AY 2020-21, FA 2019 raised the cap to TWO. Any third (and beyond) self-occupied house is DEEMED let-out and taxed on notional ALV. The s. 24(b) interest cap of Rs 2 lakh applies to the AGGREGATE SOP interest of both houses (not Rs 2 lakh per house). Under the FA 2023 default new-regime (s. 115BAC(1A)), the SOP Nil-AV concession remains available — but the resulting HP loss (typically the Rs 2 lakh interest) CANNOT be set off against salary or other-head income. Choice of regime is therefore tightly coupled to the SOP-loss arithmetic.
5. SOP-vacancy-on-employment (s. 23(2)(b)) — Naman Kumar test
Sub-clause (b) of s. 23(2) extends the Nil-AV concession to a property that the owner OWNS FOR SELF-USE but cannot occupy because of his employment, business or profession elsewhere. Naman Kumar (P&H) requires three conditions: (i) the property is owned for own use; (ii) the owner resides elsewhere on account of employment / business / profession; (iii) no benefit (rent / letting) is actually derived. Salaried clients on inter-city / overseas deputations frequently rely on this provision; the s. 24(b) interest cap of Rs 2 lakh / Rs 30,000 then applies.
6. Stock-in-trade relief (s. 23(5)) — the builder's window
FA 2017 inserted s. 23(5) to relieve builders from notional-rent tax on unsold flats held as stock-in-trade — for ONE year from end of FY of completion. FA 2019 expanded the window to TWO years. Beyond that, notional ALV under s. 23(1)(a) applies even though the units are stock-in-trade and any income would arise in PGBP only on sale. This provision tilts the scale against developers with prolonged inventory holding (commercial slowdown years). Strict computation of the completion date — typically the date of occupation certificate or the date of municipal completion certificate — is critical and should be documented.
7. Practical computation sequence
The s. 23 computation in any HP case proceeds as: STEP 1 — identify owner / deemed owner (s. 22 + s. 27). STEP 2 — classify the property as let-out, deemed let-out, SOP or stock-in-trade. STEP 3 — for let-out, compute ALV under (a), compare with actual rent (b), apply (c) if vacant; gross annual value = higher of (a) and (b), subject to (c). STEP 4 — deduct municipal taxes ACTUALLY PAID by the owner (s. 23 first proviso) to arrive at Net Annual Value (NAV). STEP 5 — apply s. 24 deductions (30% standard + s. 24(b) interest). STEP 6 — co-owner apportionment under s. 26 if applicable. STEP 7 — for FY 2023-24 onwards, screen the resultant loss for s. 115BAC(1A) inter-head set-off restriction.
Leading Decisions
1. Mrs. Sheila Kaushish v. CIT
Citation: (1981) 131 ITR 435 (SC)
Forum: Supreme Court of India
Facts & Issue: Assessee owned a residential property in Delhi let out at a contractual rent. The Income-tax Officer adopted, as Annual Letting Value (ALV), an amount exceeding the standard rent fixed/ascertainable under the Delhi Rent Control Act. Assessee contended that ALV could not exceed the standard rent.
Held / Ratio: The Supreme Court, applying the principle laid down for municipal valuation in Dewan Daulat Rai Kapoor v. NDMC, held that the sum for which the property 'might reasonably be expected to let from year to year' within the meaning of s. 23(1)(a) cannot exceed the STANDARD RENT determinable under the relevant Rent Control Act, whether or not the standard rent has actually been fixed. A landlord cannot lawfully expect to recover more than the standard rent, so a higher ALV would be unreasonable.
Section relevance: Landmark — establishes the standard-rent ceiling on ALV under s. 23(1)(a) for properties covered by Rent Control legislation.
2. Dewan Daulat Rai Kapoor v. NDMC
Citation: (1980) 122 ITR 700 (SC)
Forum: Supreme Court of India
Facts & Issue: Concerned the determination of rateable value of a property under the Punjab Municipal Act / Delhi Municipal Corporation Act. Authority sought to fix rateable value with reference to actual rent received, exceeding the standard rent under Rent Control law. Question — could rateable value exceed standard rent?
Held / Ratio: The Supreme Court held that 'rent at which the premises might reasonably be expected to let from year to year' is the same concept as in s. 23(1)(a), and a landlord cannot reasonably expect rent in excess of what the law of the land (Rent Control) permits him to recover. Standard rent, whether actually fixed or determinable, is therefore the upper limit. The contractual rent received in excess of standard rent is irrelevant for the reasonable-letting-value enquiry.
Section relevance: Foundational authority directly applied by Sheila Kaushish to ALV under s. 23. The rule applies only to properties under Rent Control.
3. Liquidator of Mahamudabad Properties (P) Ltd. v. CIT
Citation: (1980) 124 ITR 31 (SC)
Forum: Supreme Court of India
Facts & Issue: Property was vacant for the entire previous year. The owner sought a NIL annual value (or a vacancy allowance) on the ground that no rent was received. Revenue assessed the ALV on a notional basis.
Held / Ratio: The Supreme Court held that under the head 'Income from house property', annual value is a NOTIONAL income — chargeable even when no rent is actually received. The scheme contemplates a deduction (then under s. 24(1)(ix), now under s. 23(1)(c) / 23(3)) where the property is wholly or partly vacant. Vacancy as such does not displace s. 22 charge; it only attracts the vacancy-allowance / actual-rent rule of s. 23(1)(c).
Section relevance: Establishes the notional-income nature of HP charge — chargeability survives vacancy; relief lies in the specific vacancy-allowance rule.
4. CIT v. Tip Top Typography
Citation: (2014) 368 ITR 330 (Bom)
Forum: Bombay High Court
Facts & Issue: AO determined ALV under s. 23(1)(a) at sums much higher than the contractual rent and municipal rateable value, relying on comparable instances of high-end leases in the same area. Question: what is the proper methodology for fixing ALV where property is not under Rent Control and contractual rent is alleged to be low?
Held / Ratio: The Bombay High Court laid down detailed guidelines: (i) where standard rent is determinable, that is the upper limit; (ii) where there is no Rent Control, the MUNICIPAL RATEABLE VALUE provides a reliable starting point and a SAFE HARBOUR; (iii) the AO can depart from municipal rateable value only on cogent material — instances of comparable lease, market conditions, etc. — and the burden is on the Revenue; (iv) interest-free deposits cannot be notionally grossed-up unless they are shown to be a colourable device.
Section relevance: Standard authority on methodology of s. 23(1)(a) ALV determination outside Rent Control areas; widely followed across Tribunals.
5. Vivek Jain v. ACIT
Citation: (2011) 337 ITR 74 (AP)
Forum: Andhra Pradesh High Court
Facts & Issue: Assessee owned a residential flat which had never been let out — vacant throughout the previous year — and offered ALV as Nil under s. 23(1)(c). Revenue contended that s. 23(1)(c) is available only where the property was LET DURING SOME PART OF the year and remained vacant during another part; for property NEVER LET, the notional ALV under s. 23(1)(a) must be adopted.
Held / Ratio: The High Court held that s. 23(1)(c) applies only where the property is LET BUT VACANT during the whole or part of the previous year. The word 'let' implies actual letting at some point during the year. Where a property has never been let out, s. 23(1)(c) is not attracted; the notional ALV under s. 23(1)(a) applies (subject to the second self-occupied house relief, where available).
Section relevance: Leading authority on the scope of s. 23(1)(c) vacancy allowance — requires actual letting, not mere INTENT TO LET; followed in numerous Tribunal decisions.
6. Premsudha Exports (P) Ltd. v. ACIT
Citation: (2008) 110 ITD 158 (Mum)
Forum: ITAT, Mumbai
Facts & Issue: Assessee company's property was let out for part of the year and lay vacant for the remainder. Actual rent received was less than the s. 23(1)(a) notional ALV. Assessee claimed s. 23(1)(c) to be taxed on actual rent.
Held / Ratio: The Tribunal held that the proviso to s. 23(1) — s. 23(1)(c) — operates to bring down the AV to the actual rent received where there is a part-year vacancy, even if such actual rent is lower than the notional ALV under (a). Section 23(1)(c) is the express statutory exception, and its plain meaning must be given effect. The Tribunal distinguished situations of property never let, which fall outside s. 23(1)(c).
Section relevance: Frequently-cited Tribunal authority on the mechanics of s. 23(1)(c) for part-year vacancy in let-out property.
7. CIT v. Smt. Indu Sehgal Karol Bagh
Citation: (2006) 286 ITR 545 (Del)
Forum: Delhi High Court
Facts & Issue: AO disregarded the contractual rent and determined ALV on comparable-lease basis. Assessee contended that municipal rateable value should govern in absence of evidence that the rent shown was a sham.
Held / Ratio: The High Court reaffirmed that the burden is on the Revenue to demonstrate that the rent shown is not the rent at which the property might reasonably be expected to let. In the absence of cogent material, the rent shown — supported by municipal valuation — must be accepted. Mere instances of higher rent in unconnected premises are not enough.
Section relevance: Burden-of-proof authority for s. 23(1)(a); harmonised with Tip Top Typography.
— End of Section 23 Case-Law Note —