The Bombay High Court has dismissed two income tax appeals filed by Tivoli Investment & Trading Co. Pvt. Ltd., upholding the findings of the Income Tax Department on how the annual value of a property should be assessed under the Income Tax Act. The judgment, delivered by Justice Sandeep V. Marne and Chief Justice Alok Aradhe, was pronounced on 18 August 2025.
Background of the Case
The case revolved around office premises owned by Tivoli Investments on the seventh floor of “Sakhar Bhavan” at Nariman Point, Mumbai. The company had leased the property to Citi Bank in 1988 for ten years at a nominal licence fee of ₹9,825 per month. In addition, Citi Bank paid an interest-free security deposit of ₹1.54 crore. Tivoli declared only ₹1.17 lakh as annual rental income, based on the licence fee, in its tax return for 1990-91.
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The Assessing Officer, however, refused to accept this figure. Instead, he estimated the property’s annual letting value at ₹22 lakh, drawing on comparable rentals in the same building and considering the financial arrangement with Citi Bank. His decision was later upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal (ITAT).
Arguments from Both Sides
Counsel for the assessee argued that the valuation should have been restricted to the municipal rateable value, which at the time was fixed at just ₹10,200 per year. He also cited the Bombay High Court ruling in Tip Top Typography to emphasise that notional interest on security deposits cannot be treated as rental income.
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On the other hand, the Revenue’s counsel maintained that Tivoli had deliberately structured the agreement to avoid tax by fixing a nominal licence fee and taking a huge security deposit. The Revenue pointed out that the municipal valuation was unrealistically low and could not reflect the true market rent of a premium office property in Nariman Point.
Court’s Observations
The bench carefully examined the legal framework under Sections 22 and 23 of the Income Tax Act, which deal with income from house property and its annual value. The court reaffirmed that while notional interest on security deposits cannot by itself be treated as rent, the Assessing Officer is entitled to look beyond municipal valuations if they do not reflect the real market value.
“The municipal rateable value may not always represent the true and fair market rent. If there is a wide gap between municipal valuation and actual market conditions, the Assessing Officer cannot be compelled to adopt the municipal figure,” the judges noted.
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They further observed that Tivoli had offered only ₹9,825 per month as rental, which was essentially the amount of municipal taxes and outgoings, while the substantial security deposit was the real economic benefit. The court concluded that the Assessing Officer’s assessment of ₹22 lakh was both reasonable and conservative.
Rejecting Tivoli’s plea, the High Court ruled that neither the nominal licence fee nor the outdated municipal valuation could be the basis for taxation. Instead, the officer’s independent assessment, backed by market comparisons, was justified.
The appeals are dismissed.
Case Title: Tivoli Investment & Trading Co. Pvt. Ltd. vs. Assistant Commissioner of Income Tax and Another
Case Numbers: Income Tax Appeal No. 5 of 2004 with Income Tax Appeal No. 62 of 2004
