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Fair Rent is the municipal valuation of the accommodation, or rent which a similar accommodation would realize in the same locality, whichever is higher. However, it cannot exceed the standard rent, if any, fixed or determine under a Rent Control Act. If the employer hires the accommodation, Fair Rent Value is the actual rent paid for the accommodation.
It has been observed in Raval & Co. v. K.G. Ramchandran, (MANU/SC/0416/1973) relevant at page 326 para 25 (end) that it was most realistic to peg fair rent to the level of rents prevailing during the previous 12 months.
The IT Act, 1961, while levying tax on immovable properties, takes into consideration the fair value of the immovable properties. The IT law insofar as income from house property is concerned revolves round the concept of fair rent. Tax is levied on the basis of the fair rent which is supposed to be the prevailing rent for an identical property in the same locality. However, one has to pay tax on the actual rent if it exceeds the fair rent. The fair rent according to the IT Act is “the sum for which the property might reasonably be expected to be let from year to year.”
The apex court's admonition in a couple of cases that where standard rent has been fixed under the rent control law, the fair rent cannot exceed the standard rent has somewhat checked the vagueness of the explanation mentioned above, but giving rise to further questions as to how is the fair rent determined in a scenario where there is no standard rent? The confusion is not unjustified since not all States have rent-control laws and even where there is one; it does not target all cities and towns in a State. In the absence of a mechanism or an authority to fix the fair rent, an assessee could and often does face considerable harassment.