According to section 23(1.), the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year subject to deduction on account of municipal taxes. What the law contemplates by annual value is not the actual rent received by the owner of the property, but a notional rent which would be gathered from a hypothetical tenant for the property having regard to local conditions, demand for houses in the same locality, rent paid for similar houses in the same locality, the type of the building, cost of construction, valuation by the municipality, or any other local authority, the Pugree or premium, if any, paid by the tenant and so on.
Deductions from annual value :
The deductions from annual value are
Considerations for property:
It is necessary to take into account the whole of the consideration exacted by the landlord for the right to use and occupy the property. For instance, any premium originally paid by the lessee would have to be taken into account and also the interest thereon.
In a State in which rent control law is in operation, the standard rent under such law should be taken as the basis for determining the annual value. The annual value of the house belonging to the assessee must be taken to be the standard rent determinable under the provisions of the Rent Control Act. Amolak Ram Khosla v CIT  131 ITR 589 (SC).
House property :
In case, the house property was let out many years ago at the then prevailing rate and the whole transaction is genuine, it is not open to the revenue to ignore the rent actually received by the assessee. Addl. CIT v Mrs. Leela Govindan  113 ITR 136.
Municipal valuation :
It is always presumed that municipal valuation affords an indication as to the reasonable letting value of a building. This presumption can be rebutted on the basis of other materials on record. If an annual value has been assessed in or about the relevant time and after taking into consideration all the relevant factors and if the figures of actual rent are not available, the figure of annual value determined for the municipal purposes can be presumed to be the correct figure of annual value and can be adopted for income-tax purposes also, if the Assessing Officer agrees.
But the figure of assessment for municipal tax purposes is only a piece of evidence and it cannot override the figure of actual rent as the basis for determination of annual value when such figure of actual rent is available to the AO—CIT v HP. Sharma  122 ITR 675 (Del)
Actual rent :
Thus, the “annual value” may be different from the actual rent realized. A house may be let out to a person at a concessional or nominal rent on grounds of friendship, love and affection or some other consideration. Such a concession or nominal rent will not form the basis for arriving at the “annual value”. In cases where the premises let are furnished, the annual value for the purpose of income from property should be estimated exclusive of the furniture.
The portion of the rent attributable to the furniture should be excluded. This is to be taxed separately under the head ‘business’ or ‘other sources’. Similar is the position about moneys charged in respect of other services provided by the landlord.