New Delhi: Recently, the Mumbai income tax appellate tribunal (ITAT) denied a claim on house rent allowance (HRA) by a taxpayer. She had paid rent in cash to her mother, but was unable to substantiate it. On the other hand, the Ahmedabad ITAT allowed the HRA exemption claimed by a taxpayer who had paid rent to his spouse.
Given that the avenues available to save tax are limited for the salaried class, some employees try and take the ‘fullest’ advantage of the income tax exemption available for HRA by paying rent to a family member with whom they are residing. It is another matter if the rent is actually paid to the relative, or if the rent receipts are genuine.
Where do these seemingly contrary ITAT decisions leave the taxpayer? The bottom line is it isn’t illegal to pay rent to a close relative, but it carries a risk of a deeper probe by the I-T officials and if genuineness cannot be proved, the claim would be denied, with attendant consequences.
So precautions are necessary when paying rent to a relative. For instance, it is better to enter into a leave and licence agreement with the person and make payments via banking channels. Under section 10 (13A) of the I-T Act, a salaried taxpayer can claim exemption on HRA for an accommodation occupied by him, if the property is not owned by him and he has actually incurred rent expenditure on it.
Amarpal S Chadha, partner, people advisory services at EY-India, says: “Payment of rent to a parent or spouse will not impact the eligibility to claim HRA exemption as long as the above mentioned conditions are met and the transaction is genuine.” “The transaction should not be a mechanism to avoid tax,” he stresses.
So decisions by the Mumbai and Ahmedabad ITATs – one accepting the tax exemption claim on payment of rent to a relative and the other de nying it-may seem contrary, but the orders were based on specific facts in each case.
Rent paid to spouse, HRA claim allowed: In 2013, the Ahmedabad ITAT bench in Bajrang Prasad Ramdharani’s case, allowed an HRA exemption claim by the taxpayer, even though rent was paid by him to his spouse. He was living with his wife but paid her rent via bank transfers. The ITAT held that the taxpayer had fulfilled the twin requirement of occupying a house not owned by him and payment of rent.
Rent paid to mother , HRA claim disallowed: But more recently , the Mumbai bench disallowed the HRA claim by Meena Vaswani who had contended that she lived with her aging mother to take care of her and paid rent to her mother in cash. While rent receipts were obtained by her, as the transaction was with her mother, she had not entered in to any formal contract. Vaswani was not able to produce proof of cash withdrawals from her bank to substantiate the rental payments. Moreover, the authorities were able to prove that she was not residing with her mother, but in another apartment nearby with her husband and daughter. The ITAT agreed with I-T authorities that the transaction was a sham to obtain a tax benefit.
The fine print: “There is nothing in the I-T Act to prevent a salaried person from claiming exemption under section 10(13A) on the basis of rent paid to a close relative. However, section 143(2) empowers the I-T officer to examine the genuineness of such expense,” says Ameet Patel, tax partner at Manohar Chowdhry & Associates, a CA firm. “In the normal course, a taxpayer would not pay rent to his spouse or parent. I personally would never advise any client to enter into such a transaction. It is but natural for the I-T officer to look upon such arrangements with suspicion,” adds Patel.
The Mumbai ITAT placed reliance on the Indian Evidence Act, 1872, and took the position that the onus of proving that the rental transaction was real lay with the taxpayer.
Patel explains: “If at all rent is to be paid to a close relative, every possible piece of evidence must be kept by the taxpayer. Mere rent receipts would not suffice. There should be a formal rent agreement duly stamped and registered with the Property Registrar. The payments of rent must be made by account payee cheque and not by cash. Also, the recipient of rent must incur expenses of the flat (say repairs, property tax et all) from the same bank account in which the rent cheques are deposited. It is advisable that the recipient also file the I-T return (even if his income is below the threshold limit), showing rental income. This would strengthen the genuineness of the arrangement.Further, the same address (of the flat which is claimed to have been taken on rent) should be used by the taxpayer for various purposes (bank account, investments, Aadhaar card, PAN to name a few).”
“In cases of rent payment to a close relative, where HRA exemption claim is denied by I-T authorities, the claim made would be considered as income of the taxpayer. He would then be required to pay I-T along with applicable interest (for delay in payment of I-T) and may also, at the discretion of the I-T officer, be required to pay a penalty for concealment of income,” sums up Chadha.