Claiming HRA exemption on rent paid to spouse? New I-T regime will end this game of truth or dare. The payment was made to the appellant's wife, who owns the property in question. Although nothing physically stops salaried taxpayers from claiming HRA exemption for rent paid to relatives, tax officers are examining the authenticity of such claims
Curiouser and curiouser. One can't help but echo Alice of Wonderland fame after reading various judicial and quasi-judicial decisions relating to allowability of house rent allowance (HRA), in those instances where rent has been paid to a close relative such as spouse or a parent.Late last month, the Delhi bench of the Income Tax Appellate Tribunal (ITAT), the final authority on tax disputes, heard a case between Aman Kumar Jain and the income tax office (ITO). It held that an HRA deduction of ₹3.69 lakh denied by ITO, because payment of rent paid to his wife does not qualify for HRA exemption, should be allowed.
Jain submitted that his wife has been filing income-tax (I-T) returns since 2004-05. Other than the rental income, she had business income and income from other sources (interest income, etc). She obtained a bank loan to purchase the property and was repaying it in instalments. Jain added that his rent receipts cannot be doubted or discarded.
Jain supported his argument with an earlier decision of the Delhi ITAT in the Abhay Kumar Mittal case. ITAT ruled that the contention of tax authorities that a husband cannot pay rent to his wife is unsustainable and lacks merits.
ITAT ruled that the HRA deduction of ₹3.69 lakh that Jain paid to his wife should be allowed. Since the allowability of HRA deduction is a matter of fact, the dispute ends here. The aggrieved party - be it the taxpayer or the I-T department - can move the high court only if the issue involves a question of law and not of fact.
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In 2013, the Ahmedabad bench of ITAT in the Bajrang Prasad Ramdharani case also allowed the HRA exemption claim made by the taxpayer, even though he paid the rent to his spouse. He was living with his wife but paid her rent via bank transfers. ITAT held that the taxpayer had fulfilled the twin requirement of occupying a house not owned by him and payment of rent.
Contrast these decisions with the case of Meena Vaswani. In 2017, the Mumbai bench of ITAT disallowed the HRA exemption she claimed. Vaswani contended that she lived with her ageing mother to take care of her and paid rent to her mother in cash. While she had rent receipts, she did not enter into any formal agreement as the transaction was with her mother.
Vaswani could not produce proof of cash withdrawals from her bank to substantiate the rental payments. Moreover, tax authorities proved that she was not residing with her mother but in another apartment with her husband and daughter. ITAT agreed with tax authorities that the transaction was a sham to obtain a tax benefit.
Without going into the ethics of the matter, a section of salaried taxpayers views HRA as a key tax-saving avenue. Thus, rent payments, even if paid to a family member with whom they reside, should be allowed as a deduction.
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After all, the Westminster doctrine, based on a 1936 British case law enshrines the tenet, 'A person is entitled to make any [lawful] arrangement of his affairs as he sees fit, in order to reduce his liability to tax.' However, today, and rightly so, 'substance over form' increasingly plays a dominant role during tax assessments or in framing judicial decisions.
Nothing debars a salaried taxpayer from claiming HRA exemption under Section 10(13A) for rent paid to a relative. However, Section 143(2) empowers tax officers to examine the genuineness of such expenses. A few days ago, an ET report pointed out that tax officers are sifting data to find defaulters.
However, the new 'default' I-T regime has sweetened this budget with lower rates and allowability of some deductions, such as standard deduction, which will, hopefully, wean taxpayers away from ingenious (even if legal) tax-planning methods. It should be noted that HRA is not allowed as a deduction under the new I-T regime. This will end this game of truth or dare.
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This story originally appeared on: India Times - Author:Faqs of Insurances
