House Rent Allowance (HRA) under Section 10(13A) is commonly claimed by salaried individuals for tax exemption. However, some misuse this provision through sham transactions and fake receipts. This article examines the admissibility of HRA paid to parents or spouses based on judicial rulings.
House Rent Allowance u/s. 10(13A) is the commonly availed exemption by the salaried people. However, many assessee often use this tool to evade the taxes. Often time assessee engages in sham transactions basis fake rent receipts and claim the exemption of HRA to deceive tax authorities.
Further in some cases assessee may engage in transaction with his/her spouse or parents with respect to payment of rent and avail the benefit of HRA. These types of transactions are often subject to litigation as there is question of substance and genuineness of transaction versus mere legal form of transaction. In this article, admissibility of HRA paid to parents/spouse is discussed with reference to judicial rulings.
Section 10(13A) of the Income Tax Act provides that any allowance granted by employer to assessee employee to meet the expenditure incurred on payment of rent in respect of residential accommodation occupied by the assessee shall be exempt subject to limits prescribed. However, the exemption shall not be available in cases where:
1. Residential accommodation occupied is owned by the assessee.
2. Assessee has not incurred any expenditure on payment of rent in respect of residential accommodation occupied by him.
Therefore, the essential elements to claim the HRA exemption are as follows:
1. Allowance in nature of HRA should be paid by employer. Where salary structure does not contain any allowance in nature of HRA, question of claiming exemption does not arise.
2. Residential accommodation occupied by assessee should not be owned by him. It can be owned by any other person. Noted that the section does not expressly prohibits that exemption would not available if accommodation is owned by parents/relatives of assessee.
3. There must be payment of rent from assessee to the owner of accommodation. Section does not mention anything on the mode of payment. Neither there is any prohibition on the payment made in cash/other than account payee cheque.
As far as the admissibility of rent paid to parents/spouse is concerned, different appellate tribunal has given different rulings, as under.
Facts of the cases
Assessee has claimed exemption of HRA u/s. 10(13A) on the basis of rent paid to his wife. Ld. CIT(A) has confirmed the addition on the ground that assessee and his wife were living together in the same house and very fact that the assessee tenant and landlord were staying together indicates that the whole transaction is in nature of colorable device to evade taxes.
Tribunal has made below observations.
Tribunal therefore allowed the claim of assessee in respect of rent paid to his spouse.
Aman Kumar Jain vs DCIT (ITA 267/Del/2023), Delhi Tribunal
Facts of the case:
Assessee has claimed the HRA exemption in respect of rent paid to his spouse. AO disallowed the said exemption and stated that wife of assessee has no other income except the rent received from assessee.
Findings of ITAT.
“ The Id. CIT (A)’s contention that the husband cannot pay rent to the wife is devoid of any legal implication supporting any such contention. Hence, keeping in view the entire facts of the case, we hereby allow the appeal of the assessee”.
Facts of the Case
Assessee has claimed exemption in respect of rent paid to her mother. The rent was paid in form of cash. Further the assessee had also claimed deduction u/s. 80C in respect of housing loan repayment and loss from house property in respect of “Self Occupied House Property”.
Assessing officer rejected the claim of assessee basis:
Findings and Decision of Tribunal
Tribunal has disallowed the claim of the assessee and held that the transaction was mere sham and entered into to evade the tax liability. Tribunal has made below observations.
Claim of HRA exemption in respect of rent paid to relatives/spouse/parent is a subject of litigation. It depends on the basis of facts and circumstance of each case. However, the decision of Mumbai Bench in case of Meena Vaswani (sited supra) can be taken in form of brief guidelines to decide admissibility of claim.
Assessee should have necessary corroborative evidence in support of claim made by him/her.
Disclaimer The article is the comprehensive analysis of decision of various appellate forums on the allowability of HRA. This should not constitute any legal or professional advice in any manner whatsoever.