Admissibility of house rent allowances on rent paid to spouse & parents

Admissibility of house rent allowances on rent paid to spouse & parents- Threadbare analysis of the chain of events

Synopsys to the article:

(1) Introduction to the legal framework

(2) ITAT rulings and it’s consequential legal implications

(3) Key takeaways have been drawn from above cited judicial pronouncements

(1) Introduction to the legal framework:

House rent allowances (HRA) are invariably a matter of debatable issue in appertaining to an assorted chain of events legal implications arose out of, thus predicated on the strength of the merits of the happening of the cases legislative explications of the Income Tax Act, 1961 and read with Income Tax Rules, 1962 appended thereto in force, reconstrued or rebuild. Legislative intent shall not be morsel out to confined to boundaries meaning thereby true spirit of law shall not be futile, reasonable construction shall be awarded premised on merits of the cases. In light of HRA manifestations prolonged judicial precedents taken up for this matter are concerned, principles subordinated to this associated chain of events warrant twin conditions to be inter alia complacent for assessee’s contentions of claim submissions admissibility of house rent allowances u/s 10(13A) of Income Tax Act, 1961 under consideration i.e.,

(a) The assessee shall not occupy the residential house property for which rent was paid; and

(B) The assessee shall literally pay the rental amount through substantiation with sufficient and appropriate evidence supporting with corroborative evidence also to showcase the legitimacy to the Income-tax department.

Judiciaries had formulated fair award to the chain of events that prima facie showcase legitimacy of assessee contentions of HRA claim submission, if in facts surrounded by the strength of rotation of the cases material on record substantiates admissibility of HRA claim.

In this article, we shall be discussing ITAT rulings and shall formulate key parameters and issues in claiming house rent allowance as a deduction from the computation of income from salary for salaried class individuals.

(2) ITAT rulings and their consequential legal implications:

Currently, the position of law hereby stipulated u/s 10(13A) for Income Tax Act, 1961, produced below

“any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent] as may be prescribed having regard to the area or place in which such accommodation is situated and other relevant considerations.]

Explanation. – For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where-

(a) the residential accommodation occupied by the assessee is owned by him; or

(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him;]

Manner of determination of ceiling threshold hereinafter stipulated under rule 2A[1] of Income Tax Rules, 1962 for the quantum of exemption of house rent allowances

ITAT judicial pronouncements: –

1. Bajrang Prasad Ramdharani Vs. ACIT, Ahmedabad pronounced verdict in favor of assessee vide dated 12.07.2013

Facts of the case: –

Assessee case was picked for scrutiny assessment and assessment was framed u/s 143(3) of Income Tax At, 1961, vide assessment order. In the assessment order, inter alia, the learned Assessing officer (AO) denied the claim for rent paid to the wife of the assessee against house rent allowances.

On perused remand report of the learned AO, the assessee had submitted that the house is self-occupied by him and this was substantiated evidently as the assessee has shown in his return of income. The assessee has submitted evidence for house rent payments rent receipts, bank transfer entry, and other requisite details, thus material on record available with Income Tax authorities for denial of the claim,

But the grounds for denying the claim of the assessee were not inferred from the remand report & finding of the AO and other tax authorities, Learned AO denied the fact on the ground of contention that the assessee and his wife are living together and payment of rent just to avoid payment of tax liability.

The assessee had exercised locus standi right of filing appeal before learned CIT(A), learned CIT(A) also supported the addition made by learned AO after clear perused of the remand report on the ground that assessee and his wife were living together, and payment of rent was just an arrangement on the nature of colorable device meant to avoid payment of tax liability. The assessee then again exercised his right of appeal before ITAT Ahmedabad.

The issue under consideration: –

Can the assessee claim house rent exemption from house rent allowances if the rent was paid to the wife of the assessee?

Judgments of tribunal substantiated with reasoning: –

Hon’ble ITAT on clearly perused of the material on record available with department and hearing the rivalry submission of the learned DR and assessee counsel, the finding was based that assessment order was passed substantiated on the ground that assessee and his wife were living together and learned CIT(A) also confirmed the addition on the same ground but not on the ground that house owned was declared as self-occupied by the assessee. Hon’ble Tribunal only examined the question that whether the assessee is entitled to exemption u/s 10(13A) or not.

Hon’ble tribunal verdict that

On examination of section 10(13A) along with the explanation appended thereto, the tribunal inferred that house owned at the house owned by the wife is occupied by the assessee and the assessee had submitted the rent receipts and paid the rent through bank transfers and since the assessee has fulfilled the twin requirements of the provision i.e., occupation of the house and payment of rent, the assessee is entitled to exemption u/s 10(13A) of the Act and deleted the addition made by the AO.

2. Meena Vaswani Vs. ACIT, Mumbai pronounced verdict against assessee vide dated 30.03.2017

Facts of the case: –

Assessee is a Chartered Accountant working as senior finance and accounts executive with East India Hotels Ltd., AO during the course of assessment proceedings inquire that assessee is staying in her own house with her husband and her daughter for which assessee has duly taken deduction u/s 80C as payment of housing loan and substantiated with rations cards and bank account address & assessee had also claimed loss on self-occupied house property being interest on housing loan.

Assessee’s contention on record with the department that though she had self-occupied house property jointly with her husband, she had to impart healthcare services to her mother, so she paid her rental cost for daily health care maintenance and out of love & affections with her mother no formal rent agreement executed but she had placed before learned AO rental receipts as a piece of substantive evidence for compliance with Section 10(13A) of Income Tax Act, 1961.

The assessing officer noted the fact of the assessee and inquire into the matter before ward inspectors to verify the assessee that she’s was living with her mother. Learned AO observed that she’s literally never staying with her mother and accommodation cost paid to her mother never substantiated with substantive evidence being bank withdrawals for cash payment or from any other reasonable source of income to satisfaction of AO.

AO framed assessment order u/s 143(3) of Income Tax Act, 1961 & also u/s 148 of Income Tax Act, 1961 for re-opening cases of preceding assessment years.

Learned AO rejected the AO contention and make additions to the HRA allowance claim, aggrieved by the order Assessee exercised his locus standi right and file an appeal before learned CIT(A). Learned CIT (A) also supported the addition made by the AO, assessee grossly failed to place crucial substantive documentary evidence to the satisfaction of learned CIT(A). The assessee filed an appeal against the order of CIT(A) before the ITAT Mumbai bench.

The issue under consideration: –

Can the assessee claim house rent exemption from house rent allowances if the rent was paid to the wife of the assessee?

Judgments of tribunal substantiated with reasoning:

Hon’ble ITAT after perused the material on record and rivalry submissions with Income-tax authorities and examining the strength of the case, tribunal findings were premised that the assessee had received HRA from her employer for which she claimed exemption u’s 10(13A) citing provisions of the act and substantiated with rental receipts and her status with mother for healthcare accommodation occupancy in the house. Hon’ble Tribunal further noted the fact assessee could not produce substantive evidence of bank withdrawals from bank accounts and her mother does not disclose rental Income in her return of Income. Tribunal also incorporated in their findings non-compliances of notices issued u/s 133(6) by the assessee’s mother.

It also further duly observed that the application for affidavits by the assessee and her mother’s non-submission was also not supported by sufficient reasons.

Hon’ble tribunal verdict that

Finally, after drawing attention to the above-cited records and inference from the notices issued to the assessee, the tribunal meritoriously concluded that the whole arrangement of rent paid by the assessee to her mother was a sham transaction that was undertaken with the sole intention to claim exemption of HRA u/s 10(13A) of the Act in order to reduce her tax liability and dismissed the appeal of the assessee. It held that the exemption u/s 10(13A) cannot be allowed to the assessee as the payment towards rent was not a genuine payment.

3. Abhay Kumar Mittal Vs. DCIT, New Delhi pronounced verdict in favor of assessee vide dated 02.2022

Facts of the case: –

The assessee on perusal of the assessment order claimed to have paid rent to his wife Mrs. Shivani Mittal during the period of September 2012 to March 2013, in the course of assessment proceedings learned AO questioned the source of the assessee’s wife’s capacity to purchase the residential house property. Assessee submissions before AO were also denied on the ground that the assessee’s wife does not hold any independent sources of income to substantiate the claim made by the assessee. Assessing officer quashing out the assessee’s contention and determined the income from house property to be clubbed in the hands of the assessee as assessee failed out to prove the satisfaction of adequate source of income of her wife.

Assessing officer accordingly framed assessment u/s 143(3) of Income Tax Act, 1961.

Aggrieved by the order, the assessee exercised his locus standi right and filed an appeal before CIT(A), learned CIT(A) also confirmed the additions made on the ground that inferred from the documentary evidence of the income tax return filed by the assessee’s wife does not on account hold substantial income to invest in property or mutual funds for preceding assessment years.

The assessee further appealed before ITAT praying the order passed by CIT(A) liable to be annulled on various grounds.

The issue under Consideration: –

Can the assessee claim house rent exemption from house rent allowances if the rent was paid to the wife of the assessee?

Judgments of tribunal substantiated with reasoning:

Hon’ble Tribunal noted and findings premised on perusal of material available on record that assessee’s wife who has low returned income but received a loan from the assessee and she has repaid the loan from the redemption of mutual funds and liquidation of fixed. There is no bar on the part of the assessee to extend a loan from his known sources of income to his wife. Similarly, there is no bar on the assessee’s wife to repay the loan from her own mutual funds and fixed deposits. The assessee has paid house rent and the recipient, the assessee’s wife has declared the same under the head “income from house property” in her returns which has been accepted by the revenue. The copy of which has been placed before us. The house has been registered in the name of Smt. Shivani Bansal. The learned CIT(A)’s observation that the assessee has got meager income hence she cannot afford to purchase a house cannot be accepted as the source for the purchase of the house in the hands of Smt. Shivani Bansal is proved rather never doubted. The learned 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.

(3) Key takeaways have been drawn from above cited judicial pronouncements:

(a) Inference from the aforesaid cited judicial precedents there is no legal bar stand in front of the assessee that raises anomaly for not allowing assessee claim of HRA exemption on rent paid to a spouse, parents, or close reference

(b) Statute envisaged keeping sufficient legitimate evidence substantiated employing rent agreements, rent receipts, bank transfer entries, or adequate sufficient reasoning supported by bank withdrawals or from the reasonable source of income in case of cash payment

(c) Nature of arrangements shall not be sham transactions depicted as a mean of the colorable device to avoid payment of tax liability, the entire trial of the arrangement shall constitute a genuine transaction

(d) Judiciaries allowed the claim of HRA even if the assessee lives in the same native village or town where the self-occupied house of the assessee is situated subject to a genuine trial of arrangement being inferred from the evidence.

(e) Sine-qua non-condition for claiming HRA exemption

(i) The allowance must be specifically granted to the employee by his employer to meet expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee.

(ii) The employee should not be the owner of the residential accommodation occupied by him.

(iii) The employee must have actually incurred expenditure on the payment of rent.

(f) Statue also stipulates warrant employer-employee relationship shall subside at the time when employee receive house rent allowance- CIT v. UK Bose [2013] 29 taxmann.com 219/212 Taxman 399 (Delhi)

(g) There is no stipulation, either in section 10(13A) or in rule 2A, that the employee should pay the rent only to the landlord of the house occupied by the employee. Even in cases where payments are deposited in courts or with Rent Controller, the exemption can be availed by the employee.

(h) Chain of events shall not necessarily be perceived as absurd, reasonable interpretation be taken in light of merits and strength of the arrangement; thus, judiciaries shall suppress the mischief and advance remedy.

References

1.

[1]https://www.incometaxindia.gov.in/_layouts/15/dit/mobile/viewer.aspx?path=https://www.incometaxindia.gov.in/rules/income-tax%20rules/103120000000006868.htm&k=

Rule 2A of Income Tax Rules, 1962, stipulated the quantification of maximum determination of the amount exempt from tax, the operative part of this rule laid down below

(a) Amount equivalent to 50 % of salary if the allowance under question pertains to a residential house situated in Bombay, Calcutta, Delhi, or Madras, in other cases 40% of salary;

(b) House rent allowances received by the employee in respect of the period during which rental accommodation is occupied by the employee during the previous year; or

(c) Excess of rent paid over 10 % of salary

Expression “Salary” for the purpose of computation of exemption includes basic salary and includes dearness allowances if terms of employment provide for and commission based on a fixed percentage of turnover as per terms of the contract of employment but excludes other allowances and perquisites held in Gestetner Duplicators (P.) Ltd Vs. CIT (1979) 1 Taxman 1/117 ITR 1 (SC)