ITAT refuses to rectify its earlier order that disallowed HRA

Mumbai

The Income Tax Appellate Tribunal (ITAT) has rejected a plea from a taxpayer for rectification of its earlier order, in which it had upheld disallowance of HRA claimed as exempt. The taxpayer had paid rent to her mother and the entire transaction was found to be a sham.

By its act of rejecting the rectification plea, the ITAT clearly sends a message that the primary onus to prove genuineness of the rent paid to a close relative lies with the taxpayer.

Typically, the salary component includes House Rent Allowance (HRA). Under section 10(13A) of the Income Tax (I-T) Act, a salaried taxpayer is eligible to claim exemption for HRA, but there are conditions attached. It is essential that the accommodation is not owned by him/her and rent has been actually paid. The extent to which HRA, can be claimed as exempt is set out in the I-T Act.

Ameet Patel, tax partner at Manohar Chowdhry & Associates, a CA firm, explains that I-T officers have the right to examine genuineness of rent paid. “In the normal course, a taxpayer would not pay rent to his spouse or parent. It is but natural that in all such cases, the entire arrangement would be looked at with suspicion by the I-T officers.”

The ITAT had relied on the Indian Evidence Act, 1872, and held that the onus of proving that the rental transaction is real would lie on the taxpayer. “If at all rent is paid to a close relative, every possible piece of evidence must be kept by the taxpayer,” cautions Patel.

As reported earlier by TOI in its edition of April 11, 2017, Meena Vaswani had claimed HRA exemption for three financial years starting from 2008-09. The claims were of Rs 2.21 lakh, Rs 2.53 lakh and Rs 2.58 lakh respectively.

During the course of the I-T assessment, Vaswani had contended that she lived with her aging mother to take care of her and paid her rent in cash. While she obtained rent receipts from her mother, no formal lease agreement had been entered into. Vaswani was also not able to produce proof of cash withdrawals from her bank account to substantiate the rent payments nor did her mother file I-T returns declaring the rental income.

Moreover, the I-T authorities were able to prove that she was not residing with her mother, but in another apartment nearby with her husband and daughter. In various documents, including bank accounts, Vaswani had given the address of the property in which she actually resided which was jointly owned with her husband. Given these facts, the ITAT in its earlier order had held the entire arrangement to be a sham transaction meant for reducing her I-T liabilities and had disallowed her claims for HRA exemption.

Vaswani subsequently filed miscellaneous applications seeking recall of the earlier tribunal order. She contended that the tax authorities did not allow cross-examination of the I-T inspector who had submitted the report incriminating her. However, the ITAT in its order dated October 22, has set aside her contentions.

Referring to the earlier order, it pointed out that the ITAT bench then had clearly recorded that even if the inspector’s report is eschewed the materials on record do not inspire confidence that the transaction of rent was genuine.