The Mumbai Income Tax Tribunal delivered a very important decision on the claim for tax exemption on HRA (House Rent Allowance). Let us analyse the decision in details, with its ramification and relevance for salaried employees.
Facts of the case
In this case, a female chartered accountant, working for a hotel company had claimed HRA exemption, with respect to the rent paid to her mother. The assessee had taken a home loan jointly with her husband, for a joint ownership property of approximately 700 sq ft. In her income tax return, she had claimed deduction under Section 80 C for repayment of the principal component of home loan, as well as under Section 24(b) for interest on such home loan for this property. Her mother was staying in a flat owned by her in a nearby building, with a walking distance of five minutes. The assesse paid rent to her mother in cash, for a flat measuring 400 sq ft. There was no formal rent agreement with her mother. Her mother had not filed IT returns for the past six years.
Factors considered by the tribunal
The tribunal relied on various factors, including a report by the income tax inspector. The inspector had visited both the buildings – the building with respect to which the assessee was claiming the tax benefits on home loan and also the one where she claimed that she was staying with her mother and claimed HRA tax benefits.
The inspector, in his report, submitted that the secretary and watchman of both buildings had confirmed that the assessee was not staying with her mother but was staying with her husband, in the flat jointly owned by them. The inspector also reported that the mother had not given any intimation to her society that her daughter was staying with her, as a resident of the flat.
The tribunal noted that the tax payer had mentioned her jointly owned flat, as her residential address in the income tax returns, as well as in the records of the bank and her ration card. She had also shown this flat as her self-occupied house, for the purpose of Section 24(b) interest claim. The tax payer had also stated in her written submission to the assessing officer in a different context that she was staying with her husband and thus, did not have any major household expenses.
The tribunal also noted that although the assessee had paid rent in cash for the flat, she was not able to establish the source of such cash with concrete evidence, either by way of cash withdrawals from the bank or cash accumulation from other sources.
The tribunal observed that it was quite improbable that the lady would live with her mother and pay her a substantial rent of Rs 31,500 per month for a small 1-BHK flat of 400 sq ft, when her own flat of 700 sq ft was merely five minutes away. The tribunal also observed that it was improbable that the assessee, being a married lady, would leave her husband and daughter and start living with mother at another residential flat so near and pay a huge rent per month.
Decision taken by the tribunal
Based on the facts before, it the tribunal disallowed the claim of the tax payer for HRA exemption, with respect to the rent paid to her mother and dismissed the appeal filed by her. While arriving at the decision, the tribunal stated that since the tax payer had claimed that she had paid the rent to her mother in cash, it was her responsibility to produce relevant evidence, which she was not able to do. She was not able to explain the source of payment of such rent in cash, looking at the fact that there was no sufficient cash withdrawal from her bank account during the relevant year.
For claiming exemption, under Section 10(13A) of the Income Tax Act, with respect to HRA, the tax payer has to satisfy two conditions. Firstly, the tax payer has to actually pay the rent for an accommodation which s/he occupies for the purpose of residence. Secondly, the accommodation should not be owned by the tax payer. From the above decision, we may conclude that the tribunal has not come to a conclusion that a tax payer cannot claim HRA, for rent paid to a relative but it has held that you should be able to prove with concrete evidence that the rent in fact has been paid to the person.
So, there should not be any problem in claiming the HRA exemption, as long as you can prove the payment of rent with evidence like a rental agreement or regular payments through banking channels. In case of cash payment, there should be sufficient cash withdrawal from the bank. You also need to ensure that the residential address, as motioned in the relevant documents, like income tax records, ration card and bank records, is the same, with respect to which you are claiming the HRA exemption.
(The author is a tax and investment expert, with 35 years’ experience)