What evidence does the department actually need before it will accept HRA on rent paid to my mother?
More than rent receipts. The Tribunal denied the exemption for three years on rent said to be paid to the assessee's mother, holding the arrangement a sham: there was no leave and licence agreement, the rent was paid in cash with nothing in the bank, the mother had not returned the rent as her income, and an inspector found the assessee actually living in her own flat nearby.
Decided by the ITAT (ITAT Mumbai - Shri C.N. Prasad (Judicial Member) and Shri Ramit Kochar (Accountant Member)) on 2017-03-30, reported as [2017] 80 taxmann.com 2 (Mumbai - Trib.) / [2017] 57 ITR(T) 497 (Mumbai) / [2017] 164 ITD 120 (Mumbai) / [2017] 186 TTJ 689 (Mumbai); IT Appeal Nos. 1983 to 1985 (Mum.) of 2015, assessment years 2009-10 to 2011-12, order dated 30 March 2017. It bears on section 10(13A), section Rule 2A, section 133(6), section 148 of the Income Tax Act 1961, in Salary & Perquisites, Capital Gains Exemptions and Evidence & Burden of Proof matters.
This is the case the department leads with whenever the landlord is a relative, and it is the reason a family HRA claim has to be built on paper before the notice arrives rather than after. Read against the entries in this library that allowed HRA on rent paid to a spouse, it marks out the line: the relationship is not the disqualification, the absence of a bank trail, a registered or written tenancy, and a matching return in the landlord's hands is. Occupation of the rented premises is the condition the Tribunal treated as failing first.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, a chartered accountant working as a senior finance and accounts executive, claimed exemption of house rent allowance under s.10(13A) for assessment years 2009-10 to 2011-12 - Rs 2,21,640, Rs 2,52,000 and Rs 2,58,000 respectively - on rent said to be paid to her mother at Rs 31,500 a month in cash for a one-bedroom flat of 400 square feet at Neha Apartments, Andheri. She and her husband jointly owned a two-bedroom flat at Tropicana about five minutes' walk away, which she had returned as self-occupied, claiming deduction under s.80C for repayment of the housing loan and a loss under the head income from house property for the interest, and which was the address on her return, her ration card and her bank account. There was no leave and licence agreement, no cheque payment, no intimation to the society, and no cash withdrawals from her bank account to match the rent - she accepted that her husband met the household expenses and that her own withdrawals were minimal. Her mother had filed no return for six assessment years and filed one for assessment year 2011-12 only on 21 March 2013, after the enquiry began; notices under s.133(6) served on her went unanswered and she was not produced. An inspector deputed by the Assessing Officer visited both flats and made enquiries of the secretaries and watchmen of the two societies, and reported that the assessee lived at Tropicana with her husband and daughter while her mother lived at Neha Apartments with an unmarried daughter. Affidavits of the assessee and her mother were filed for the first time before the Tribunal, without any application under rule 29 of the Income-tax (Appellate Tribunal) Rules 1963. The assessment for 2010-11 was under s.143(3); that year's order was the basis for reopening 2009-10 by a notice under s.148 dated 5 April 2013.
All three appeals were dismissed and the exemption denied. The arrangement of rent payment to the mother was held to be a sham entered into with the sole intention of claiming exemption of house rent allowance and reducing tax, so the payments were not genuine payments of rent (para 11).
The Tribunal put the burden where the facts lay. Under s.106 of the Indian Evidence Act 1872 a fact especially within a person's knowledge must be proved by her, and the evidence that would ordinarily exist while a tenancy is running - a leave and licence agreement, an intimation to the society, payment through a bank, cash payments traceable to a known source, utility bills paid by cheque, correspondence of the period - was simply absent; the Tribunal invoked s.6 of that Act and the doctrine of res gestae for the proposition that evidence contemporaneous with the transaction is what counts (para 11). Rent receipts written by the mother, standing alone and unsupported by any cash withdrawal, did not inspire confidence. Against the claim also stood the mother's failure to return the rental income for six years and her filing for one year only after the enquiry started, her failure to answer notices under s.133(6), and the assessee's failure to produce her. On the probabilities, the Tribunal thought it improbable that a married woman would leave her husband and daughter to pay substantial rent for a smaller flat five minutes away that she could visit freely, and noted that contributing to the support of an aged parent is not the same thing as paying rent. The affidavits filed for the first time before it were not admitted for want of an application under rule 29, and in any event only repeated what was already on record. On the complaint that the inspector's report had not been furnished and no cross-examination allowed, the Tribunal held the right of cross-examination is not absolute: it becomes absolute where the assessee has discharged the primary onus and the authorities nonetheless act on a third party's statement taken behind her back, but here the primary onus was never discharged - and, it added, even leaving the inspector's report out of account the material on record did not inspire confidence that the rent transaction was genuine (para 11).
These facts are especially in the knowledge of the assessee and burden is on the assessee to bring out these evidences to substantiate her contentions that rent paid was genuine but such evidences are not forthcoming.
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Handle my notice → Ask a CA on WhatsAppMore than rent receipts. The Tribunal denied the exemption for three years on rent said to be paid to the assessee's mother, holding the arrangement a sham: there was no leave and licence agreement, the rent was paid in cash with nothing in the bank, the mother had not returned the rent as her income, and an inspector found the assessee actually living in her own flat nearby. This was decided by the ITAT (ITAT Mumbai - Shri C.N. Prasad (Judicial Member) and Shri Ramit Kochar (Accountant Member)) and bears on section 10(13A), section Rule 2A, section 133(6), section 148 of the Income Tax Act 1961. It is reported as [2017] 80 taxmann.com 2 (Mumbai - Trib.) / [2017] 57 ITR(T) 497 (Mumbai) / [2017] 164 ITD 120 (Mumbai) / [2017] 186 TTJ 689 (Mumbai); IT Appeal Nos. 1983 to 1985 (Mum.) of 2015, assessment years 2009-10 to 2011-12, order dated 30 March 2017. This is the case the department leads with whenever the landlord is a relative, and it is the reason a family HRA claim has to be built on paper before the notice arrives rather than after. Read against the entries in this library that allowed HRA on rent paid to a spouse, it marks out the line: the relationship is not the disqualification, the absence of a bank trail, a registered or written tenancy, and a matching return in the landlord's hands is. Occupation of the rented premises is the condition the Tribunal treated as failing first. If it applies to you, the first step is this: Pay the rent by bank transfer every month, on a fixed date, and never in cash.
The assessee, a chartered accountant working as a senior finance and accounts executive, claimed exemption of house rent allowance under s.10(13A) for assessment years 2009-10 to 2011-12 - Rs 2,21,640, Rs 2,52,000 and Rs 2,58,000 respectively - on rent said to be paid to her mother at Rs 31,500 a month in cash for a one-bedroom flat of 400 square feet at Neha Apartments, Andheri. She and her husband jointly owned a two-bedroom flat at Tropicana about five minutes' walk away, which she had returned as self-occupied, claiming deduction under s.80C for repayment of the housing loan and a loss under the head income from house property for the interest, and which was the address on her return, her ration card and her bank account. There was no leave and licence agreement, no cheque payment, no intimation to the society, and no cash withdrawals from her bank account to match the rent - she accepted that her husband met the household expenses and that her own withdrawals were minimal. Her mother had filed no return for six assessment years and filed one for assessment year 2011-12 only on 21 March 2013, after the enquiry began; notices under s.133(6) served on her went unanswered and she was not produced. An inspector deputed by the Assessing Officer visited both flats and made enquiries of the secretaries and watchmen of the two societies, and reported that the assessee lived at Tropicana with her husband and daughter while her mother lived at Neha Apartments with an unmarried daughter. Affidavits of the assessee and her mother were filed for the first time before the Tribunal, without any application under rule 29 of the Income-tax (Appellate Tribunal) Rules 1963. The assessment for 2010-11 was under s.143(3); that year's order was the basis for reopening 2009-10 by a notice under s.148 dated 5 April 2013. The matter was decided on 2017-03-30 by the ITAT (ITAT Mumbai - Shri C.N. Prasad (Judicial Member) and Shri Ramit Kochar (Accountant Member)). On those facts the ITAT held as follows. All three appeals were dismissed and the exemption denied. The arrangement of rent payment to the mother was held to be a sham entered into with the sole intention of claiming exemption of house rent allowance and reducing tax, so the payments were not genuine payments of rent (para 11).
The Tribunal put the burden where the facts lay. Under s.106 of the Indian Evidence Act 1872 a fact especially within a person's knowledge must be proved by her, and the evidence that would ordinarily exist while a tenancy is running - a leave and licence agreement, an intimation to the society, payment through a bank, cash payments traceable to a known source, utility bills paid by cheque, correspondence of the period - was simply absent; the Tribunal invoked s.6 of that Act and the doctrine of res gestae for the proposition that evidence contemporaneous with the transaction is what counts (para 11). Rent receipts written by the mother, standing alone and unsupported by any cash withdrawal, did not inspire confidence. Against the claim also stood the mother's failure to return the rental income for six years and her filing for one year only after the enquiry started, her failure to answer notices under s.133(6), and the assessee's failure to produce her. On the probabilities, the Tribunal thought it improbable that a married woman would leave her husband and daughter to pay substantial rent for a smaller flat five minutes away that she could visit freely, and noted that contributing to the support of an aged parent is not the same thing as paying rent. The affidavits filed for the first time before it were not admitted for want of an application under rule 29, and in any event only repeated what was already on record. On the complaint that the inspector's report had not been furnished and no cross-examination allowed, the Tribunal held the right of cross-examination is not absolute: it becomes absolute where the assessee has discharged the primary onus and the authorities nonetheless act on a third party's statement taken behind her back, but here the primary onus was never discharged - and, it added, even leaving the inspector's report out of account the material on record did not inspire confidence that the rent transaction was genuine (para 11). In the words reproduced by the source cited on this page: "These facts are especially in the knowledge of the assessee and burden is on the assessee to bring out these evidences to substantiate her contentions that rent paid was genuine but such evidences are not forthcoming."
It was decided by the ITAT on 2017-03-30 and is reported as [2017] 80 taxmann.com 2 (Mumbai - Trib.) / [2017] 57 ITR(T) 497 (Mumbai) / [2017] 164 ITD 120 (Mumbai) / [2017] 186 TTJ 689 (Mumbai); IT Appeal Nos. 1983 to 1985 (Mum.) of 2015, assessment years 2009-10 to 2011-12, order dated 30 March 2017. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 10(13A), section Rule 2A, section 133(6), section 148, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. All three appeals were dismissed and the exemption denied. The arrangement of rent payment to the mother was held to be a sham entered into with the sole intention of claiming exemption of house rent allowance and reducing tax, so the payments were not genuine payments of rent (para 11). It arises in Salary & Perquisites, Capital Gains Exemptions and Evidence & Burden of Proof matters, on section 10(13A), section Rule 2A, section 133(6), section 148 of the Income Tax Act 1961, and was decided by ITAT Mumbai - Shri C.N. Prasad (Judicial Member) and Shri Ramit Kochar (Accountant Member). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Put a written leave and licence or tenancy agreement in place before the first payment, not retrospectively. Make sure the relative returns the rent as income from house property in her own return for the same years. Be able to show occupation of the rented flat - utility bills, address on records, correspondence - because that is where this claim failed. Do not claim a property as self-occupied and simultaneously claim HRA on a second premises in the same city without an explanation the officer can test.
Validity check could not be completed. Nothing later was found. A citation search on 164 ITD 120 returns three documents - the order itself, one article and a commentary paragraph on Rule 2A - and no decision citing, following or doubting it. The rectification order of 22 October 2018 on which the earlier note rested is not carried in the database and could not be checked; note also that the sentence attributed to it, that even leaving the inspector's report out of account the material did not inspire confidence, is in this order itself at para 11, so a secondary report may simply have been restating this order. No appeal to the High Court surfaced. The decision rests on a finding of fact and is a Tribunal decision, so it persuades rather than binds. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order has now been read. What the Tribunal did not lay down is a checklist: it decided the case on a finding that the arrangement was a sham, so the absence of any one item of evidence is not by itself fatal. Two points in the earlier note need correcting. The cross-examination question was answered in this order, not in a later rectification: the Tribunal held that the right of cross-examination is not absolute, that it hardens into an absolute right only where the assessee has discharged her primary onus and the authorities still act on a third party's statement recorded behind her back, and that even setting the inspector's report aside the material did not inspire confidence. And the rectification order said to have been rejected on 22 October 2018 is not carried in the database, so it cannot be relied on. Note also a feature the entry did not record, and which probably decided the case as much as anything else: the assessee had returned the flat she owned as self-occupied, claiming both the s.80C deduction for loan repayment and a loss for interest, while claiming house rent allowance for living elsewhere. Read against the entries in this library allowing HRA on rent paid to a spouse, the line is the same - genuineness, not relationship - but this assessee failed on evidence that would exist if the tenancy were real. It does not tell you what happens where the paperwork is complete but the officer still suspects the arrangement. It does not decide what weight an inspector's report carries where the assessee has discharged her primary onus - the Tribunal said only that in that situation the right to cross-examine would become absolute, which is an observation and not a decision on facts it had to apply. It predates the documentation regime under Rule 26C and Form 12BB and says nothing about the landlord PAN reporting threshold, and it does not address whether the mother could have been assessed on the rent had it been genuine. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All three appeals were dismissed and the exemption denied. The arrangement of rent payment to the mother was held to be a sham entered into with the sole intention of claiming exemption of house rent allowance and reducing tax, so the payments were not genuine payments of rent (para 11).
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
My return was only processed under 143(1). Does that stop the department reopening it later?
How much am I actually required to disclose — and can they reopen because the officer drew the wrong conclusion?
The sanctioning authority just wrote 'yes' and signed. Is that a sanction?
A reassessment was done in between. Does the two-year clock for s.263 restart from it?