Is rent paid to wife eligible for HRA exemption?

Husband and wife are expected to live in the same house and if one is paying rent to the other; it may sound odd, isn’t it? What would be the reason for such payment? Maybe tax planning, reduce the tax outputs! Will such exemptions, if claimed by the taxpayer, be allowed by Income Tax department? Common sense says ‘No’, agree? But here is a case where the department allowed such a claim. Read to know more about it

Facts of the case

The Income Tax return filed by Mr. Bajrang Prasad Ramdharani (called as ‘taxpayer’) was picked up for scrutiny assessment by the department. During the course of assessment, the Assessing Officer (AO) disallowed HRA exemption claimed by the taxpayer and passed assessment order.

Aggrieved by the Order, the taxpayer filed an appeal before CIT (Appeals). CIT (Appeals) confirmed the order of the Officer in respect of disallowance of HRA exemption.

Again, the taxpayer went on appeal to Income Tax Appellate Tribunal (ITAT).

The contentions of Assessing Officer (AO)

The AO disallowed the claim of the assessee on the ground that the taxpayer has not given details of payment and evidences, and also on the basis that the taxpayer and his wife are living together, hence the claim of payment of rent is just to avoid payment of taxes and to reduce the tax liability

The contentions of CIT (Appeals)

The rent is paid by the taxpayer as a tenant to his wife who is a landlord and he found that the landlord and tenant are living together in the same house property and the very fact that the landlord and tenant are staying together which indicates that the whole arrangement is of the nature of colourable device. He observed that since it is evidently a colourable device, the amount purportedly paid as a rent will not qualify for exemption u/s.10(13A)

What section 10(13A) says –

“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 situate 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;

The Order of ITAT

The Order of ITAT said that “the assessee has fulfilled twin requirements of the provision, i.e. occupation of the house and the payment of rent. Under these circumstances, the assessee is entitled for exemption u/s.10(13A) of the Act.

Thus, the rent paid to his wife legitimately through bank transfers should be eligible for tax exemption.

One should also note that this is the order passed by ITAT, Ahmedabad. So, based on this order the assessing officers needn’t pass favorable orders in other cases. ITAT or other courts may be of contrary opinions. Hence, exemption claimed on payment of rent to wife will be subject to litigations.

Read Also :  13 things to know about House Rent Allowance

Thought for the day

We learn something every day if we pay attention.

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