Fake rent receipts will not save taxes anymore

Fake rent receipts will not save taxes anymore

Submission of fake rent receipts to show rent expense in order to reduce the tax liability has been a regular practice with many. However, a recent tribunal ruling by ITAT Mumbai Bench has changed it all. The Income Tax department will now tighten the rules and may ask for many details like leave and license agreement, proof of actual payments made through bank statements etc.

Currently, most of the private sector employees receive an allowance in the nature of HRA (House Rent Allowance). This HRA is paid in order to help you meet the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by you at the place of duty.

The Income Tax Act exempts any such HRA received by you provided you fulfill the following conditions:
You should have actually rented an accommodation
You should be actually occupying the said accommodation
Further no HRA exemption is allowable if  
The residential accommodation occupied by you is owned by you; or
You have not actually incurred any expenditure on payment of rent in respect of the residential accommodation occupied by you

Apart from this, the Income Tax Act also allows you to claim the deduction for the interest paid on your housing loan. This deduction is restricted to Rs 2 lakh per financial year if such property is self-occupied by the assessee.

It is many times seen that in order to reduce the tax liability and to save the taxes many employees claim the HRA benefits without correctly evaluating their eligibility.

To save taxes, taxpayers claim HRA benefit by showing dummy rent receipts (without actually paying any rent) even when they are staying in a house owned by them or any of their close relatives. Generally these relatives fall in lower/ Nil tax bracket as compared to the taxpayer. This results in significant tax saving for the employee as he can claim the HRA and Housing loan interest both.

The laws do not stop any taxpayer from renting an apartment from a relative or a friend and claim HRA benefit for such rental payment, provided it is a genuine transaction. If it is not a genuine one then it can lead to serious tax consequences, if caught.

In a recent order passed by ITAT Mumbai Bench ‘H’ in the case of Meena Vaswani v/s ACIT-26(1), Mumbai, the tribunal disallowed assessee chartered accountant’s claim of HRA exemption based on sham rent payment entries to her aged mother.

In this case the assessee claimed that she was staying in a house owned by her old aged mother so that she can take care of her ailing mother.

She further claimed that she was paying her mother, a monthly fixed rent so that her other siblings don’t object to her staying with her mother and since this was a transaction with her mother she never felt any need of a formal/written agreement.

Fact of the case was, she was actually staying in a house jointly owned by her with her husband, located at five minutes walking distance from her mother’s house. On a deeper scrutiny of the case, the assessee was unable to prove that she was actually staying in a rented house owned by her mother and was even unable to prove that she actually paid any rent in cash to her mother as her bank statement hardly had any cash withdrawals.

Based on the order passed in this case it is clear that the taxman is looking to catch hold of these types of sham/dummy transactions and relevant exemption claims. Going forward the tax department would definitely like to probe into the genuineness of such transactions. All the assesses who have genuine HRA exemption claims will have to ensure that they have sufficient transaction trail in the form of
 Leave and License Agreement with the landlord (preferably a registered one),
 Proof of rent payment (bank debits or bank entries for cash withdrawals)
 In case you have rented an apartment from your relative then he/she reports such rental income in the tax returns

This transaction trail will help in establishing the fairness of the HRA claim. Hence, make sure that you collect all the necessary details of the rent transactions so that you do not face the tax axe.

(The author is Head of Tax research, H&R Block India)

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