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Landmark Caselaw on HRA claim

Written By Admin on Tuesday, 1 October 2013 | Tuesday, October 01, 2013

Staying in a house your wife owns? You could now give her rent and claim house rent allowance (HRA) exemption. In a landmark ruling, the Ahmedabad Income Tax Appellate Tribunal has sided with a person whose HRA exemption was rejected by the IT officers on the ground that the landlord was his wife.

“Assessee 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 very fact that the landlord and tenant are staying together which indicates that the whole arrangement is of the nature of colourable device,” the income tax officers had contended, disallowing an exemption of Rs111,168 to the assessee, Bajrang Prasad Ramdharani, for 2009-10.

On appeal, however, the Tribunal ruled that since the house was owned by the wife and rent was paid, which was proven via bank transfers, Ramdharani is entitled to exemption under section 10(13A), which pertains to HRA under Income tax Laws, 1961.

Since the appellant fulfilled the twin requirement of occupying the property and paying rent, he is liable to get rent exemptions, the Tribunal held.

The ruling is likely to set the benchmark in similar cases, said chartered accountants, pointing out that the practice has so far been frowned upon by the authorities concerned.

“Theoretically, there is nothing in the law that prevents it (paying rent to your spouse and claiming HRA exemption), but it stinks of ‘bogusness’ and is therefore not honoured by employers or the assessing officers,” said Ameet Patel, a Mumbai-based chartered accountant.

Mehul Sheth, another Mumbai-based chartered accountant, said, technically, if your wife is earning and the house is solely owned by her then you are liable for HRA exemptions. “ In case your wife is not earning, then you can’t claim this provision since the incomes of the husband and wife would then get clubbed.”

To be sure, where a person is living in a house owned by his parents, he can claim tax exemption by producing receipts of rent paid to them. They, in turn, need to show the rent received as income from other sources in their income tax returns. The Tribunal appears to have extended this reasoning to the spouse now.

But Sandeep Shanbhag, another Mumbai-based chartered accountant, put in a caveat. “HRA exemptions were not allowed if the rent was being paid to the spouse since husband and wife typically don’t have a commercial relationship. However, now that the court has allowed this, based on the merits of the case, others can try and take the route. However, they should be ready for litigation as the income tax officer may still not allow it.”

Calculating HRA 
The HRA exemption granted is the least of these three options
a) Actual HRA amount received

b) The amount of rent you pay for your house in excess of 10% of your basic pay

c) 50% of basic salary if you reside in a metro city and 40% for 
non-metro.

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