Rent payment to wife and HRA Deduction

Rent payment to wife and HRA Deduction

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Rent payment to wife and HRA Deduction

One of the most common questions by the salaried taxpayers is whether I can pay rent to my wife and claim HRA? Or Whether I can pay rent to my wife and claim HRA?
Let us discuss this and one of the important judgments where it has been decided in favour of the taxpayers.
Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly.
This allowance is for expenses related to rented accommodation. If you don’t live in a rented accommodation, this allowance is fully taxable.
In short, the taxpayer is entitled to claim the HRA exemption for rent paid to anyone provided there is documentation to prove that the arrangement is genuine.
It may be noted that neither the Income-Tax Act, 1961 nor the Income-Tax Rules, 1962, prohibit claiming HRA exemption on the rent paid to one’s spouse. The conditions associated are:
  1. The house should be owned by the wife. The law requires that the house or property should be in the name of the person who is receiving the rent.
  2. Husband must pay the rent to the wife according to the rent agreement and get rent receipts from them.
  3. Mere declaration or submission of rent receipts won’t be sufficient, you must pay the actual rent
One of the judgement recently decided by the ITAT Delhi is as under:

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘A’, NEW DELHI

Before Sh. A. D. Jain, Vice-President
Dr. B. R. R. Kumar, Accountant Member
ITA No. 3385/Del/2019 : Asstt. Year : 2013-14
 
Abhay Kumar Mittal,
Flat No. A-42, Himalayan Residency, Plot No. 10, Sector- 22, Dwarka, New Delhi-110077
Vs
DCIT,
Circle-72(1), New Delhi
(APPELLANT)
(RESPONDENT)
PAN No. AAJPM3747K
Assessee by : Sh. Rajesh Mahana, Adv.
Revenue by : Sh. Sanjay Kumar, Sr. DR
 
Date of Hearing: 07.12.2021
Date of Pronouncement: 08.02.2022
 
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of ld. CIT( A)- 21 , New Delhi dated 21 .01. 2019.
  1. . Following grounds have been raised by the assessee:
“1 . The CIT( A) has erred in law and on  facts  in confirming the addition made by the Ld.  Dy. Commissioner of  Income Tax  Circle 72( 1),  on  account of Rental Income amounting  Rs.3,73,800/-  earned  by the Spouse of the Assessee, in the  hands  of  the Assessee, U/ s 64 of the Income Tax Act, 1961 .
  1. . The      CIT(A),  misconstrued  the   fact and law and confirming the imposition of provisions of clubbing and   disallowing   the   rent   paid   to   spouse by    the Assessee,   as    his    investment/ funding towards the purchase of  the Property and further, clubbing  Rental Income  earned  from  that  Property with  the  Income  of the  Assessee U/s 64 of  the  I. T. Act, 1961 .
  1. .  The  CIT  (A)  has, further failed to appreciate facts that the  Part of  Financial Loan assistance  stands returned by the Spouse to the Assessee on 02 .08 . 2013 Rs.7 ,50,000/- and  19 .07 .2015 Rs.50 ,00,000/-. That the case was selected for scrutiny through CASS and Notice U/s 142 ( 1) of the Income Tax Act, 1961  was issued on 12 .10 .2015 .
  1. . That the  CIT( A)  has  erred  in  law  and  on facts that the Rental Income  cannot  be  taxed  twice, both  in hands of the Assessee as well as the Spouse, since  the Spouse    had    declared    the     Rental Income and accordingly filed her Income Tax
  1. .  That  the  CIT  (A)   has  erred  in   law  in making observations that the property has been transferred for inadequate Such observation  has  no reference  w.r. t.   Section  27   of the Income Tax Act, 1961 .
  1. .  That   the   CIT   ( A),   further   misconceived the provisions  of   the  Act,  to   state  that accommodation can’t be  shared  if  one  claims  that  he or she  is paying rent.  There  must  be  complete  house or a part of house with clear  demarcated  portion  in which  the   one   is staying  in    A tenant  can’t share living spaces in a house with the landlord in  a rented   accommodation. Thus,  it   establishes  that  if one  is  staying,  along  with his/ her  spouse   in   the same  accommodation,   HRA deduction cannot be claimed.
  1. .  That  the  CIT(A)  also  erred  to not  to consider other income e.  tax  free income  of  the spouse of  the assessee as  a source of  income from where the Spouse accumulated funds to purchase the property.  Further, the   CIT( A)   erred   in   law   and facts of the case to consider that the Spouse of the Assessee only declared Income from Profession  in  2 years i.e. 2001- 02  and 2003 – 04 and held that the Spouse of the Assessee did not had the  substantial taxable income to justify her source of income from purchase of the property.
  1. . That the  CIT( A) also  erred  in  law  to consider and observe   that   the   Assessee   is   the   second holder  in various investments made in name of the Spouse and thereby deemed to consider that the investments where made by the ”
  1. .  The   assessment  in   this   case   has   been   completed u/ s 143 ( 3 ) of the   Act   on   03 .2016   at   taxable   income of Rs.66 ,88 ,240/- inter alia making an addition of  Rs.3 ,73 ,800/-. On perusal of assessment order, it is observed that assessee claimed to have paid rent  to his  wife  Mrs.  Shivani Mittal  during the  period  September  2012  to March  2013 totaling to a sum of Rs.5 ,34,000/-. During assessment proceedings,  Assessing Officer  required the   assessee   to explain the  capacity of assessee’ s wife  to purchase  the property giving  details  of source/ sources  of  funds  for  the same.  It was  explained  by  the assessee  that  property  worth Rs. 1.15 .Crore  was  claimed  to be purchased  by   assesssee’s wife  for   which  amount  of   Rs.87 .50 lacs   were   funded   by the   assessee   himself   and    remaining amount   was   claimed to   have   been   invested  out   of   her   own sources   i.e. maturity   of   FD    amounting   to    Rs.33.25   lacs. However  it was noticed by the  Assessing Officer that  assessee’ s wife,  in fact, had  no independent source of  income to make the investment in the FDR’s and  the  major share of  Rs. 87.50  lacs was also funded  by  the  assessee.  In these  circumstances,  it was held by  the  Assessing Officer that the  rental income earned by Mrs. Shivani Mittal, the W/o the assessee is liable to be clubbed in the hands of the  assessee since it  is  proved that the investment to have purchased the property was in fact was made without having any independent source of income. Accordingly  Assessing  Officer  clubbed  the  rental  income  of Rs.5 ,34,000/- after  allowing  deduction  u/ s 24 A @ 30%  (Rs. 1 ,60,200/-) in  the  hands  of  the  assessee  and  addition  of  Rs. 3 ,73,800/- was made in the hands of the assessee.
  1. .  The    CIT( A) confirmed  the  addition  holding  that the claim  of  the  appellant  that  the  investment  has  been made in the house property by  his  wife  from  her  own independent resources, is also not found to be acceptable. While confirming, the ld. CIT(A) relied on the income summary statement of Smt. Shivani Mittal, for the assessment year 2001 -02 and 2003- 04 wherein she  has  shown income from profession of  Rs.57,400/- and Rs.1,48 ,900/- respectively. The ld. CIT( A) further relied on the total taxable income shown in the ITR filed from  the assessment year 2001 – 02 till A.Y 2012- 13 which is as under:-
Assessment Year      Income    Returned  ( In Rs.)
2001-02
86,946/-
2002-03
1 ,05.950/-
2003-04
1 ,48,900/-
2004-05
Nil
2005-06
1 ,44,855/-
2006-07
3 ,36,580/-
2007-08
1 ,72,663/-
2008-09
2 ,16,961/-
2009-10
1 ,68,547/-
2010-11
2 ,90,000/-
2011-12
1 ,52,356/-
2012-13
3 ,27,315/-
2013-14
3 ,73,800/-
  1. . The    CIT( A) held  that  it is  evident  that  there  is no substantial taxable income shown by  appellant’s wife  during the above assessment years, on the basis of  the  same, it can easily be  inferred  that  she  had  no   substantial  source  of income through which she can make investment in her  own capacity either in the property or in the mutual funds etc. The ld. CIT( A) also observed that in most of  the  cases,  appellant is the  second holder  in  various  investments  made  in   the  name of Shivani Mittal.
  1. .  Before us,  it was  submitted that Income Tax  Act does not prohibit  claiming  HRA  exemption  on   the   rent  paid   to one’ s spouse,  that  her  wife  is qualified  medical  practitioner and she has returned the loan extended to her by the assessee from liquidation of mutual funds and fixed deposits.
  1. . Heard the arguments of  both  the  parties  and  perused the material available on
  1. .  We  find  that  the  assessee’ s wife  who  has  low returned income but received loan from  the  assessee  and  she has repaid the loan from the redemption of mutual funds and liquidation  of fixed    There  is  no bar  on  the  part  of the  assessee  to extend  loan  from  his   known  sources  of income  to   his   wife. Similarly,  there  is  no bar  on  the assessee’ s wife  to  repay  the loan  from   her   own   mutual funds   and   fixed   deposits.  The assessee has paid house rent and  the  recipient, the  assessee’s wife has declared the same under the head “income from house property”  in her  returns which   has   been   accepted   by   the revenue.  The  copy  of which  has  been  placed  before  us.  The house has been registered in the name of Smt. Shivani Bansal. The ld. CIT( A)’s observation that  the  assessee  has  got  meager income  hence he cannot  afford  to purchase  a house  cannot  be accepted  as the  sources for purchase of the house in the  hands of  Smt. Shivani Bansal are proved  rather  never  doubted.  The ld. CIT( A)’s contention that the husband cannot pay rent to the wife is devoid  of  any  legal  implication  supporting  any  such contention. Hence, keeping in view the  entire facts of  the  case, we hereby allow the appeal of the assessee.
  1. . In the result, the appeal of the assessee is Order Pronounced in the Open Court on 08/ 02/ 2022 .
Sd/-                                                                     Sd/
 (A. D. Jain)                                     (Dr. B. R. R. Kumar)
Vice President                             Accountant Member
Dated: 08/02/2022
Subodh Kumar, Sr. PS Copy forwarded to:
  1. Appellant
  2. Respondent
  3. CIT
  4. CIT(Appeals)
  5. DR: ITAT
ASSISTANT REGISTRAR

1 Comment

  1. March 4, 2022
    Yogesh Kumar

    Very well reasoned order.

    Reply

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