ITAT Delhi in the case of Abhay Kumar Mittal vs. DCIT held that on the basis of the facts and the circumstances of the case, rent paid to the wife of the assessee by the assessee himself shall be allowed as a deduction from House rent Allowance (HRA) received from the employer.
Read the case details.
Facts of the case:
The case of the assessee was selected for scrutiny assessment and was completed u/s 143(3) for the AY 2013-14. In the assessment order, the AO made an addition of Rs. 3,73,800/- being the rental income paid to his wife on which assessee claimed HRA Exemption.
Issues:
Whether the rent paid to the wife is allowed as a deduction from House Rent Allowance (HRA) and is subject to clubbing provisions in the hands of the husband
Arguments of the assessee:
The assessee submitted that the Income Tax Act does not prohibit claiming HRA exemption on the rent paid to one’s spouse. The assessee’s wife is a qualified medical practitioner. The amount was invested by the wife of the assessee out of her own sources. She had tax free income as a source of income from where the Spouse accumulated funds to purchase the property.
Arguments of the department:
It was the case of the department that the property was transferred to the wife for inadequate consideration.
Further, CIT(A) held that accommodation can’t be shared if one claims that he or she is paying rent. There must be a complete house or a part of a house with a clear demarcated portion in which the one is staying in rent. A tenant can’t share living spaces in a house with the landlord in rented accommodation. Thus, it establishes that if one is staying, along with his/her spouse in the same accommodation, HRA deduction cannot be claimed.
The Assessee is the second holder in various investments made in name of the Spouse and thereby deemed to consider that the investments were made by the Assessee.
The Decision:
The ITAT held that 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 house has been registered in the name of the wife. The sources for purchase of the house in the hands of the wife of the assessee are proved.
The contention that the husband cannot pay rent to the wife is devoid of any legal implication.
In the end, the Tribunal allowed the appeal of the assessee and deleted the addition. Hence, the rent paid to the wife of the assessee is allowed to be eligible for claiming HRA exemption and the rental income cannot be clubbed with the asseessee.
Analysis:
In the instant case, the AO disallowed the HRA exemption from the rent paid to the wife of the assessee. Also, the rental income was added back in the income of the assessee after the allowance of standard deduction of 30% from the rental income paid to his wife.
Nevertheless, this decision once again reiterates the legal principles that in the eyes of income-tax law, both the husband and wife are different persons and if the rent payment to wife is genuine, rental payment to wife or spouse cannot be disallowed. The arrangement shall not be a sham transaction.
Also See: HRA Tax Exemption Allowed for Rent Paid to Spouse - ITAT
The view that rent cannot be paid to the spouse as the relationship between a husband and wife is not commercial in nature does not bear merit under the income-tax laws and this opinion is without basis. Neither the Income-Tax Act, 1961 nor the Income-Tax Rules, 1962, prohibit claiming HRA exemption on the rent paid to one's spouse.
Further, CBDT Circular No. 388 dated 16th July 1984 states that only the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee qualifies for exemption from income-tax. Thus, house rent allowance granted to an employee who is residing in a house/flat owned by him is not exempt from income-tax.
One should be careful in claiming the exemption for payment of rent to the wife. In case the house property is transferred in the wife’s name without consideration and then pays her rent, such rental income will be subject to clubbing provisions. Even though HRA deduction may be allowed in that case, with the clubbing of income, the deduction will be neutralized.
In this case, it was proved that the wife of the assessee has acquired the property out of her own resources and then rented the same to the assessee. One must be mindful of applying the judicial precedents as each case is decided on the basis of the facts of each case.
Other articles on HRA Exemption
HRA Tax Exemption for Rent Paid to Parents and Spouse
HRA Exemption is allowed on actual payment of rent
HRA Tax Exemption Not Allowed for Rent Paid to Mother–ITAT
HRA Tax Exemption Allowed for Rent Paid to Spouse - ITAT
Full text of the judgment:
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
Assessee by : Sh. Rajesh Mahana, Adv.
Revenue by : Sh. Sanjay Kumar, Sr. DR
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.
2. 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.
2. The Ld . 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.
3. The Ld . 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.
4. That the CIT(A) has erred in law and on facts that the Rental Income cannot be taxed twice , both in hands o f the Assessee as well as the Spouse , since the Spouse had declared the Rental Income and accordingly filed her Income Tax Returns.
5. That the CIT (A) has erred in law in making observations that the property has been trans ferred for inadequate consideration . Such observation has no reference w.r.t. Section 27 o f the Income Tax Act, 1961.
6. 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 rent. 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.
7. That the CIT(A) also erred to not to consider other income i .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 o f 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 .
8. 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 Assessee.”
3. The assessment in this case has been completed u/s 143(3) of the Act on 03.03.2016 at taxable income of Rs .66,88,240/- inter alia making an addition o f 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 o f 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 o f source/sources o f 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 ma jor 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/- a fter allowing deduction u/s 24A @ 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 .
4. The ld. CIT(A) confirmed the addition holding that the claim o f 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 o f 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/-
5. The ld . 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 o f 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.
6. 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 o f mutual funds and fixed deposits.
7. Heard the arguments o f both the parties and perused the material available on record .
8. 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 deposits. 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 o f 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
9. In the result, the appeal of the assessee is allowed .
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
Download ITAT Order in ITA No. 3385/Del/2019 on HRA Exemption for Rent Payment to Wife in pdf format.
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