Rent Paid to Mother: ITAT disallows HRA based on sham rent payments supported only by rent receipts

The Brief facts of the case as they will unfold are in a very narrow compass . The assessee is a chartered accountant working as Senior Finance and Accounts Executive with East India Hotels Limited. The A.O. during the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of 1961 Act observed that the assessee is staying in his own house in Mumbai as the assessee had claimed deduction u/s 80C of the Act for housing loan repayment . It was also observed by the AO that House Rent Allowance(HRA) of Rs. 2,52,040/- received by the assessee from her employer was claimed as exempt by the assessee as per provisions of Section 10(13A) of the Act. The assessee was asked by the AO vide SCN dated 14-02-2013 as to why HRA claimed as exempt should not be added to income of the assessee and consequently brought to tax under the provisions of 1961 Act.

The assessee submitted that she has paid a rent of Rs.31,500/- per month to her mother in cash.

What does ITAT say in this matter?

The doctrine of Res gestae will set in. The assessee could not produce any evidence arising in the normal course of happening of transaction of hiring of premises such as leave and license agreement, letter to society intimating about her tenancy, payment through bank, cash payments backed with known sources, electricity bill payments through cheque, water bill payments through cheque , some correspondence coming during that period of alleged tenancy to prove that transaction of hiring of premises was genuine and was happening during the said period. In-fact we have observed that no such cogent evidence has been brought on record which could substantiate that the assessee had taken the said premises on rent from her mother as no evidence of her actually staying at the said premises were produced on record. The assessee was in-fact staying in her own flat at ‘Tropicana’ with her husband which is emanating from various evidences which are on record such as ration card, bank statements, return of income filed with Revenue etc which is also in consonance with normal human conduct of Indian married women living with her husband and daughter in a residential flat owned by the assessee jointly with husband , the assessee also did not bring any cogent evidence to substantiate that she had taken the residential flat at ‘Neha Apartment’ on rent from her mother. The mother of the assessee has also not filed return of income since last six assessment years and said rental income was not brought to tax in the hands of mother of the assessee. The assessee could also not able to bring on record any cogent evidence to prove that her un-married sister Ms Vimla was living at Bhayander. Even on touchstone of preponderance of human probabilities , it is quite improbable that the assessee was living with her mother at ‘Neha Apartments’ and paying her substantial rent of Rs. 31,500/- per month for a small flat of 1 BHK of 400 square feet while her own house was at just five minute walking distance at ‘Tropicana’ . It is also improbable that the assessee being a married lady will leave her husband and daughter and start living with mother at another residential flat which is just five minute walking distance and pay huge rent per month. It is different matter that the assessee may look after her old and sick mother by frequent visits but this theory of rent as set out by the assessee did not inspire confidence keeping in view material produced before us. It is also probable that the assessee may contribute towards looking after her old and ailing mother out of salary but the same is not sufficient to claim exemption u/s 10(13A) of 1961 Act. Looking into all these factual matrix of the case before us, we are of considered view that the whole arrangement of rent payment by the assessee to her mother is a sham transaction which was undertaken by the assessee with the sole intention to claim exemption of HRA u/s 10(13A) of 1961 Act in order to reduce tax liability and hence in our considered view, exemption u/s 10(13A) of the Act cannot be allowed to the assessee as the payments towards rent are not genuine payment . The evidences on record are speaking loudly which is just opposite to what the assessee is contending. Even if we eschew report of inspector , then also material on record do not inspire confidence that the transaction of rent was a genuine transaction as discussed by us in detail above. The right of cross examination is not absolute. The assessee has to first discharge its primary onus cast under law and if the same stood duly discharged which is not rebutted by authorities, but despite that then also the authorities proceed to put assessee to prejudice solely relying on the basis of incriminating statement recorded of third party at the back of the assessee, then certainly the right to cross examination the said third party whose incriminating statement recorded at the back of the assessee is relied upon by authorities to prejudice the assessee will become absolute. But in the instant case , primary onus cast on the assessee itself did not stood discharged by the assessee as discussed above. The assessee could not prove the genuineness of the rent paid by the assessee to her mother Mrs. P B Dorwani for alleged renting of ‘Neha Apartments’ and usage of the said premises ‘Neha Apartments’ by the assessee. Under these circumstances, we find no infirmity in the order of the ld. CIT(A) and we confirm the same and dismiss the appeal of the assessee. We order accordingly.

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