Rent from children not a tax evasion tool, rules ITAT

Receiving rent from your children will not be treated as tool for tax evasion, provided it is for genuine tax-saving arrangement, Income Tax Appellate Tribunal (ITAT) has ruled.

ITAT is a quasi judicial institution set up in January, 1941 and specialises in dealing with appeals under the Direct Taxes Acts, such as Income Tax Act 1961. The orders passed by the ITAT are final, an appeal can be made to the High Court only if a substantial question of law arises for determination. An order by ITAT is binding on the concerned parties and can be used as persuasive in similar matter.

The said matter here involves an income-tax assessment order where the official did not accept the claim of the assesee, who is the petitioner. He had claimed a loss of ₹15,32,120 on account of interest (on borrowed capital) at ₹21,62,120, adjusting it against the rental income of ₹9 lakh. The said rent was, on the basis of a field enquiry by the Assessing Officer (AO), found to be from the assessee’s major son and daughter, Neha Pathan, residing along with the other family members.

Nobody would, in the view of the AO, charge rent (for residence) from his own son and daughter, given that both are unmarried and living together with the family in their own property. The arrangement was therefore regarded merely as a tax-reducing device adopted by the assessee and liable to be ignored. Treating the house as a self-occupied property, the AO restricted the claim of interest to ₹1.50 lakh, which was confirmed later by the appellate officer.

The assessee claimed that that there was nothing to show that the arrangement, duly supported by written agreements and furnished, was fake or a make-believe. Also, it was said that the rental income cannot be overlooked or disregarded merely because it arises from close family members.

‘Unusual arrangement’

After hearing both sides, though the Bench admitted that it is an unusual arrangement, “That, however, to our mind, may not be conclusive of the matter.” The Bench was also conscious of the fact that assessee’s major son and daughter are financially independent, with independent incomes, sharing the interest burden of their common residence with their father. And, as such, instead of transfer of funds to him per se , have regarded, by mutual agreements, the same as rent, as that would, apart from meeting the interest burden to that extent, also allow tax saving to the assessee-father.

Further, it said that a genuine arrangement cannot be disregarded as the same results or operates to minimise the assessee’s tax liability. “We are, accordingly, in principle, in agreement with the assessee’s claim inasmuch as, as aforenoted, there is nothing on record to further the (Department of) Revenue’s case of the arrangement being not a genuine arrangement, that is, apart from being unusual,” it said.

This ruling is expected to help a lot of assesses who submit rent receipts from the family members for tax savings. However, in most of cases, the rent recipient is husband or wife. Now, it will be interesting to see how husband or wife will be treated compared to a son or a daughter at the tax assessment.

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