There is tax planning and then there is oversimplified tax planning. Some of the most common tax deductions and exemptions provided under the Income Tax Act, 1961 (‘the Act) have been interpreted and oversimplified by taxpayers to their convenience. Such interpretations have often been the matter of litigation with the Tax Department and further at various appellate authorities such as tribunals and courts. Let us see some such oversimplified deductions and exemptions to understand the consequences thereof.
House Rent Allowance
A recent judgement by the Mumbai Tax Tribunal (Meena Vaswani v. ACIT) in relation to the exemption claimed for the House Rent Allowance (HRA) has revealed certain laxities on part of taxpayers. In the said case, the taxpayer was a Chartered Accountant working in a company, married to a Chartered Accountant and having a daughter. The taxpayer owned a house property and claimed the interest benefit available for self-occupied houses under the applicable section of the Act. In addition to this, she also claimed exemption for the HRA paid to her as a part of her salary. For this exemption, she claimed that she paid rent (in cash) to her mother who stayed in a separate flat, which was located close to the taxpayer’s flat. The taxpayer substantiated her claim by way of rent receipts duly signed by her mother.
However, the tax officer argued that there was no rent agreement available to back the taxpayer’s claim for exemption and further relied on the department’s field-investigation which revealed that the taxpayer was in fact staying in her own apartment while her other sister was staying along with their mother in her the flat nearby. In its decision, the Tribunal observed that the taxpayer could not produce any evidence such as a leave and license agreement, letter to society intimating about her tenancy, rent payments through bank, cash payments backed with known sources, electricity bill payments through cheque, water bill payments through cheque, or other correspondence during the period of alleged tenancy to prove she had indeed hired her mother’s premises on rent during the year. Further, documents such as the ration card, bank statements, tax returns filed, along with the fact that an Indian married woman normally lives with her husband in a jointly owned residential flat, pointed strongly towards the fact that the taxpayer had in fact not stayed on rent.
All of the above along with the fact that the taxpayer’s mother did not file her returns for any of the periods and the said rental income was not brought to tax in the hands of the mother did not help the taxpayer’s cause. Giving due weightage to all of the above factors, the case was finally decided against the taxpayer. Basis the above judgement, taxpayers need to note that HRA exemption is available only for those (actually) paying rentals for their accommodation on an arm’s length basis. All elements that usually form part of a lease agreement need to be in place to prove the genuineness of the transaction, without which the Department may see the deduction claimed in bad colour.
Leave Travel Concession
Abolition of the standard deduction for salaried taxpayers a few years back meant fewer avenues of tax-exemption and savings. Besides the HRA, leave travel concession/ allowance (LTA/LTC) is yet another exemption for taxpayers who go on exemptions in respect of money spent for their domestic vacations.
Typically, companies insist that the declarations by employees should be backed-up by the air /rail tickets for self and family (members) travelling together. In many cases, boarding passes in original need to be submitted along with air tickets. Thus, it was interpreted that the exemption , thus puts the onus of verification of expenses on the employer. In 2009, the Supreme Court of India, in the case of Larsen & Toubro, held that employers while assessing the LTC claims of employees, are under no obligation to collect and check supporting evidence and furnish them to the Tax Department.
Exemption against donations u/s 80G
Income tax returns forms over the past 2 years have made it mandatory for incorporating basic details like the donee institution’s name, address and PAN in respect of claim for donations made u/s 80G. Taxpayers who make donations will be required to obtain the receipt for the same and verify if the donations qualify for the said deduction. It is not mandatory that every donation is tax deductible. In the absence of a valid receipt, the taxpayer may be deprived of the tax benefit.
What does the future hold?
Both the above judgements, although in relation to different exemptions under the Act, in the writer’s opinion point towards an emerging trend in relation to stringent verification of tax exemptions availed by salaried taxpayers. In the case of HRA and LTC, the first-level of verification and assessment is done by the employer and the necessary exemption and taxability are accordingly stated in the employee’s Form 16.
Tax officers are slowly and steadily looking to independently verify exemption claims as given in the Form-16 during the course of assessments of salaried taxpayers. For this purpose, salaried taxpayers will be asked to reproduce all / any of the documents that were first submitted/ declared by them to their respective employers in support of their exemption claim.
As observed in Meena Vaswani’s case, the tax officer actually instituted an inquiry by his Inspector to verify the ground realities and record statements of the society secretary, watchman and neighbours to validate the claim made by the taxpayer regarding her place of stay. Borrowing from this case, tax officers may initiate inquiry reports from the airlines / railways regarding verification of traveller’s data as per documents submitted by employees at the time of claim. Records in relation to stay at hotels / resorts supporting the travel details may also be sought. Road trips could also be easily subject matter of deeper investigation by the tax officer.
During the course of tax assessments currently undertaken for salaried taxpayers, tax officers regularly demand independent verification of documents for deductions claimed under section 80C and 80D of the Act. Although these documents are regularly filed by employees with their respective companies during January-March, there is nothing stopping the tax officer from re-investigating them.
The above trend can be easily extended for various other exemptions including but not limited to medical reimbursements, petrol bills, conveyance reimbursements, driver salaries, telephone bills, etc.
Judgements like that of Meena Vaswani serve as a wake-up call for taxpayers to get their claim documentation and records straight. Corporate taxpayers are already attuned to regular scrutiny of their accounts by the taxman. As India moves closer to a more stringent tax regime, its time salaried taxpayers too brace themselves for a stricter verification.
(The author is proprietor at Arvind Rao & Associates, a Mumbai-based Chartered Accountancy firm)