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Rent from Children can’t be treated as a Tool for Evasion if it is a Genuine Arrangement for Tax Savings: ITAT [Read Order]

Renting Property - Taxscan

In a significant ruling, the Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the rent received from son and daughter of the assessee could not be treated as a tax evasion tool if the same was a genuine arrangement for tax savings.

In the instant case, the assessee has claimed a loss of Rs.15,32,120 and adjusted the loss against the rental income of Rs. 9 lakhs which was received by him from his unmarried, working son and daughter residing thereat along with the assessee’s other family members. He Assessing Officer, under an impression that nobody would charge rent from his own son and daughter, particularly considering that both are unmarried and living together with their family at its’ self-owned abode. He, therefore, treated the same as a device to evade tax and made an addition.

Concurring with the contentions of the assessee, the Tribunal noted that the arrangement is highly unusual, particularly considering that the rent is in respect of a self-owned property (i.e., for which no rent is being paid), which constituted the family’s residence, with, further, the assessee’s son and daughter being unmarried.

“However, to our mind, may not be conclusive of the matter. Being a private arrangement, not involving any third party, not informing the cooperative housing society may also not be of much consequence. The Revenue has rested merely by doubting the genuineness of the arrangement, without probing the facts further,” the Tribunal said.

“Why, there was even no attempt to inquire if the arrangement was a subsisting/continuing one, or confined to a year or two, strongly suggestive of, in that case, a solely tax-motivated exercise,” the Tribunal added.

The Tribunal also noted that the assessee’s major son and daughter are financially independent (or substantially so), 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 savings to the assessee-father. A genuine arrangement cannot be disregarded as the same results or operates to minimize the assessee’s tax liability. ……………………. We are, accordingly, in principle, in agreement with the assessee’s claim inasmuch as, as afore-noted, there is nothing on record to further the Revenue’s case of the arrangement being not a genuine arrangement, i.e., apart from being unusual,” the Tribunal said.

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