Mar 302021
 
Total rental income

Standard Deduction @ 30%

Interest on borrowed capital

Rs 9,00,000/-

Rs 2,70,000/-

Rs 21,62,120/-

Loss under the head House Property Rs 15,32,120/-

 

Details of rent income and issue involved: The above rent was, on the basis of a field inquiry by the Assessing Officer (AO), found to be from the assessee’s major son, Roman Pathan, and major daughter, Neha Pathan, residing thereat along with the assessee’s other family members. Nobody would, charge rent (for residence) from his own son and daughter, particularly considering that both are unmarried and living together with their family at its’ self-owned abode. The arrangement was therefore regarded merely as a tax-reducing device adopted by the assessee, liable to be ignored. Is this sufficient ground to ignore the rental income and treat the house property as a self-occupied property, and restrict the claim of interest u/s. 24(b) to Rs. 1,50,000?

 

Facts to be considered:

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. That, however, is not 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.

However, due to its unusual nature, it raises a doubt about the genuineness of the arrangement and needs a further investigation of the matter with respect to:

  • What is the total area, as well as its composition/profile?
  • Quantum of rent received per se the proportionate area leased out?
  • How many family members, besides the assessee (the owner) and the two tenants, are residing thereat?
  • Has the area let been specified, allowing private space (a separate bedroom each) to son and daughter,
  • Who would, in any case, be also provided access to or user of the common area – specified or not so in the agreement/s, kitchen, balcony, living area, bathrooms, etc.
  • How has the rent been received, e., in cash or through bank and, further, been sourced, i.e., whether from the assessee (or any other family member) or from the capital/income of the tenants.
  • 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?

 

In the instant case, 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 saving to the assessee-father.

 

How to claim an interest in such case u/s 24 of income tax act treating the same as against both a self-occupied and a let out property:

The house property, is, in view of the rent agreements, both a self-occupied and a let-out property. The interest claimed (Rs. 21.62 lakhs) is qua the entire property, which therefore cannot be allowed in full against the rental income, which is qua a part of the house property. The assessee’s interest claim therefore cannot be allowed in full and shall have to be suitable proportioned.

For adjusting the above interest amount, in the instant case, in view of the joint residence, be that no area (portion) is specified in the rental agreements. The number of family members living jointly; their living requirements – which may not be uniform; the fair rental value of the property, etc., are some of the parameters which could be considered for the purpose.

 

Conclusion:

Thus, a genuine arrangement cannot be disregarded as the same results or operates to minimize the assessee’s tax liability.

Sensys

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