HRA HOUSE RENT ALLOWANCE

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All salaried people love to have in their salary slip. Most of salaried people will claim 100% of HRA as exemption in Form 16 J.

HRA is one area where even ITO is more interested to know during scrutiny (Read Myths about HRA). His first question in Income Tax Scrutiny is Are you claiming HRA in Form 16? The First document that ITO wants to see after Form 16 is Payment proof of Rent claimed for HRA exemption.

This is one area where people get caught & ITO may disallow HRA exemptions & thereby will increase taxable Income. This increase will make tax payer to pay tax on that increased Income & to pay interest on that.

6 Myths about HRA (wrong knowledge on HRA)

1. HRA is automatic exemption from Salary

2. Full HRA is exempt from tax

3. HRA does not need any proof of payment

4. ITO will not ask any proof on HRA Claim if it appears in Form 16

5. HRA & Housing Loan are mutually exclusive

6. Rent paid to relatives are not eligible for claiming HRA exemption

This article aims at enlightening the people more on HRA so that they can get the insight on rules & regulations of HRA. This article also helps assessee to avoid tough time at the time of Scrutiny assessment if they get selected. This also aims to prepare assessee to have proofs related to this exemption.

1) Section 10(13A) HRA section is as follows

Any special allowance specifically granted to an assessee by his employer to meet expenditure actually incurred on payment of rent (by whatever name called) in respect of residential accommodation occupied by the assessee, to such extent as may be prescribed having regard to the area or place in which such accommodation is situate and other relevant considerations

Explanation: For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply in a case where

(a) the residential accommodation occupied by the assessee is owned by him; or

(b) the assessee has not actually incurred expenditure on payment of rent (by whatever name called) in respect of the residential accommodation occupied by him.

2) Rule 2A as per Income Tax Rules (Limits for the purposes of section 10(13A)).

Lowest is allowed as exemption:

a) Actual HRA received,

b) Actual Rent Paid -10% of your basic salary.

c) 40% or 50% of Basic

3) Other points about HRA

A. Payment of Proof is must: Rent agreement is not a proof of payment. Rent receipt is must or payment through cheque on record is must to claim the HRA exemption.

B. Sharing is allowed: Both Husband & Wife can claim HRA exemption subject to that rent is shared/paid. They can claim exemption up to the share of rent paid actually by each of them.

C. No Notional Payment: The assessee needs to pay rent actually, not notionally. He can claim HRA exemption if he is paying rent to his mother or any relative (owner of the house) for the house where he resides.

D. Not for Family: The assessee cannot claim HRA exemption for the house where his parents are residing. HRA is allowance for the assessee & not for family. He can reside with family, but family cannot reside separately to claim HRA exemption.

E. Monthly Basis: HRA exemption is calculated on monthly basis rather on yearly basis. Assessee can claim HRA exemption for the part of the year too.

4) Penal Interest provisions for wrong claim of HRA

If assessee fails to provide proof of Rent payment during Income Tax assessment, then he may end up paying huge interest as mentioned below along with tax on the Increased Income because of disallowance of HRA exemption..

SI	Section	Details of interest
1	Sec 234A	1 % per month of Tax payable amount from due date of filing
2	Sec 234C	3.7% on Tax Payable amount
3	Sec 234B	1 % per month of Tax payable amount if it exceeds Rs. 10,000 from due date of filing

5) Impact of disallowance of HRA exemption by ITO during Scrutiny:

Disallowance of HRA exemption will impact more on assessee. This impact varies from person to person.

Eg: HRA exempted is Rs. 5,000 per month & Whole Year 12 months * Rs. 5,000= Rs. 60,000. If assessee fails to provide proof of rent payment, then impact is as below

AY 2009-10
SI	Particulars	10%	20%	30%
1	HRA Disallowed	60,000.00	60,000.00	60,000.00
2	Tax on HRA disallowed	6,000.00	12,000.00	18,000.00
3	Cess	180.00	360.00	540.00
4	Total Tax Payable	6,180.00	12,360.00	18,540.00
5	234A Interest	1,037.00	2,091.00	3,145.00
6	234B Interest	1,281.00	2,583.00	3,885.00
7	234C Interest	226.00	456.00	683.00
8	Total Interest	2,544.00	5,130.00	7,713.00
9	Total Outflow	8,724.00	17,490.00	26,253.00

Calculation of Interest is as on 28^th December 2010

Conclusion: Form 16 is not final. ITO has power to question & ask for proof for any exemptions or benefits claimed in this TDS certificate. Form 16 is just a proof for Salary received & Tax deducted (TDS) by employer during that financial year. It is always safe to have documentation & proof for all exemptions & benefits claimed even in Form 16.

Last but not the least, there is no relation between HRA claim & Housing loan. Assessee can claim both benefits subject to few conditions.

FAQ's on Furnishing of TDS / TCS return

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Furnishing of TDS/TCS return / statement

1. Where can I file my TDS/TCS return?

You can file your TDS/TCS return at any of the TIN-FCs managed by NSDL. TIN-FCs are set – up at specified locations across the country. Details are given in the NSDL-TIN website. These can also be furnished directly at NSDL-TIN web-site.

2. Will annual returns/quarterly statements furnished by entities who are eligible to file the same in physical form be accepted by the Income Tax Department?

No. Physical TDS/TCS returns/statements will be received at TIN-FCs

3. What are the basic details that should be included in the of e-TDS/TCS return?

Following information must be included in the e-TDS/TCS return for successful acceptance. If any of these essential details is missing, the returns will not be accepted at the TIN-FCs:

Correct Tax-deduction/collection Account Number (TAN) of the deductor / collector should be clearly mentioned in Form No. 27A as also in the e-TDS/TCS return, as required by sub-section (2) of section 203A of the Income-tax Act.

The particulars relating to deposit of tax deducted at source in the bank should be correctly and properly filled.

The data structure of the e-TDS/TCS return should be as per the structure prescribed by the e-Filing Administrator.

The Control Chart in Form No. 27A (enclosed in paper form with the e-TDS/TCS return on CD/floppy) should be duly filled and signed.

4. What are the charges for filing e-TDS/TCS return with TIN-FCs?

You have to pay charges as mentioned below:

No. of deductee records in e-TDS/TCS return Upload charges (inclusive of service tax) Returns having up to 100 records 30 Returns having 101 to 1000 records 182 Returns having more than 1000 records 606

5. What are the due dates for filing quarterly TDS Returns?

The due dates for filing quarterly TDS returns, both electronic and paper are as under:

Quarter Due Date for Form Nos. 24Q & 26Q Due Date for Form No. 27Q Due Date for Form No. 27EQ April to June 15 July 15 July 15 July July to September 15 October 15 October 15 October October to December 15 January 15 January 15 January January to March 15 May 15 May 30 April

6. Is the procedure for filing of e-TCS different from that of filing e-TDS return?

The procedure for filing of e-TCS return is the same as that of e-TDS return except that the forms to be used are different. The relevant forms for filing the e-TCS return are:

· Annual return: Form No. 27E, 27B (Control Chart)

· Quarterly statement: Form No 27EQ, 27A (Control Chart).

The e-TCS returns are also to be filed with NSDL at the various TIN-FCs.

7. Should I file TDS certificates and bank challans along with the e-TDS/TCS return?

No, you need not file TDS certificates and bank challans for tax deposited along with the e-TDS/TCS return.

8. Can more than one e-TDS/TCS return be filed in a single computer media (CD/floppy)?

No, each e-TDS/TCS return should be in a separate CD/floppy along with separate Form No. 27A for each return.

9. Can a single e-TDS/TCS return be filed in two or more floppies?

No, if the size of the return is more than what can be stored in one floppy then it should be stored in a CD.

10. Can e-TDS/TCS return be filed in compressed form?

Yes, if e-TDS/TCS return file is filed in compressed form, it should be compressed using Winzip 8.1 or ZipItFast 3.0 (or higher version compression utility only), so as to ensure quick and smooth acceptance of the file.

11. Do I have to affix a label on the e-TDS/TCS return CD/floppy? What do I mention on the label affixed on the e-TDS/TCS return CD/floppy?

Yes, you should affix a label on the e-TDS/TCS CD/floppy for identification purpose. You should mention your PAN, TAN, name, Form No., Financial Year and period to which return pertains on the label affixed on the e-TDS/TCS return CD/floppy.

12. What if e-TDS/TCS return does not contain PANs of all deductees?

In case PANs of some of the deductees are not mentioned in your e-TDS/TCS return, the Provisional Receipt will contain the count of missing PANs in the e-TDS/TCS return. You may file the details of missing PANs within seven days of the date of Provisional Receipt to TIN-FC as a corrected e-TDS/TCS return.

13. If a deductor faces any difficulty in filing of e-TDS return where can it approach for help?

The details regarding the help required for filing of e-TDS are available on the Income-Tax Department website and the NSDL-TIN website. The TIN-FCs are also available for all related help in the e-filing of TDS returns.

Easy Exit Scheme, 2011

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It has been observed that certain companies have been registered under the Companies Act, 1956, but due to various reasons some of them are inoperative since incorporation or commenced business but became inoperative later on and are not filing their due documents timely with the Registrar of Companies. These companies may be defunct and are desirous of getting their names strike off from the Register of Companies.

In order to give an opportunity to the defunct companies, for getting their names strike off from the Register of Companies, the Ministry had launched a Scheme namely, “Easy Exit Scheme, 2010” under Section 560 of the Companies Act, 1956 during May-Aug, 2010. A large number of companies availed this scheme. However, on huge demands from corporate sector, the Ministry has decided to re-launch the Scheme as, “Easy Exit Scheme, 2011” under Section 560 of the Companies Act, 1956. The details of the Scheme are as under:-

(i) The Scheme shall come into force on the 1^st January, 2011 and shall remain in force up to 31^st January, 2011.

(ii) Definitions - In this Scheme, unless the context otherwise requires, -

(a) “company” means a company registered under the Companies Act, 1956;

(b) “Collective Investment Management Company” means the company as defined in clause (h) of sub-regulation of 2 of Securities and Exchange Board of India (Collective Investment Companies) Regulations, 1999;

(c) “defunct company” means a company registered under the Companies Act, 1956 which is not carrying over any business activity or operation on or after the 1^st April, 2008 and includes a company which has not raised its paid up capital as provided in sub sections (3) and (4) of section 3 of the Companies Act, 1956;

(d) “Non-Banking Financial Company” means a company as defined under clause (f) of section 45-I of the Reserve Bank of India Act, 1934;

(e) “Scheme” means the “Easy Exit Scheme, 2011” (EES, 2011), being specified through this Circular;

(f) “vanishing company” means a company, registered under the Companies Act, 1956 and listed with Stock Exchange which, has failed to file its returns with Registrar of Companies and Stock Exchange for a consecutive period of two years, and is not maintaining its registered office at the address notified with the Registrar of Companies or Stock Exchange and none of its Directors are traceable.

(iii) Applicability: -

(a) Any “defunct company” which has active status on Ministry of Corporate Affairs portal may apply under EES, 2011 in accordance with the provisions of this Scheme for getting its name strike off from the Register of Companies;

(b) Any defunct company which is a Government Company shall submit ‘No Objection Certificate’ issued by the concerned Administrative Ministry or Department or State Government along with the application under this Scheme;

(c) The purpose of the Scheme is to allow eligible companies to avail of this opportunity to exit from the Register of Companies after fulfilling the requirements laid down herewith and the decision of the Registrar of Companies in respect of striking off the name of company shall be final.

(iv) Scheme not applicable to certain companies: - The Scheme does not cover the following companies namely:-

(a) listed companies;

(b) companies that have been de-listed,

(c) companies registered under section 25 of the Companies Act, 1956;

(d) vanishing companies;

(e) companies where inspection or investigation is ordered and being carried out or yet to be taken up or where completed prosecutions arising out of such inspection or investigation are pending in the court;

(f) companies where order under section 234 of the Companies Act, 1956 has been issued by the Registrar and reply thereto is pending or where prosecution if any, is pending in the court;

(g) companies against which prosecution for a non-compoundable offence is pending in court;

(h) companies accepted public deposits which are either outstanding or the company is in default in repayment of the same;

(i) company having secured loan ;

(j) company having management dispute;

(k) company in respect of which filing of documents have been stayed by court or Company Law Board (CLB) or Central Government or any other competent authority;

(l) company having dues towards income tax or sales tax or central excise or banks and financial institutions or any other Central Government or State Government Departments or authorities or any local authorities.

(v) Procedure for making an application:-

(a) Any defunct company desirous of getting its name strike off the Register under Section 560 of the Companies Act, 1956 shall make an application in the Form EES, 2011, annexed;

(b) The Form EES, 2011, should be filed electronically on the Ministry of Corporate Affairs portal namely www.mca.gov.in accompanied by filing fee of ` 3,000/-;

(c) In case, the application in Form EES, 2011, is not being digitally signed by any of the director or Manager or Secretary, a physical copy of the Form duly filled in, shall be signed manually by a director authorised by the Board of Directors of the company and shall be attached with the application Form at the time of its filing electronically;

(d) In all cases, the Form EES, 2011, shall be certified by a Chartered Accountant in whole time practice or Company Secretary in whole time practice or Cost Accountant in whole time practice;

(e) The company shall disclose pending litigations if any, involving the company while applying under this Scheme;

(f) The Form shall be accompanied by an affidavit annexed at Annexure- A of Form EES, 2011, which should be sworn by each of the existing director(s) of the company before a First Class Judicial Magistrate or Executive Magistrate or Oath Commissioner or Notary, to the effect that the company has not carried on any business since incorporation or that the company did some business for a period up to a date (which should be specified) and then discontinued its operations and has not carried on any business after the 1^st April, 2008, as the case may be;

(g) The Form EES, 2011 shall further be accompanied by an Indemnity Bond, duly notarized, as annexed at Annexure B of Form EES, 2011, to be given by every director individually or collectively, to the effect that any losses, claim and liabilities on the company, will be met in full by every director individually or collectively, even after the name of the company is struck off the register of Companies;

(h) The Company shall also file a Statement of Account annexed at Annexure C, prepared as on date not prior to more than one month preceding the date of filing of application in Form EES, 2011, duly certified by a statutory auditor or Chartered Accountant in whole time practice, as the case may be.

(i) In the case of 100% Government companies, if no Board is in existence, an officer not below the rank of Deputy Secretary of the concerned administrative Ministry may be authorized to enter his name and other details in Form EES, 2011 and in Annexure A, B and C in place of name and other details of the directors and also to sign the said documents before filing.

(vi) Simplified procedure for Registrar of Companies for removal of name of defunct companies:-

(a) The Registrar of Companies, on receipt of the application, shall examine the same and if found in order, shall give a notice to the company under section 560(3) of the Companies Act, 1956 by e-mail on its e-mail address intimated in the Form, giving thirty days time, stating that unless cause is shown to the contrary, its name be struck off from the Register and the company will be dissolved;

(b) The Registrar of companies shall put the name of applicant(s) and date of making the application(s) under EES, 2011, on daily basis, on the MCA portal www.mca.gov.in, giving thirty days time for raising objection, if any, by the stakeholders to the concerned Registrar;

(c) In case of company(s) like Non-Banking Financial Company(s), Collective Investment Management Company(s) which are regulated by other Regulator(s) namely RBI, SEBI, the Registrar of Companies, at the end of every week, after the Scheme commences, shall send intimation of such companies availing EES, 2011, during that period to the concerned Regulator(s) and also an intimation in respect of all companies availing EES, 2011, during that period to the office of the Income Tax Department giving thirty days time for their objection, if any;

(d) The Registrar of Companies immediately after passing of time given in sub-paras (a) to (c) of this Para and on being satisfied that the case is otherwise in order, shall strike its name off the Register and shall send notice under sub-section (5) of section 560 of the Companies Act, 1956 for publication in the Official Gazette and the applicant company under this Scheme shall stand dissolved from the date of publication of the notice in the Official Gazette.

Disallowances in case of Interest free loans given by a company to a sister concern or others

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In this regard it is pertinent to note that it is a well settled law that notional incomes are not taxable under the Income Tax Act, 1961. The Orissa High Court in the case of Tripty Drinks Pvt. Ltd. (1978) 112 ITR 721 held that, the profits that are charged under the Act are real profits and those which are regarded as profits in the commercial world. No tax may be levied on fictional or notional profits.

Therefore, no notional interest on such advances shall be taxable in the hands of the company making advances to its sister concern or others. However, if the advances are made without any business purpose and out of borrowed funds than proportionate interest paid or payable on such borrowed funds shall be disallowed.

The Delhi High Court in the case of Punjab Stainless Steel Industries (2010) 41 DTR 289 has held that, if the assessee failed to make out a case of commercial expediency in advancing interest free advances to its sister concern which where made from its CC account with a bank, proportionate interest paid by assessee on borrowing was rightly disallowed.

In yet another case, the Punjab & Haryana High Court in the case of Abhishek Industries Limited (2006) 286 ITR 1 has held that once it is borne out of record that the assessee has borrowed certain funds on which liability to pay tax is being incurred and on the other hand certain amounts has been advanced to sister concerns or others without carrying any interest or without any business purpose, the interest to the extent the advance has been made without carrying any interest is to be disallowed u/s 36(1)(iii).

However, the Chhattisgarh High Court in the case of Beekay Eng. Corporation (2010) 38 DTR 289 has held that, where there were sufficient funds of partners in the opening balance and sufficient profit has been earned during the year and no borrowed funds diverted as interest free funds to the sister / associate concerns. The assessing officer cannot disallow a part of the interest paid on the funds borrowed by the assessee.

Therefore, in my view, under following two circumstances the disallowance of the proportionate interest on borrowed capital can be negated:

1) If the commercial expediency for advancing loan can be proved.

2) If the advances are made out of profits. This can only be proved if the company has huge reserves and profits. Also, it is important that there should not be any direct nexus between the funds borrowed and the advances made.

CBDT Clarification on Tax Scrutiny Of Mergers and Acquisitions Cases

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The Central Board of Direct Taxes (CBDT) has clarified that the Income Tax Department is currently scrutinizing only a handful of cases relating to takeovers, mergers and acquisitions; not 380 or 100 as reported in some sections of the media. Tax scrutiny is an ongoing process and the numbers vary from year to year. This has already been stated in replies to several Parliament Questions

The Income Tax Department reposes trust in taxpayers. It scrutinizes about 1 percent of its total taxpayer base. Selection of cases for scrutiny is risk-based and non-intrusive. Besides, some cases are scrutinized following intensive tax investigation, such as surveys, search and seizure. Mere incidence of takeover, merger and acquisition does not qualify a case for tax-scrutiny. The overall scrutiny level by the Income Tax Department has never exceeded 1.5 percent in the last decade.