MUMBAI: For as long as anyone can remember, producing fake property rent receipt, often from parents and relatives, has been an easy way to lower tax burden. Such cavalier disregard for tax rule was overlooked by most employers as well as taxman, who possibly felt it was a minor transgression. Perhaps, not anymore.

The income tax department now has good reason to insist on proof from the tax payer showing that he is indeed a genuine tenant, staying in the property in question.

A salaried employee receiving 'house rent allowance' from the employer could escape paying tax on at least 60% of this amount by generating sham rent receipt.

However, according to a recent tribunal ruling, the assessing officer can now demand proof — such as leave and licence agreement, letter to the housing co-operative society informing about the tenancy, electricity bill, water bill etc. — in allowing a lower taxable income as computed by a salaried employee.

"The ITAT (Income Tax Appellate Tribunal) ruling has now laid down the criteria for the assessing officer to consider the claim of a salaried employee and if necessary question its justification. This will put the onus on the salaried class to follow the rules in availing the tax rebate," said Dilip Lakhani, senior tax advisor, Deloitte Haskins & Sells LLP.

Understandably, none of the required documents are available with salaried employees submitting fake rent receipts. There may not be any actual rent outflow from the person as he may be staying in his family home and collecting a receipt signed by his father. Even if a person is a genuine tenant, the amount mentioned in the receipt may be more than what's paid. This will not pose a problem if the person receiving the rent is outside the tax net. There are several instances where a person may be staying separately but claiming to pay rent to a relative owning another property in the same city; or, one of member of the family claiming a loan repayment deduction while another submitting a false rent receipt to evade tax.

Given the widespread practice of paying tax on only a small slice of HRA, it's unclear how far tax officials would go in questioning such claims and pinning down salaried employees.

However, ITAT Mumbai's decision to strike down the HRA exemption claim of a salaried individual for rent paid to her mother could set a precedent. "Technology and stricter reporting system may make it easier for the (income tax) department. For instance, there was a time when many never bothered to pay tax on interest earned from bank fixed deposits. Today, it’s almost impossible. In case of HRA exemption, the assessing officer may crosscheck whether the address mentioned in the ITR form is the same as the property on which rent is paid," said a tax officer.

The Tribunal ruling comes a few months after the government's decision to cap the loss on property bought with borrowed money. Till now, a person paying an interest of, say, Rs 3 lakh on a loan (he took to buy the property) and earning Rs 1.2 lakh as rent could show the difference of Rs 1.8 lakh as 'loss' and set it off against salary income to pay lower tax.

In the last Union budget it was laid down that such losses for an individual tax payer cannot exceed Rs 2 lakh.