Misuse of PAN for fake HRA claims under I-T dept radar: What should landlord do in case of a fake claim?

Misuse of PAN for fake HRA claims under I-T dept radar: What should landlord do in case of a fake claim?

Fake HRA Claims: If a tenant is using someone else's PAN to make a fake HRA claim, then without doubt the tenant would get into trouble, however the individual whose PAN was used as a landlord for this fake HRA claim would also get into trouble with the income tax department.

The Income Tax department has discovered numerous instances of mismatch between rent received and HRA claims. In this regard, many taxpayers have been sent intimations through the 'e-verification' system on the department's compliance portal.

It must be noted that, as per the law, if the annual rent exceeds Rs 1 lakh in a financial year, then it is mandatory to obtain the landlord's PAN and quote it. However, landlords often avoid giving their PAN. So, if a tenant, to save himself, uses some other landlord's PAN to claim HRA, then both of them will get into trouble with the tax authorities.

"Various instances have come to the notice of the tax department wherein taxpayers (employees) have wrongly claimed HRA exemption by showing fictitious rent payment to landlords," says S. Vasudevan, executive partner, Lakshmikumaran & Sridharan (LKS) Attorneys.

Are landlords personally liable if their PAN has been misused by someone to claim HRA?

Lawyers say that in cases where it can be proved that the landlord had no knowledge about his/her PAN being used by an unauthorised person, there should be no legal issues.

"If your PAN is fraudulently used to claim House Rent Allowance (HRA) without your consent or knowledge, you shouldn't be held personally accountable for these actions. However, it's crucial to promptly address the situation. You also have the right to challenge any false claims made with your PAN and request an investigation," says Sanket Jain, Partner, Pioneer Legal, a law firm.

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Proof of HRA claims of previous years; can you really take it easy after CBDT's assurance of no review of old HRA cases

Ramakrishnan Srinivasan, former chief commissioner of Income Tax, shares his experience working for more than 30 years in the Income Tax department.

"In my experience, I have noticed instances where Landlords have received notice from the Department for the purported rent said to have been received when their PAN was misused to claim House Rent Allowance (HRA) by unscrupulous assessees. The moment PAN is quoted, it acquires a sense of authenticity and the HRA gets allowed without much scrutiny. Landlords have to take a lot of effort to deny tax liability and it is a long-drawn process to prove they didn't receive the purported rent," says Srinivasan.

In some higher-value rental cases, where landlords share the PAN, either tenants claim a higher HRA than the actual rent or the landlord accepts only one part of the rent through cheque and the rest through cash. Tax authorities often identify such cases for action.

"If the landlords can prove that they have not received the rent and their PAN is misused then proceedings initiated in their cases would be closed. I have seen cases where they were not successful in proving their stand and hence, they were fastened with tax liability and had to go through long drawn litigation process by filing tax appeal with the attended cost," says Srinivasan.

What can happen to landlords whose PAN has been misused by someone to claim HRA?

Experts say that the individual who misused a landlord's PAN to claim HRA and the unsuspecting landlord both will get into trouble with the income-tax department. This is because for every HRA claim there should be a matching rental income offered for income tax.

"Misuse of your PAN for HRA benefits will result in the fraudulent HRA amount appearing as taxable income on your Tax Information Statement (TIS). If not addressed, the tax authorities will treat this information as accurate and will levy the corresponding taxes, interest, and penalties on you," says Neeraj Agarwala, Partner, Nangia Andersen India, a tax and business consultancy company.

"Fraudulent use of PAN of purported landlords to claim HRA certainly can result in enquiry by the tax department with respect to understatement of income by the PAN card holder. Such alleged understatement may expose the PAN card holder to tax, interest and penalties. In some extreme cases, it may also result in initiation of criminal prosecution," says Vasudevan.

Chartered accountant Harsh Kedia, who is based out of Dubai, UAE explains the process followed by the income-tax department in rent-HRA mismatch cases. He says that if a discrepancy or mismatch is identified in the HRA claim, the Income-tax department may first send a notice to the tenant to provide clarification or additional information regarding the rent payments and the landlord's PAN card details. "If the tenant fails to provide satisfactory explanations or if the department suspects a fraud has happened, then they may then send a notice to the landlord whose PAN card has been used in the HRA claim," he says.

What to do if a landlord's PAN is misused by someone to claim HRA?

Legal experts suggest landlord include clauses in the rental agreement itself to protect themselves. "The landlord may also add clauses in the rental agreement enabling him/her to take legal action against the agent/tenant or to claim indemnities towards any liability incurred on account of unauthorized sharing or use of PAN. Such clauses will act as deterrent. It is also highly advisable to get the rent agreement duly registered so that it can be admitted as evidence in legal proceedings," says Vasudevan.

• Review Your Tax Information: Carefully review your Tax Information Statement (TIS) and AIS to identify any discrepancies or unauthorised claims related to HRA.
• File a Grievance: File a grievance through your income tax portal to formally report the misuse of your PAN for HRA claims.
• Gather Documentation: Gather any evidence you have to support your claim, such as lease agreements, utility bills, bank statements or other documents that demonstrate your house property details and rental incomes, if any.

“Data analysis was carried out in some high-value cases of mismatch between the rent paid by the employee and receipt of rent by the recipient for the FY 2020-21,” said the Central Board of Direct Taxes (CBDT) in a press release dated April 8, 2024.

What NRI landlords, who face a fake HRA claim, can do about it?

NRI landlords with empty property in India may choose to put it on rent through authorised Indian property agents. However, if any of these authorised Indian property agents decide to let out to another tenant, who in turn, claimed HRA against this PAN, it can create problems. This is because information about this another tenant is privy to the property agent, who may choose to not share this with the NRI landlord. The NRI landlord, being absent from India, may either get to know this situation later or may not know ever.

According to Kedia, "Landlords must make sure to sign a legal agreement outlining the terms and conditions of the arrangement with the authorised local agent to include clauses that specify the authorised use of your PAN card for tax purposes only."

Jain says that while such an agreement, as mentioned above, can be advantageous, however its enforceability may vary depending on local laws and regulations.

According to Jain, here are some steps that landlords must take:

• Clearly communicate the terms of the agreement, particularly regarding the PAN card's authorised use for tax purposes, before finalising the lease or rental agreement,
• Maintain detailed records of all agreements, communications, and transactions related to the rental property, including PAN card usage agreements,
• Regularly review and update rental agreements to comply with current laws,
• If you suspect fraudulent activity or PAN card misuse, promptly notify the relevant authorities and take necessary legal action to safeguard your rights and interests.