It is a pleasure discussing a case with a Fellow Chartered Accountant. I understand that leaving the law aside your main dilemma is not to involve any litigation and unnecessary harassment by the ITO.
With the help of a Personal case I would like to help you with your following query :
1. Will the AO open up the case ???
Just on the grounds of the HRA, the ITO may not open up your case. But if your case is taken up for any other reason then he may pick up the HRA part.
2. Will the AO consider it as a Tax Avoidance & ask you to pay taxes.
Yes he may consider it as Tax Avoidance and ask you to pay taxes as he will be of the view that you have made this arrangement with a pure purpose of avoiding taxes.
3. Now the main question, will you actually have to shell out taxes.
As you know AO is always of the Revenue point of view and hardly knows Tax Laws, so may stick to it saying that it will be added to your income and you will have to pay taxes.
But if you have all the necessary documents at your disposal, your father has regularly filled returns, paid the due amount of tax on his return, then the Comissioner Appeal will allow your appeal and dismiss the AO's additions.
Trust this clarifies your query.
Feel free to get back/ call back for any further clarifications.
Rohit R Sharma
BCOM, ACA, LLB - GEN, CERT. FAFP