Direct payment of rent by employer after salary recovery does not disentitle assessee to House Rent Allowance exemption.

JUDGMENT

Bhargav D. Karia, J.- Heard learned advocate Mr. B.S. Soparkar for the appellant and learned Senior Standing Counsel Mr. Rutvij Patel for the respondent.

2. This Tax Appeal is filed under Section 260A of the Income Tax Act, 1961 (for short ‘the Act’) by the appellant-assessee being aggrieved by the order dated 15.06.2012 passed by the Income Tax Appellate Tribunal, “D” Bench, Ahmedabad in ITA No. 437/Ahd/2010 for Assessment Year 2006-07.

3. This appeal was admitted by order dated 13.03.2013 for consideration of the following substantial question of law:

“(a) Whether in the facts and circumstances of the case the Income-tax Appellate Tribunal was right in law in reversing the order of CIT (A) confirming addition 10 (13A)?” of HRA and of Rs. 16,19,940/ by denying exemption u/s 10(13A)?”

4. Brief facts of the case are as under:

4.1 The appellant assessee was a Chief Operating Officer (COO) & Chief Executive Officer (CEO) of Sterlite Industries India Ltd. For the assessment year 2006-07, return of income was filed by the assessee showing total income of Rs.2,12,75,910/-. The case of the assessee was selected for scrutiny on the ground that the assessee had shown one house property situated in Delhi claiming the same being exempt as self-occupied property. But the assessee was at Mumbai in a leased premises of Sterlite Industries India Ltd., where he was employed as CEO.

4.2 The asessee for the assessment year in consideration had claimed exemption of House Rent Allowance (for short ‘HRA’) under Section 10(13A) of the Act amounting to Rs.16,19,940/-. During the assessment proceedings, it was submitted by the assessee that being an employee of Sterlite Industries India Ltd., Mumbai, he was paid HRA for lease accommodation. The employer had obtained residential flat on leave and licence basis vide Agreement dated 29.03.2024, which was provided to the assessee for his residential accommodation and amount of Rs.1,70,000/- was recovered from the salary of the assessee on monthly basis, which in turn was paid by the employer Sterlite Industries India Ltd., to the landlord. The assessee, therefore, claimed exemption of HRA of Rs.16,19,940/- per annum under Section 10(13A) of the Act read with Rule 2A of the Income Tax Rules, 1962 for short ‘The Rules’).

4.3 However, the Assessing Officer was of the view that exemption claim of Rs. 16,19,940/- in respect of the HRA would not qualify for exemption under Section 10(13A) of the Act as the assessee was allowed to occupy the lease accommodation provided by the employer for which he was not paying any rent to the landlord directly.

4.4 The Assessing Officer, therefore, vide Assessment Order dated 03.12.2008 passed under Section 143(3) of the Act, disallowed the exemption claimed by the assessee under Section 10(13A) of the Act and made an addition of Rs.16,19,940/- towards denial of exemption under Section 10(13A) of the Act. Being aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [for short ‘the CIT(A)’]. After considering the submissions made by the assessee to the effect that amount of rent paid by the employer to the landlord for the leased premises was recovered from the assessee by deducting the same amount from his salary and considering the provision of Section 10 (13A) of the Act read with Rule 2A of the Rules, the CIT(A) allowed the appeal by deleting the addition made by the Assessing Officer denying the exemption of HRA under Section 10(13A) of the Act by observing as under:

“4.3 I have considered the submissions of the Id. AR and facts of the case and also seen the assessment order. Here, it is a case where rent was paid by the employer to the landlord and the same was recovered from the employee. The rental agreement between the landlord and the employer is for the purpose of safeguarding the interests of the landlord. In big cities getting proper residential accommodation is very difficult when the employee approaches the landlord, hence this is the way how accommodation is procured and there is nothing new about it. The AO’s view that since employer is paying rent, even though the same is recovered from the employee, the employee is not entitled for exemption u/s 10(13A) of the Act in respect of HRA is ill founded. Prima facie, it appears from the facts that the appellant is eligible to claim exemption u/s 10(13A) of the Act in respect of HRA and as such the Assessing Officer was not justified in making addition and rejecting the claim of the appellant for exemption of HRA u/s. 10(13A) of the Act. Thus, in the given facts and circumstances, the AO is directed to allow the claim of the appellant and as such this ground of appeal is allowed.”

5. Being aggrieved, the revenue preferred an appeal before the Tribunal. The Tribunal, however, did not agree with the findings of CIT(A) and restored the order passed by the Assessing Officer relying upon the provision of Section 17(2) of the Act relating to perquisite. The Tribunal, while allowing the appeal filed by the revenue, took a different view on the facts that there was no reimbursement of the rent by employer but rent was paid by the employer to the landlord directly and, therefore, the ingredients of Section 10(13A) of the Act would not be attracted and what the assessee was provided was rent free accommodation only.

6. The Tribunal also examined the matter from the taxability of perquisite under Section 17 of the Act by referring to Rule 3 of the Rules.

7. While allowing the appeal of the revenue, the Tribunal has observed as under:

“8. From the above para of the order of Ld. CIT(A), we find that he has proceeded to decide this issue on this basis alone that since the rental agreement between the land lord and the employer is for the purpose of interest of land lord and the rent is being reimbursed by the assessee employee to the employer, the assessee is eligible for exemption u/s 10(13A) of the Income tax Act, 1961. But he has not considered the 2nd objection of the A.O. that the assessee was allowed to occupy the leased accommodation provided by the employer for which the employer paid rent as per lease & license agreement and this was also one of the reasons given by the A.O. for disallowing the claim of the assessee u/s 10(13A) of the Act. We find that in the facts of the present case, the assessee is getting twin benefit from the employer, one of which is not taxed on the Basis of reimbursement of rent by the assessee to the employer. The first benefit is of rent free accommodation provided by the employer to the assessee employee for which the employer is incurring rental expenditure of Rs.1.70 lacs per month in addition to providing interest free deposit of Rs.40 lacs with the land lord. The 2nd benefit being received by the assessee is this that he is getting HRA of Rs.3 lacs approximately per month including special HRA of Rs.1.70 lacs per month. Against these two benefits being received by the assessee, the assessee is making one payment i.e. reimbursement of rentals to the employer company @ Rs.1.70 lacs per month. Now, this reimbursement of rent to the employer company of Rs.1.70 lacs per month is considered against the free housing accommodation provided by the employer company to the employee assessee, then this reimbursement of house rent to employer is no more available to be considered for exemption u/s 10(13A): As per Rule 3, the perquisite value of the housing accommodation provided by the employer company has to be worked out @ 15% of the salary or actual amount of lease rental paid by the employer whichever is lower as reduced by the rent if any actually paid by the employee. In the present case, 15% of the salary will be more than the actual rent being paid by the employee i.e. Rs.1.70 lacs per month and the same amount has been reimbursed by the employee to the employer and, therefore, perquisite value of hosing accommodation provided by the employer company to the employee assessee is ‘nil’ as per Rule 3 of the Income Tax Rules. But once, the housing perquisite value is worked out as ‘nil’ after considering this rental payment of Rs.1.70 lacs per month to the employer company, there is no rental payment made by the assessee employee for the purpose of working out exemption of HRA u/s 10(13A) of the Act and, therefore, we are of the considered opinion that the disallowance made by the A.O. regarding the claim of the assessee for exemption u/s 10(13A) is in order and, therefore, the order of Ld. CIT(A) resulting in deletion of disallowance is not sustainable. We, therefore, reverse the order of Ld. CIT(A) on this issue and restore that of the A.O.

9. Now, we consider the applicability of the judgement of Hon’ble Apex Court cited by Ld. A.R. being the judgment of Hon’ble Apex Court rendered in the case of Arun Kumar and others (supra). In that case, the dispute was regarding perquisite value of housing accommodation /provided by the employer. In the present case, there is no dispute on this aspect and we have seen that the same was not taxable as per Rule 3 of the Income tax Rules 1962 and neither the assessee has declared any perquisite value of the housing accommodation provided by the employer nor any addition was made by the A.O. on this account and hence, this judgement is not applicable in the present case. In the present case, the dispute is regarding allowability of exemption u/s 10(13A) against receipt of HRA by the assessee employee which was never the dispute before the Hon’ble Apex Court in the case cited by the Ld. A.R.”

8. Being aggrieved, the assessee has preferred this appeal.

9. Learned advocate Mr. B.S. Soparkar for the assessee has submitted the paper-book of the documents which were filed from the assessment stage. Referring to the paper-book, it was pointed out that the assessee has claimed HRA of Rs.16,19,940/- as exemption under Section 10 of the Act. It was submitted that as per Form 12BA issued by the employer of the assessee, no perquisite is mentioned for accommodation. It was, therefore, submitted that as per the provision of Section 10(13A) of the Act, when the employer provides reimbursement to the rent paid by the assesssee, such allowance is exempted. It was submitted in the facts of the case that instead of rent being paid by the assessee, the same was paid by the employer and recovered from the assessee and this fact is not disputed by the Assessing Officer. It was, therefore, submitted that the amount deducted from the salary of the assessee was towards rent which in turn was paid to the landlord by the employer instead of the assessee directly paying rent to the landlord and being reimbursed by the employer. It was submitted by learned advocate Mr. Soparkar that as per the Certificate issued by the employer, the amount is recovered from his salary, and this fact is not in dispute and, therefore, the Tribunal has committed an error in ignoring the fact that the amount recovered from the salary of the assessee is in turn paid to the landlord by the employer and therefore, it cannot be said that there is no reimbursement of the rent paid by the assessee.

10. On the other hand, learned Senior Standing Counsel Mr. Rutvij Patel for the respondent Revenue submitted that on plain reading of Section 10(13A) of the Act, it is evident that the assessee is required to pay the rent to the landlord which is to be reimbursed by the employer by way of an allowance and then only such allowance would qualify as exempt income. It was pointed out by learned Senior Standing Counsel Mr. Patel that in facts of the case, it is not in dispute that leave and licence agreement was entered into by the employer Sterlite Industries India Ltd. for the accommodation of assessee and the rent is also paid by the Sterlite Industries India Ltd and not the assessee. It was, therefore, submitted that the Tribunal was justified in restoration of addition of the exemption claimed by the assessee, which was made by the Assessing Officer and deleted by the CIT(A) on the wrong premises. It was submitted that the Assessing Officer has also considered such facts in detail by referring to the provision of Section 17 of the Act. Learned Senior Standing Counsel Mr. Patel referred to and relied upon the order of the Tribunal to submit that when there is no rental payment by the assessee employee for the purpose of working out exemption under Section 10(13A) of the Act, the disallowance made by the Assessing Officer regarding the claim for exemption was justified.

11. Having heard the learned advocates for the respective parties and in the facts of the case to decide as to whether the amount of rent paid by the employer directly to the landlord and recovered from the assessee would qualify for exemption under provision of Section 10(13A) of the Act or not and for the same, it would be germane to refer to the provision of Section 10(13A) of the Act., which reads as under:

“Section 10(13A): 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 having regard to the area or place in which such accommodation is situated 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;

(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]

12. On perusal of the above provision, it is clear that the said provision is inserted with effect from 06.10.1964 and any special allowance granted to the assessee by employer to meet the expenditure actually incurred on payment of rent in respect of residential accommodation occupied by the assessee, as may be prescribed, and to that extent such special allowance would be exempt from the income and would not form part of the total income.

13. In view of the above unambiguous position of Section 10(13A) of the Act, the CIT(A) was justified in holding that it is immaterial as to who pays the rent, more particularly when in the facts of the case, the assessee has not been provided rent free accommodation by the employer, in fact, the rent of same amount is recovered from the salary of the assessee, which is paid by the employer to the landlord.

14. In our opinion, therefore, the reimbursement of the amount which otherwise would have been payable by the assessee but is paid by the employer and recovered from the salary of the assessee and paid to the landlord by the employer, would not make any difference for granting exemption of the HRA under Section 10(13A) of the Act.

15. Circular No. 90 [F.No. 275/79/72- ITJ] dated 26.6.1972 issued by the Central Board of Direct Taxes (CBDT) also clarifies the entitlement of eligibility of exemption under Section 10(13A) of the Act in Para-4 of the Circular, as under:

“4. t is also clarified that the house rent allowance paid to a person, who is living in his own house or in a house for which he does not actually pay any rent, is not exempt from tax in any circumstances.

1. Reference is invited to the Board’s letter No. 12/19/64-IT(B), dated 8-1-1965, addressed to all State Governments. A question has been raised whether the house rent allowance at flat rates sanctioned to Central Government servants without verification of rent receipts vide the Ministry of Finance (Department of Expenditure) O.M. No. 2(22) E-II/60, dated 2-8-1960, will be exempt from tax under section 10(134) read with rule 2A of the Rules or it is necessary for the Disbursing Officers to verify in each case whether the employee has paid house rent and the allowance exempted is less than the difference between the actual expenditure on house rent and 10 per cent of the salary?

2. The Board have decided that in the case of Central Government employees who are in receipt of house rent allowance at flat rates and who are not residing in their own house or in the house of their parents, the allowance at the flat rates so received may be treated as exempt from incometax under section 10(134) without further verification. Necessary amendment to the rules is being made accordingly but pending this amendment there is no objection to Disbursing Officers ignoring such house rent allowance while calculating the tax to be deducted at source during the current financial year.”

It is also clarified that it is not necessary for rent receipt from the assessee but expenditure on rent is required to be actually incurred and only clarification is to be made regarding the fact that the employee concerned has incurred the expenditure on rent.

16. Similarly, letter F. No. 12/19/64-IT (A-1) dated 2.1.1967 issued by the Department also clarifies of the expenditure which have been actually incurred for the purpose of claiming exemption under Section 10(13A) of the Act.

17. Therefore, only in a case where the employee is not incurring any actual expenditure of rent or is residing in his own house, then special allowance paid by the employer to meet with the expenditure on rent by the employee is not eligible for exemption. In the facts of the case, it is not in dispute that the amount of rent is actually recovered from the employee from the salary of the employee by the employer to be paid to the landlord and, therefore, in effect the employee has not incurred expenditure on payment of rent, which was paid on his behalf by the employer instead of reimbursement of the rent to the employer.

18. The effect of both the said transactions is same as payment of special allowance by the employer to meet the actual expenditure incurred by the employee on the rent paid.

19. Thus, by aforesaid Circular of 1972, the eligibility of exemption of HRA is clarified and legal position has remained the same. Hence, in the facts of the case, when the employer has paid rent after recovering the same from the employee, it would not make any difference then the employee making payment of the rent and getting reimbursement from the employer.

20. In view of the above discussion, the question is answered in favour of the assessee and against the revenue as the Tribunal was not right in law in reversing the order of CIT(A) and confirming the addition and was also not right in confirming the addition of HRA of Rs.16,19,940/- by denying exemption under Section 10(13A) of the Act. The order of the CIT(A) deleting the addition is, therefore, restored and the Assessing Officer is directed to allow the claim of the appellant.

21. The appeal is, accordingly, allowed. No order as to costs.