Recovery of rent from employee's salary for payment to landlord qualifies for HRA exemption under Section 10(13A).

The Appellant, serving as CEO of Sterlite Industries India Ltd., claimed an exemption of Rs. 16,19,940/- for House Rent Allowance (HRA) under Section 10(13A) of the Income Tax Act for the Assessment Year 2006-07

The employer had leased a residential flat and provided it to the Appellant, but recovered the rent of Rs. 1,70,000/- per month directly from the Appellant’s salary to pay the landlord

The Assessing Officer (AO) disallowed the exemption, arguing that since the employer paid the rent to the landlord directly, the Appellant did not "actually incur" the expenditure

The CIT(A) reversed this, but the Income Tax Appellate Tribunal (ITAT) restored the AO's addition, viewing the arrangement as a "rent-free accommodation" perquisite under Section 17(2) rather than an HRA expenditure qualifying for exemption

Whether, in the facts and circumstances of the case, the ITAT was right in law in reversing the order of CIT(A) and denying the exemption under Section 10(13A) of the Income Tax Act

Section 10(13A) of the Income Tax Act, 1961, which exempts special allowances granted to meet expenditure "actually incurred" on the payment of rent for residential accommodation

Rule 2A of the Income Tax Rules, 1962, regarding the computation of HRA exemption

CBDT Circular No. 90 dated 26.06.1972 and Letter F. No. 12/19/64-IT (A-1) dated 02.01.1967, which clarify that the exemption is permissible provided the employee is not living in their own house and actually incurs rental expenditure, regardless of the method of verification of rent receipts

The High Court observed that the ITAT erred in mischaracterizing the transaction as a non-taxable perquisite instead of HRA expenditure.

The Court reasoned that the statutory requirement under Section 10(13A) is that the expenditure must be "actually incurred" by the assessee

In this case, although the employer physically transferred the funds to the landlord, the amount was being deducted from the Appellant’s salary; thus, the economic burden of the rent fell entirely on the employee

The Court held that there is no functional difference between an employee paying the landlord and seeking reimbursement versus an employer paying the landlord and recovering the sum from the employee’s salary

Since the Appellant was not provided with rent-free accommodation but was paying for it through salary deductions, the "actual incurrence" of rent was established

It held that the Appellant was entitled to the exemption under Section 10(13A) as the rent recovered from his salary constituted expenditure actually incurred on rent

The Court set aside the ITAT’s order, restored the order of the CIT(A), and directed the Assessing Officer to allow the claim for HRA exemption