ITAT Allows HRA Exemption of ₹7.8 Lakh for Salaried Employee, Slams CPC for Erroneous Disallowance [Read Order]

The Income Tax Appellate Tribunal (ITAT) Ahmedabad bench has ruled in favor of a salaried employee, allowing a house rent allowance (HRA) exemption of ₹7.8 lakh and criticizing the Centralized Processing Center (CPC) for incorrectly disallowing the claim. The tribunal found that the CPC’s adjustment under Section 10(13A) of the Income Tax Act, 1961, was unjustified and violated the rules.

Nikhil Vinodchandra Shah, a salaried individual from Ahmedabad, who challenged the intimation issued under Section 143(1) for the assessment year 2020-21. The CPC had disallowed his HRA claim of ₹7,79,842, leading Shah to file an appeal. The appeal was initially dismissed by the National FacelessAppeal Centre (NFAC) due to a delay of over 30 months. However, the ITAT condoned the delay after Shah explained that he had been pursuing grievance applications and rectification petitions with the department since 2022, which went unaddressed.

Shah’s counsel argued that the disallowance by the CPC was incorrect as the HRA claim complied with Rule 2A of the Income Tax Rules. The tribunal examined the calculations and confirmed that Shah’s claim was valid. According to Rule 2A, the exempt HRA is the lowest of three amounts: actual rent paid minus 10% of salary, 40% of salary (for non-metro cities), or the actual HRA received. In Shah’s case, the correct exempt amount was ₹7,79,843, which the CPC had wrongly denied.

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The tribunal noted that the CPC’s grievance resolution dated April 12, 2024, incorrectly stated that the exemption exceeded the permissible limit. The ITAT emphasized that the CPC’s action was not in line with the law and directed the deletion of the disallowance. The Revenue’s representative also conceded that the CPC’s decision was flawed and agreed to a fresh verification by the Assessing Officer.

The bench, comprising Judicial Member TR Senthil Kumar and Accountant Member Annapurna Gupta, allowed Shah’s appeal, holding that the HRA exemption was rightfully claimed. The tribunal’s decision highlights the importance of accurate processing by the CPC and reinforces the rights of salaried taxpayers to legitimate exemptions.

The ruling serves as a reminder to tax authorities to ensure proper scrutiny before disallowing claims, especially in cases where taxpayers provide all necessary documentation. The ITAT’s order brings relief to Shah and sets a clear precedent for similar disputes involving HRA exemptions.

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