House rent allowance and leave encashment taxation clarified: own-house occupancy breaks HRA exemption, and service-linked leave encashment is taxable income.

House rent allowance is not exempt under section 10(13A) where employees occupy their own residential accommodation and pay no rent, because the exemption is confined to allowance meeting actual rent expenditure under Rule 2A. Leave encashment received during service is taxable as "profits in lieu of salary" under section 17(3)(ii) because it arises from the employment relationship and service conditions, and is not outside salary merely because it is paid during service. The stated conclusion is that both claims for exclusion from taxable income fail and the writ petitions are dismissed.

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Issues: (i) Whether house rent allowance received by employees occupying residential accommodation owned by them and not taken on lease is exempt under section 10(13A) of the Income-tax Act, 1961 read with Rule 2A of the Income-tax Rules, 1962; (ii) Whether leave encashment received during service falls within the meaning of "profits in lieu of salary" under section 17(3)(ii) of the Income-tax Act, 1961.

Issue (i): Whether house rent allowance received by employees occupying residential accommodation owned by them and not taken on lease is exempt under section 10(13A) of the Income-tax Act, 1961 read with Rule 2A of the Income-tax Rules, 1962.

Analysis: The exemption under section 10(13A) applies only to a special allowance granted to meet expenditure actually incurred on payment of rent for residential accommodation occupied by the assessee. The allowance is intended to reimburse rent paid to a landlord, and the statutory formula in Rule 2A presupposes actual rent expenditure. Where the assessee occupies his own house, no rent is paid or incurred, and nothing goes out of his coffers as rent. The contrary view taken in some Punjab and Haryana decisions was not accepted.

Conclusion: The house rent allowance received by such employees is not exempt and is includible in total income, against the assessee.

Issue (ii): Whether leave encashment received during service falls within the meaning of "profits in lieu of salary" under section 17(3)(ii) of the Income-tax Act, 1961.

Analysis: Leave encashment received under service rules flows from the terms and conditions of employment and from the employer-employee relationship. It is not compensation outside the contract of service, nor a capital receipt. Payments due from an employer which are referable to employment and not specifically excluded by section 10 are comprehended by section 17(3)(ii). The later exemption for retirement leave encashment did not extend to employees generally.

Conclusion: Leave encashment received by the petitioners falls within "profits in lieu of salary" and is taxable, against the assessee.

Final Conclusion: Both claims for exclusion from taxable income failed. The writ petitions were dismissed and the rule discharged, with parties directed to bear their own costs.

Ratio Decidendi: Section 10(13A) exempts only allowance paid to meet actual rent expenditure, and leave encashment flowing from service conditions is taxable as salary-related income under section 17(3)(ii) unless expressly exempted.

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