House rent allowance exemption survives when employer pays rent directly but recovers it from salary, as actual rent expenditure is incurred.

House rent allowance exemption under section 10(13A) remained available where the employer paid rent directly to the landlord and recovered the amount from the employee's salary, because the employee was still shown to have actually borne the rent expenditure. The mode of remittance did not change the character of the payment or amount to rent-free accommodation in substance. The circulars relied on also supported the view that actual incurring of rent, not the form of payment, governs the exemption. Accordingly, the disallowance was unsustainable and the assessment addition was deleted.

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Issues: Whether house rent allowance exempt under section 10(13A) of the Income-tax Act, 1961 was unavailable merely because the employer paid the rent to the landlord directly and recovered the same from the employee's salary.

Analysis: Section 10(13A) exempts special allowance granted by the employer to meet expenditure actually incurred on payment of rent for residential accommodation occupied by the assessee. The employee had not been provided rent-free accommodation in substance, because the rent paid by the employer was recovered from his salary and paid towards the same residential premises. The mere mode of payment, whether by the employee directly or by the employer with recovery from salary, did not alter the character of the expenditure actually borne by the employee. The circulars relied upon also supported the view that actual incurring of rent expenditure, and not the form of remittance, was the governing consideration.

Conclusion: The exemption under section 10(13A) was available to the assessee, and the disallowance of house rent allowance was not sustainable.

Final Conclusion: The assessment addition was deleted and the assessee's claim for house rent allowance exemption stood restored.

Ratio Decidendi: For the purposes of section 10(13A), exemption depends on whether the assessee actually incurs rent expenditure; direct payment of rent by the employer with recovery from salary is equivalent to rent paid by the employee and does not defeat the exemption.

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