House Rent Allowance (HRA) exemption is one of the most common exemption claimed by salaried taxpayers across the country. Under the provisions of the Income Tax Act, 1961 ('the Act'), every taxpayer who stays in a rented accommodation and receives HRA from his/her employer is entitled to claim exemption for the allowance received subject to a maximum of allowance received. The respective employers take the necessary declarations and copies of lease agreements/rent receipts from the employees in order to calculate the exemption amount, which in turn is then shown in the Form-16 of the employee taxpayer.
In this week's case, an individual taxpayer filed his return of income for assessment year 2013-14 disclosing total income of Rs 21.77 lakh under the head 'Income from salaries'. During the course of assessment, the tax officer observed that the taxpayer had claimed exemption towards HRA for Rs 4.15 lakh, and thereby requested the taxpayer to submit evidence in support of this claim. The taxpayer was not able to submit any supporting evidence and hence the taxman disallowed the claim and passed the assessment order declaring total income of Rs 26.38 lakh. The taxpayer chose not to file an appeal against the above addition and paid-up the tax demand raised by the taxman.
Further, the tax officer initiated penalty proceedings and sought explanation from the taxpayer as to why penalty should not be levied under the ground that he had furnished inaccurate particulars of income resulting in the disallowance of HRA exemption. The taxpayer did not file any explanation at this stage. The tax officer went ahead and levied a penalty of Rs 2.17 lakh under the relevant provisions of the Act.
The taxpayer filed an appeal before the first-level appellate authority and submitted that mere disallowance of a claim does not amount to furnishing of inaccurate particulars of income and hence levy of penalty is not correct. The appellate authority, after considering these submissions, ruled in favour of the taxman.
The next-stage appeal was filed by the taxpayer with a delay on medical grounds, which was rightly pardoned by the appellate authority. The tax Tribunal observed that the penalty was levied for filing inaccurate particulars of income, but the fact remains that the taxpayer had not filed any details whatsoever in support of the HRA claim. Accordingly, the very basis of penalty had failed. Further, the employer too had not disputed the HRA claim.
The taxpayer argued that the Supreme Court had confirmed that a mere incorrect claim does not amount to furnishing inaccurate particulars. In the current case too, the taxpayer had merely made the HRA exemption claim, which if the tax officer felt is not right, the same cannot be ruled as furnishing inaccurate particulars. The preceding Supreme Court decision would be squarely applicable here, thereby making the penalty order wrong.
The tax Tribunal, relied on the Supreme Court judgement and accordingly ruled that the levy of penalty is erroneous and ordered the tax officer to delete the same.
The writer is a Sebi-registered investment advisor