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Issues involved: Interpretation of tax law regarding the inclusion of house rent allowance (HRA) in taxable income.
Summary: The judgment by the High Court of Punjab and Haryana addressed the question of whether the amount received by the assessee as HRA should be included in taxable income. The assessee, a Chief Justice of the Sikkim High Court, received HRA while residing in a HUF bungalow. The claim for exemption under section 10(13A) of the Income Tax Act, 1961, was based on the argument that even though no actual expenditure was incurred, the assessee was deprived of rental income. The Income Tax Officer initially rejected the claim, but the Appellate Authority Commission accepted it, emphasizing that HRA was granted to all government employees, including judges, irrespective of actual cash expenditure. The Tribunal upheld the decision based on similar cases. In a previous case involving Justice S. C. Mittal, the court had ruled that the purpose of section 10(13A) was to compensate for actual expenditure on rent for residential accommodation. The court noted that an assessee occupying their own house would be entitled to exemption if compensated by the employer through HRA, within the limits set by the Act and Rules. The court also highlighted that when two interpretations are possible, the one favorable to the assessee should be preferred in a taxing statute. Based on this precedent, the High Court answered the question against the revenue and in favor of the assessee, citing consistency with previous judgments. The judgment was a unanimous decision by the judges, with R. N. Mittal agreeing with the conclusion. The court ruled in favor of the assessee, holding that the HRA received should not be included in taxable income. No costs were awarded in this matter.
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