ITAT Approves ₹7.8 Lakh HRA Exemption, Slams CPC Disallowance

In a significant relief to salaried individuals across the country, the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has ruled in favor of a taxpayer and allowed a House Rent Allowance (HRA) exemption of ₹7.8 lakh, which was earlier wrongly disallowed by the Centralized Processing Center (CPC). The decision not only vindicates the taxpayer's right to claim valid exemptions but also highlights the pressing need for accuracy and fairness in automated tax processing systems.

Background of the Case

The appellant, Nikhil Vinodchandra Shah, a salaried employee from Ahmedabad, had filed his income tax return for Assessment Year 2020–21, claiming an HRA exemption of ₹7,79,842 under Section 10(13A) of the Income Tax Act, 1961. However, the Centralized Processing Center (CPC), which processes income tax returns electronically, disallowed his HRA claim, citing that it exceeded the permissible limit.

As a result, Shah received an intimation under Section 143(1), leading to additional tax liability. When he tried to appeal, the National Faceless Appeal Centre (NFAC) dismissed the appeal, citing a delay of over 30 months.

Persistent Efforts by the Taxpayer

Despite the rejection, Shah did not give up. He continued pursuing the matter through:

• Grievance applications

• Rectification petitions

Since 2022, he had been following up with the department, but his requests remained unaddressed. Given his genuine attempts, the ITAT condoned the delay and took up the matter for hearing.

Key Legal Arguments & Rule 2A Clarified

Shah’s legal counsel pointed out that:

• The HRA claim was fully compliant with Rule 2A of the Income Tax Rules.

• All calculations were transparent and supported by documentation.

• The CPC's disallowance was unjustified and lacked proper scrutiny.

Rule 2A of Income Tax Rules – Explained:

Under this rule, HRA exemption is calculated as the least of the following:

1. Actual HRA received

2. Rent paid minus 10% of salary

3. 40% of salary (for non-metro cities like Ahmedabad)

Shah’s exempt amount was correctly calculated at ₹7,79,843 — yet CPC disallowed it, without reasonable justification.

ITAT’s Observations

The bench, consisting of Judicial Member TR Senthil Kumar and Accountant Member Annapurna Gupta, strongly criticized the CPC for its erroneous processing.

Key observations:

• The CPC’s grievance resolution dated April 12, 2024, was factually and legally flawed.

• The disallowance was not in line with Rule 2A.

• CPC should have considered the documentary proof and calculations before denying the claim.

• Tax authorities must ensure due diligence before adjusting taxpayer claims.

The Revenue representative also admitted that the CPC’s rejection was incorrect and supported the idea of fresh verification by the Assessing Officer.

Final Verdict: Taxpayer Wins

The ITAT allowed Shah’s appeal and directed the tax department to delete the disallowance of ₹7.8 lakh. This judgment sets an important precedent for similar cases where salaried individuals face arbitrary rejections of rightful claims.

Why This Matters to Salaried Taxpayers

This ruling is significant for a number of reasons:

✅ Protects the rights of honest salaried taxpayers
✅ Ensures accountability from the CPC and automated systems
✅ Reinforces the value of accurate documentation and legal recourse
✅ Encourages others to challenge unjust disallowances

Conclusion

This case serves as a powerful reminder that salaried individuals should not blindly accept CPC intimations without review. If your claim is legitimate and supported by evidence, the law is on your side — even if automated systems make errors.

Taxpayers are advised to:

• Double-check CPC-generated adjustments

• File grievances or rectification petitions promptly

• Keep records of all rent payments and HRA receipts

• Consider appealing when rightful claims are rejected

The ITAT’s judgment brings long-awaited relief to Nikhil Shah and provides hope and guidance to countless others facing similar issues.