Employer Pays Rent Directly to the Landlord – Can an Employee Still Claim HRA?(Income Tax Rulings)

Gujarat High Court Gives Relief to Taxpayers
In a landmark decision in Kuldeep Kumar D. Kaura v. DCIT [2026] 187 taxmann.com 1025 (Gujarat), the Gujarat High Court has clarified that an employee is entitled to claim House Rent Allowance (HRA) exemption under Section 10(13A) even when the employer pays the rent directly to the landlord, provided the rent is ultimately recovered from the employee’s salary.
Background
The assess, a senior executive of Sterlite Industries India Ltd., was provided residential accommodation under a lease agreement entered into by the employer with the landlord. The employer paid the monthly rent directly to the landlord but deducted the same amount from the employee’s salary. The employee received HRA and claimed exemption under Section 10(13A).
The Assessing Officer rejected the claim, holding that the employee had not paid rent directly to the landlord and had merely occupied employer-provided accommodation. While the Commissioner (Appeals) allowed the exemption, the Income Tax Appellate Tribunal reversed the decision, treating the accommodation as a rent-free perquisite.
High Court’s Ruling
The Gujarat High Court restored the order of the Commissioner (Appeals) and held that the employee was eligible for HRA exemption.
The Court observed that Section 10(13A) requires the employee to actually incur expenditure on rent, but it does not prescribe that the payment must be made directly to the landlord. Since the rent was recovered from the employee’s salary, the employee had borne the rental expenditure. The employer merely acted as an intermediary in making the payment to the landlord.
The Court also referred to CBDT Circular No. 90 of 1972, which clarifies that HRA exemption is unavailable only where the employee occupies his own house or does not actually incur any rental expenditure. Neither of these conditions applied in the present case.
Significance of the Decision
This judgment is important because it recognizes the commercial practice of employers leasing accommodation for employees, particularly senior executives in metropolitan cities. It confirms that the substance of the transaction is more important than the mode of payment. Where the employee ultimately bears the rent through salary deduction, HRA exemption cannot be denied merely because the employer pays the landlord directly.
Key Takeaways
* Employer’s direct payment of rent does not automatically convert the accommodation into a taxable rent-free perquisite.
* Recovery of rent from the employee’s salary amounts to actual payment of rent by the employee.
* The route through which rent reaches the landlord is not decisive for claiming HRA exemption.
* Genuine lease arrangements, salary deductions, and proper documentation are essential to support the exemption.
Conclusion
The Gujarat High Court’s decision provides significant clarity on Section 10(13A) and adopts a practical approach to employer-leased accommodation arrangements. It reinforces that HRA exemption depends on whether the employee actually bears the rental cost, not on who physically transfers the rent to the landlord.

Bogus LTCG Addition Cannot Be Sustained Without Direct Evidence: ITAT Raipur
In Kavita Patel v. ITO [2026] 188 taxmann.com 902 (Raipur ITAT), the Income Tax Appellate Tribunal held that Long-Term Capital Gain (LTCG) exemption under Section 10(38) cannot be denied merely because the shares traded were later identified as penny stock scrips. The Revenue must establish the assess conscious involvement in any share-rigging or accommodation entry arrangement.
Facts of the Case
The assess claimed exemption under Section 10(38) on LTCG arising from the sale of shares that were subsequently alleged to be penny stock scrips. The Assessing Officer treated the gains as bogus and made additions under Section 69A based primarily on investigation reports relating to penny stock manipulation. Income Tax Rulings

The assesses contended that:
• The shares here purchased and sold through recognized stock exchanges.
• Securities Transaction Tax (STT) had been paid.
• The shares were held in Demat accounts.
• Payments were made through banking channels.
• All transactions were duly disclosed in the income tax returns.
• They had no knowledge that the shares were allegedly manipulated penny stocks.

Tribunal’s Decision
The Tribunal deleted the additions, observing that the Revenue had failed to produce any direct evidence linking the assessees with brokers, entry operators, or any organized share-rigging activities. Mere reliance on investigation reports and the theory of human probabilities, without corroborative evidence, was held to be insufficient.
Following its earlier decision in Anju Parekh v. ITO [2025] 180 taxmann.com 653 (Raipur ITAT), the Tribunal held that where transactions are genuine on record and there is no proof of the assess conscious participation in any tax evasion scheme, the exemption under Section 10(38) cannot be denied.

Key Takeaways
• Trading in a penny stock alone does not justify treating LTCG as bogus.
• The burden lies on the Revenue to establish the assessee’s conscious involvement in accommodation entry or share-rigging activities.
• Genuine transactions supported by Demat records, banking channels, stock exchange transactions, and payment of STT cannot be disregarded merely on suspicion.
• Additions based solely on investigation reports, without direct evidence, are unsustainable.

Conclusion
The decision reinforces the principle that suspicion, however strong, cannot replace evidence. Unless the Revenue establishes a direct nexus between the assess and the alleged penny stock manipulation, LTCG exemption cannot be denied merely because the scrip involved was subsequently identified as a penny stock.

Multiple Floors Received Under Redevelopment Constitute One Residential House; Full Section 54 Exemption Allowed:
In a significant ruling in Ranjan Sen Jain v. ITO [2026] 188 taxmann.com 645 (Delhi – Trib.), the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that an assessee cannot be denied exemption under Section 54 merely because the residential property received under a redevelopment agreement comprises multiple floors. The Tribunal further held that the Assessing Officer (AO) cannot arbitrarily reject registered valuers’ reports and substitute his own estimate of the fair market value (FMV) without referring the matter to the Departmental Valuation Officer (DVO).

Background of the case
The assessee inherited a residential property situated at Vasant Vihar, New Delhi, after the death of his mother in 1997. The property was subsequently mutated in his name. Initially, the assessee entered into a collaboration agreement with a developer in 1999, under which the first floor of the redeveloped property was allotted to the builder while the assessee retained the basement, ground floor, second floor and terrace.
Subsequently, in 2018, the assessee and the owners of the first-floor portions entered into another redevelopment agreement with a new builder. Under this collaboration agreement, the existing building was demolished and reconstructed. In consideration for transferring part of his rights in the property, the assessee received the basement, ground floor, third floor and terrace of the newly constructed building along with monetary consideration of approximately ₹75 lakh.
The builder completed the construction and handed over possession of the assessee’s share in February 2020. While filing his return, the assessee computed long-term capital gains arising from the transfer of development rights and claimed exemption under Section 54 in respect of the entire residential property received from the builder, namely the basement, ground floor and third floor.

Assessment proceedings
During scrutiny assessment, the AO questioned two aspects of the computation:
• the fair market value (FMV) adopted as on 1 April 2001 for determining the indexed cost of acquisition; and
• the assessee’s claim of exemption under Section 54 in respect of all three floors.
The AO held that after the amendment made by the Finance (No. 2) Act, 2014, Section 54 permits exemption only in respect of one residential house. Since the basement, ground floor and third floor had separate entrances and were capable of independent use, the AO treated them as separate residential units and restricted the exemption only to the ground floor.
On the valuation issue, the assessee had relied upon reports prepared by two Government-registered valuers to determine the FMV of the property as on 1 April 2001. However, the AO rejected both reports on the ground that the valuation methodology was unreliable, particularly because the valuers had worked backwards from later sale instances to estimate the historical value. Instead, the AO adopted a value based on Government circle rates and recomputed the capital gains, resulting in a substantial addition.
The Commissioner (Appeals) affirmed both the disallowance of the Section 54 claim and the AO’s adoption of the circle-rate-based valuation.

Tribunal’s decision on Section 54 exemption
The Tribunal reversed the findings of the lower authorities on the issue of exemption under Section 54.
It observed that the decisive factor under Section 54 is whether the assessee has acquired one residential house, and not whether the building contains multiple floors or independent residential units. Merely because different floors are capable of separate use or have separate entrances does not automatically convert them into multiple residential houses.
The Tribunal noted that the basement, ground floor and third floor were received by the assessee under a single redevelopment agreement as part of one residential property. The construction of multiple floors merely reflected the architectural design of the property and did not alter its character as a single residential house owned by the assessee.
In reaching this conclusion, the Tribunal relied extensively on the Delhi High Court’s decision in Pr. CIT v. Lata Goel [2025] 174 taxmann.com 535, wherein it was held that acquisition of multiple floors within the same residential property does not amount to ownership of more than one residential house. The High Court had also reiterated that Section 54/54F does not prescribe any particular manner in which a residential house should be constructed.
The Tribunal also referred to several earlier judicial precedents, including CIT v. Gita Duggal, CIT v. Gumanmal Jain, Mrs. Chanda Runwal v. ACIT, Nakul Aggarwal v. ACIT, Saroj Rani v. ITO, and Smt. Payal Bansal v. ITO, all of which recognised that multiple floors forming part of one residential property are eligible for exemption under Section 54/54F.
Accordingly, the Tribunal held that restricting the exemption to only one floor was legally unsustainable and directed that the assessee be granted the benefit of Section 54 in respect of the entire reconstructed residential property.

Tribunal’s findings on valuation and computation of capital gains
The Tribunal also found serious defects in the AO’s approach while computing the capital gains.
The assessee had furnished two separate valuation reports prepared by Government-registered valuers to establish the FMV of the land as on 1 April 2001. The Tribunal observed that although the AO rejected these reports, he failed to identify any specific defect or infirmity in either report. More importantly, despite disputing the valuation, the AO did not refer the matter to the Departmental Valuation Officer (DVO), which would have been the appropriate statutory course.
Instead, the AO adopted an ad hoc value based on Government circle rates by applying his own assumptions. The Tribunal noted that this approach was particularly flawed because the AO himself had acknowledged that circle rates for the locality were introduced only in later years, yet he still relied upon those rates to estimate the FMV as on 1 April 2001.
The Tribunal further observed that during appellate proceedings the assessee had produced a builder’s certificate under Rule 46A certifying the actual cost of construction incurred by the developer. This evidence was directly relevant to determining the full value of consideration and the quantum of exemption under Section 54. However, the Commissioner (Appeals) completely ignored this material evidence without assigning any reasons.
Relying on the Delhi Tribunal’s earlier decision in Ved Kumari Subhash Chander v. ITO [2019] 109 taxmann.com 542, the Tribunal reiterated that a registered valuer’s report constitutes valid evidence and cannot be discarded without cogent reasons. If the AO disagrees with such valuation, the proper course is to seek a DVO’s report rather than substitute it with his own estimate.
Consequently, the Tribunal directed the AO to recompute the long-term capital gains by adopting the FMV contained in the unrebutted registered valuer’s report dated 6 September 2022, taking into account the builder’s certificate regarding construction cost, and thereafter granting the appropriate exemption under Section 54.

Significance of the ruling
This decision provides important guidance for taxpayers involved in redevelopment or collaboration agreements. It reinforces that the expression “one residential house” under Section 54 refers to the residential property as a whole and not to the number of floors or self-contained units within it. Where multiple floors are acquired as part of a single residential property, the exemption cannot be denied merely because each floor is capable of independent use.
The ruling also reiterates an equally important principle governing valuation disputes. Once an assessee produces reports from registered valuers, the AO cannot disregard them and substitute his own valuation based on assumptions or circle rates without identifying specific defects or obtaining an expert valuation from the DVO. Further, any material evidence, such as a builder’s certificate establishing the actual cost of construction, must be duly considered while computing capital gains and determining the admissible exemption under Section 54.