Madras H.C : Whether, on the facts and in the circumstances of the case, the assessee was not entitled to exemption under s. 54 of the IT Act, 1961, in respect of the capital gains of Rs. 32,500 that arose on the sale of the residential house of the assessee at Tiruppattur during the accounting year relevant to the asst. yr. 1975-76 ?

Counsel Appeared

J. Jayaraman, for the Revenue : Janarthana Raja for Subaraya Aiyar, Padmanabhan & Ramamani, for the Assessee

VENKATASWAMI, J.:

At the instance of the Revenue, the Tribunal, Madras Bench “C”, Madras, has referred to us for our opinion the following question of law, under s. 256(1) of the IT Act,1961 (hereinafter called “the Act”):

“Whether, on the facts and in the circumstances of the case, the assessee was not entitled to exemption under s. 54 of the IT Act, 1961, in respect of the capital gains of Rs. 32,500 that arose on the sale of the residential house of the assessee at Tiruppattur during the accounting year relevant to the asst. yr. 1975-76 ?”

2. The brief facts leading to this reference are the following: The respondent/assessee owned two residential houses, one at Tiruppattur and another at No. 19, Pinjala Subramaniam Road, Madras-17. The house at Tiruppattur which was in his }njoyment for residential purpose was sold by him on 24th May, 1974, for a sum of Rs. 45,000. By that sale, admittedly, he has earned capital gain to an extent of Rs. 32,500. The assessee claimed exemption under s. 54 of the Act before the Assessing Officer on the ground that by utilising the sale proceeds obtained by the sale of the house at Tiruppattur, he has put up first floor at No. 19, Pinjala Subramaniam Road, Madras-17, after demolishing the old structure (first floor). The ITO disallowed the assessee’s claim for exemption on the ground that the assessee had made only some alteration by adding additional rooms to the existing house. Consequently, the said sum of Rs. 32,500 was subjected to tax under the head “Capital gains”.

3. Aggrieved by the view taken by the ITO, the assessee preferred an appeal to the AAC who accepted the case of the assessee and held that the construction of the first floor could be taken as construction of a unit of house property for the purpose of granting exemption under s. 54 of the Act. In doing so, the AAC placed reliance on a ruling of the Gujarat High Court in CIT vs. Tikyomal Jasanmal (1971) 82 ITR 95 (Guj) : TC22R.261.

4. The Revenue preferred further appeal against the above said view of the AAC to the Tribunal. Before the Tribunal, the assessee produced an order passed by the Accommodation Controller dt. 31st Dec., 1971, releasing the first floor from the Government tenancy on the ground that the assessee required the first floor for demolition and reconstruction of the first floor. The purpose of filing the said order before the Tribunal presumably was to show that there was a condition subject to which the release was ordered and the condition was to the effect that the work of demolition must be commenced within one month and should be completed within three months from the date of the order. The assessee, by producing the order of the Accommodation Controller, has made it clear before the Tribunal that the demolition of the first floor was complete and it is not a case of mere alteration and addition as pointed out by the ITO. The Tribunal, concurring with the view taken by the AAC, held that the assessee is entitled to the exemption under s. 54 of the Act. In support of this conclusion, the Tribunal placed reliance on two judgments of the Gujarat High Court, one referred to and relied on by the AAC and another in CIT vs. Natu Hansraj 1976 CTR (Guj) 365 : (1976) 105 ITR 43 (Guj) : TC22R.227.

5. The Revenue, still aggrieved by the view taken by the Tribunal, decided that a reference should be made to this Court for its opinion and, accordingly, the Tribunal has referred the matter with a statement of the case, under s. 256(1) of the Act.

6. Mr. J. Jayaraman, learned senior counsel for the Revenue, distinguished the cases in CIT vs. Tikyomal Jasanmal (supra), CIT vs. Natu Hansraj (supra) and another case of the Delhi High Court (concurring with the view of the Gujarat High Court) in Addl. CIT vs. Vidya Prakash Talwar (1981) 25 CTR (Del) 220 : (1981) 132 ITR 661 (Del) : TC22R.222 by contending that, in all these cases, the assessee, after selling the old house, has purchased a new property whereas in the case on hand, the assessee has put up the first floor in the already existing ground floor. Therefore, the principles laid down in those decisions will not apply to the facts of this case. Apart from that, learned counsel also pointed out that in construing the scope of s. 54 of the Act, due regard must be given to the provisions of s. 48 r/w s. 55(b) of the Act. If regard is so given, the exemption granted to the assessee in this case cannot be sustained is the contention of learned counsel.

7. Mr. Janarthana Raja, learned counsel for the assessee, submitted that the distinction made by learned counsel for the Revenue, as mentioned above, is not at all warranted and the principles of those cases squarely apply to the facts of this case. In addition to the three judgments referred to above, learned counsel for the assessee also cited a recent decision of the Gujarat High Court in CIT vs. Kodandas Chanchlomal (1985) 48 CTR (Guj) 346 : (1985) 155 ITR 273 (Guj) : TC22R.229 and in this case all the three judgments mentioned above have been noticed.

In CIT vs. Tikyomal Jasanmal (supra) though the case went against the assessee on facts, the principle laid down therein, while interpreting the scope of s. 54 by Bhagwati C. J., as he then was, speaking for the Bench, was to the effect that for the purpose of claiming exemption under s. 54, two conditions are required to be satisfied, namely, (1) the house property must have been used by the assessee or a parent of his, mainly for the purposes of his own or the parent’s residence during the two years immediately preceding the date on which the transfer took place, and (2) the assessee must have, within a period of one year before or after such date, purchased or within a period of two years after such date constructed a house property for the purposes of his own residence. It has also been pointed out in that judgment that the ground floor could be taken as a unit of house property independently for the purpose of s. 54.

In CIT vs. Natu Hansraj (supra) another Division Bench of the Gujarat High Court, after referring to Tikyomal Jasanmal’s case (supra) has held as follows : “Held, that it is well-settled that the words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the legislature has in view. Their meaning is found not so much in a strictly grammatical or etymological propriety of language, nor even in its popular use, as in the subject or in the occasion on which they are used, and the object to be attained.

The legislative object in enacting the exemption under s. 54 is that when an assessee utilises the surplus money realised on the sale of the old house property, which was mainly in his or his parent’s self-occupation, for acquiring a new house property, which he purchases or constructs with the end in view of his own immediate residential purpose, then, he should not be made subject to the charge of capital gains. In order to effectuate this object, therefore, what the legislature could have intended to provide is that the new property must have been really and substantially purchased or constructed by the assessee for the immediate purpose of his own residence. Under s. 54, it is sufficient if the old house was mainly used for the purpose of the residence of the assessee or his parent. Since this is the requirement of the first condition, it is difficult to ascribe to the legislature, while laying down the second condition for exemption, the intention to provide that the new property must be purchased or constructed by the assessee entirely or solely for the purpose of his own residence.

The AAC found that the assessee had to borrow a loan for the purpose of purchasing the new property, since his other funds were locked up, and that because he ultimately found that he could not afford to live in a house, the cost of acquisition of which was so high, he sold away the new property within a year and purchased another house of lesser value for his residence. This might explain why the assessee let out 25% of the area of the new house.

Considering all the circumstances, the only conclusion possible was that the new property was purchased by the assessee in reality and in substance for the purpose of his own residence and that he was entitled to the benefit of the exemption in s. 54. The Tribunal was right in law in holding that the capital gain earned by the assessee was exempt from tax under s. 54.”

10. In Addl. CIT vs. Vidya Prakash Talwar (supra), Ranganathan J., as he then was, speaking for the Bench, after referring to the above two Gujarat High Court decisions, has clearly and in unequivocal terms held as follows:

“. . . when the section talks of house property it does not mean an independent and complete house in the sense in which the term used to be understood once upon a time. House property for the purposes of s. 54 has the same meaning as the concept of house property under ss. 22 to 27 which make it clear that the expression ‘house property’ takes into account an independent residential unit. In fact, there can be no doubt that the section takes into account all independent residential units particularly in these days when multi-storeyed flats are becoming the order of the day.”

The above judgment rendered by a Division Bench of the Delhi High Court has been cited with approval in the latest judgment of the Gujarat High Court in CIT vs. Kodandas Chanchlomal (supra) wherein the headnote reads as follows: “A house property for the purposes of s. 54 of the IT Act, 1961, has the same meaning as the concept of house property under ss. 22 to 27 which takes into account an independent residential unit and does not mean an independent and complete house; it takes into account all residential units, particularly in these days when multi-storeyed flats are becoming the order of the day.

The assessee sold a residential property valued at Rs. 1,02,000 and earned capital gains of Rs. 79,000. Within two years of the sale of the property, the assessee constructed a house for Rs. 96,500 which consisted of a ground floor, a first and a second floor. The assessee leased out the ground floor and used the first and second floors for personal residence. The assessee claimed deduction of Rs. 57,600 under s. 54 of the IT Act, 1961, on the ground that part of the capital gains in respect of the sale of the property was used for construction of a new residential house property. The ITO rejected the assessee’s claim. The AAC allowed the claim of the assessee on the ground that s. 54 did not provide that the new house property should be exclusively used for residential purposes of the assessee. The Tribunal held that since the first and second floors which were used for the residential purposes of the assessee were completed within the statutory time limit of two years, he was entitled to the benefit of proportionate exemption from capital gains under s. 54. On a reference: Held, that a substantial portion of the new house property was retained by the assessee for his personal purposes and since the construction of the new building was completed within the statutory period of two years, both the conditions for grant of exemption were satisfied and the assessee was entitled to pro rata exemption under s. 54 from the liability to tax on capital gains to the extent of the value of the portion of the property in his occupation.”

From the above decisions, it is quite clear that the view taken by the Tribunal is unexceptionable having regard to the admitted position that the assessee, after demolishing completely the first floor, had put up a new construction within the period allowed by the statute, namely, s. 54 of the Act. It is also common ground that the assessee is in enjoyment of the entire property. The distinction sought to be made by learned counsel for the Revenue by contending that the construction put up by the assessee in the present case is on the existing old building and, therefore, the principles laid down by the Gujarat High Court and the Delhi High Court will not apply, cannot be accepted. Once the principle laid down in the said judgment to the effect that the “house property” takes into account an independent residential unit has come to stay with which we respectfully agree, there is no force in the contention that, since the independent residential unit (in this case, the first floor) was put up on an existing old house, the exemption under s. 54 was not available. Therefore, we are unable to agree with learned counsel for the Revenue that the principles laid down in those cases will have no application to the facts of the present case.

The other contention is that, having regard to the language employed in ss. 48 and 55(b), if at all the assessee is entitled to any concession, it can be only at the time of sale of the newly built first floor along with the ground floor or independently. In other words, according to learned counsel for the Revenue, the exemption/concession is postponed till such time the newly built-up property comes for sale. Here also, we are not able to agree with this contention as once we come to the conclusion that the assessee is entitled to the exemption under s. 54 of the Act, the question whether s. 48 r/w 55(b) is applicable or not, will not arise.

13. For the foregoing reasons, we answer the question referred to us in the affirmative in favour of the assessee and against the Revenue. The assessee is entitled to his costs. Counsel’s fee is fixed at Rs. 500.

[Citation :181 ITR 101]