LAWS(GJH)-1970-10-13

COMMISSIONER OF INCOME TAX Vs. TIKYOMAL JASANMAL

Decided On October 15, 1970
COMMISSIONER OF INCOME TAX Appellant
V/S
TIKYOMAL JASANMAL Respondents

JUDGEMENT

(1.) THE question which arises for determination in this reference is a narrow one and it relates to the interpretation of S. 54 of the IT Act, 1961. The facts giving rise to the reference are few and may be briefly stated as follows. The assessee is a refugee from Pakistan. He purchased a house property at an auction held by the rehabilitation department. The price was Rs. 6,825 and it was paid by the assessee by way of adjustment of his claim for compensation in respect of properties left in Pakistan. This house property was used by the assessee, mainly, for the purpose of his own residence right up to 26th June, 1962, when he sold it for the price of Rs. 40,000. The sale of the house property resulted in a capital gain of Rs. 33,175. The assessee by utilising the sale proceeds purchased a piece of land on 30th July, 1962, and started constructing a building on it in August, 1962. The construction of the ground floor of the building was completed by March, 1963, at a cost of Rs. 34,000. The total area of the ground floor was 1,389 sq. ft. and as soon as it was about to be ready, the assessee occupied the whole of it in February, 1963. Out of the total area of 1,389 sq. ft. the assessee It out an area of 734 sq. ft. to certain tenants in March, 1963, with the result that an area of only 655 sq. ft. remained in the occupation of the assessee. The assessee thereafter started construction on the first floor of the building towards the end of 1964 and completed construction on an area of 132 sq. ft. at a cost of Rs. 6,000 and occupied it for his personal residence. On these facts the question arose before the ITO in the course of the assessment for the asst. year 1963 64, the relevant accounting year being Samvat Year 2018, whether the profit of Rs. 33,175 arising to the assessee from the sale of the old building was chargeable to tax under the head "capital gains". Now, ordinarily, since this profit arose to the assessee from the transfer of the old house property which was a capital asset in the relevant year of account, it would be chargeable to tax as capital gain under S. 45 but the assessee claimed that it was exempt from tax on the ground that it fell within the exempting provision contained in S. 54. The ITO did not accept this claim of the assessee; he held that the condition for the applicability of the exemption was not satisfied in the case of the assessee since the assessee did not construct the new building within a period of two years from the date of sale of the old house property and, moreover, the new building was not constructed by the assessee for the purpose of his own residence as required by S. 54. The assessee carried the matter in appeal to the AAC but the AAC took the same view and rejected the appeal. The assessee thereupon preferred a further appeal to the Tribunal and before the Tribunal the assessee was successful in his claim for exemption. The Tribunal held that, on a proper construction of S. 54, it was not necessary that the new building in its entirety must be constructed within a period of two years from the date of sale of the old building and it was sufficient if a part of it was constructed for the purpose of the residence of the assessee. What was essential, according to the Tribunal, was that the new building should have been constructed for the purpose of the residence of the assessee and so far as this requirement was concerned, the Tribunal found that it was satisfied since the new building was constructed by the assessee mainly for the purpose of his own residence. The Tribunal stated that when the old building was sold and the new building constructed by the assessee, the main purpose of the assessee could not have been anything except to use it as his own residence and the new building was, therefore, constructed by the assessee mainly "for the purpose of his own residence". The Tribunal accordingly allowed the claim of the assessee for exemption in respect of the capital gain resulting from the sale of the old building. Hence, the present reference at the instance of the CIT.

(2.) THE short question which arises for consideration on these facts is :

(3.) THE second condition consists of two limbs : one is that the new building must have been constructed by the assessee within a period of two years from the date of sale of the old house property, and the other is that such construction must have been made by the assessee for the purposes of his own residence. The Revenue contended that neither of these two requirements was satisfied and the second condition was, therefore, not fulfilled. Now, so far as the first limb of the condition is concerned, it is possible to say that the requirement embodied in it was satisfied by the assessee since the ground floor of the new building was constructed by the assessee within a period of two years from the date of sale of the old house property. There was an interregnum of a period of more than a year and a half between the completion of construction of the ground floor and the commencement of construction of the first floor of the new building and we may, therefore, take the ground floor of the new building as a unit of house property for the purpose of determining the applicability of the exempting provision and this unit of house property was admittedly constructed before the expiration of the period of two years from the date of the sale of the old house property. But the real difficulty in the way of the assessee lies in so far as the requirement embodied in the second limb of the condition is concerned. Can it be said, on the facts of the present case, that the assessee constructed the ground floor of the new building for the purpose of his own residence ? The answer can only be in the negative. The construction of the ground floor of the new building was completed by March, 1963, and immediately on completion of the construction, the assessee let out an area of 734 sq. ft. to tenants and retained with him an area of only 655 square feet for his own occupation. When more than 50 per cent. of the area of the ground floor of the new building was let out by the assessee to tenants as soon as the construction was completed, it is difficult to see how it can be said that the ground floor of the new building was constructed by the assessee for the purpose of his own residence. If the purpose for which the ground floor was constructed by the assessee was his own residence, it is inexplicable why the assessee should have let out a major portion of the area of the ground floor to tenants. It was not the case of the assessee that the ground floor was originally constructed by him for the purpose of his own residence but by reason of subsequent events or supervening circumstances it became impossible or impracticable for him to occupy a part of the ground floor for the purpose of his own residence and it was, therefore, let out to tenants. Such, indeed, could not be the case of the assessee since no period of time elapsed between the completion of the construction of the ground floor and the letting out of a portion of it to tenants. More than 50 per cent. of the portion of the ground floor was let out to tenants immediately on completion of the construction and there was, therefore, no question of any change of circumstances arising by reason of subsequent events which might induce the assessee not to utilise such portion of the ground floor for the purpose for which it was constructed, namely, his own residence and to let it out. It is in the circumstances impossible to say that the assessee constructed the ground floor of the new building for the purpose of his own residence. He constructed a part of it for the purpose of his own residence and the other part for the purpose of letting it out in order to earn rent. That is not sufficient compliance with the requirements of the section.