2002 (2) TMI 77 - HC - Income Tax

Summary

Issues Involved:
1. Whether the capital gain of Rs. 19,018 was exigible to tax.
2. Applicability of section 54(1)(ii) of the Income-tax Act, 1961.
3. Validity of the assessee's claim for exemption under section 54(1)(ii).
4. Interpretation of "residence" and "stop gap arrangement" under section 54(1).

Issue-Wise Detailed Analysis:

1. Whether the capital gain of Rs. 19,018 was exigible to tax:

The primary issue was whether the capital gain of Rs. 19,018, which arose from the sale of a house property by the assessee, was subject to tax. The assessee sold the original residential house on March 16, 1979, and purchased a new house on March 23, 1979, for Rs. 45,000. The assessee claimed exemption under section 54(1)(ii) of the Income-tax Act for the capital gain of Rs. 19,018 in the assessment year 1980-81. The Income-tax Officer (ITO) later added this amount to the assessee's income as short-term capital gain when the new house was sold within three years.

2. Applicability of section 54(1)(ii) of the Income-tax Act, 1961:

Section 54(1)(ii) provides that if the amount of capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45. The ITO held that since the new asset (house purchased on March 23, 1979) was sold within three years, the exemption of Rs. 19,018 allowed for the assessment year 1980-81 would reduce the cost of the building sold, thereby increasing the short-term capital gain. The Tribunal upheld this view, stating that the provisions of section 54(1)(ii) were applicable as the new asset was sold within three years.

3. Validity of the assessee's claim for exemption under section 54(1)(ii):

The assessee contended that the house purchased on March 23, 1979, was a stop gap arrangement as his permanent house was under construction, completed on May 29, 1980. The Appellate Assistant Commissioner (AAC) and the Commissioner of Income-tax (Appeals) (CIT(A)) supported the assessee's claim, noting that the exemption should be adjusted against the house constructed for permanent residence. The Tribunal, however, disagreed, stating that the purchase of the house on March 23, 1979, was relevant and the provisions of section 54(1)(ii) were attracted.

4. Interpretation of "residence" and "stop gap arrangement" under section 54(1):

The court examined the term "residence" and concluded that the benefit of section 54(1) applies to the new asset meant for the assessee's permanent residence. The court noted that a stop gap arrangement does not qualify as permanent residence. The court held that the assessee's construction of a new house, completed on May 29, 1980, was for permanent residence, and thus, the capital gain should be adjusted against this house, not the one purchased temporarily on March 23, 1979.

Conclusion:

The court concluded that the Tribunal erred in its judgment. It held that the capital gain of Rs. 19,018 was not exigible to tax as the assessee was entitled to adjust this amount against the cost of the house constructed for permanent residence, completed on May 29, 1980. The court answered the question in the negative, in favor of the assessee and against the Revenue, thereby disposing of the reference with no order as to costs.