1993 (12) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of Section 54 of the Income-tax Act, 1961, prior to its amendment by the Finance Act, 1982.
2. Requirement of continuous use of the residential property for claiming exemption under Section 54.
3. Differing judicial interpretations by various High Courts on the matter.

Detailed Analysis:

1. Interpretation of Section 54 of the Income-tax Act, 1961:
The primary issue revolves around the interpretation of Section 54 of the Income-tax Act, 1961, as it stood before the amendment by the Finance Act, 1982. The section provided for exemption from capital gains tax if the property transferred was used by the assessee or their parents for residence "in the two years immediately preceding the date on which the transfer took place." The court needed to determine whether this meant continuous use for the entire two years or if intermittent use within the two years was sufficient.

2. Requirement of Continuous Use of the Residential Property:
The court examined whether the assessee or his parents must have used the residential house for an unbroken and continuous period of two years before the transfer to claim exemption. The High Courts of Madras and Gujarat held that continuous use for two years was necessary, while the Karnataka High Court opined that any use within the two years was sufficient. The Delhi High Court took a middle ground, suggesting that the house must have been "mainly" used for residence during the relevant period, even if not continuously.

3. Differing Judicial Interpretations:
The judgment reviewed various interpretations by different High Courts:
- Madras and Gujarat High Courts: These courts insisted on continuous and unbroken use for two years to claim the exemption.
- Karnataka High Court: This court held that any use within the two years sufficed.
- Delhi High Court: This court emphasized that the house must have been "mainly" used for residence during the two years, even if not continuously.

Court's Conclusion:
The court concluded that the original asset must have been "mainly" used for personal residence by the assessee or his parents in the two years immediately preceding the transfer. The use must be substantial and not occasional or casual. The court rejected the extreme views of the Madras and Gujarat High Courts, which required continuous use, and the Karnataka High Court, which allowed for any use within the two years. Instead, it aligned with the Delhi High Court's interpretation, emphasizing the word "mainly" to indicate significant use for residence.

Application to the Case:
In the case at hand, the assessee's parents used the original flat for only two months before its transfer. The court held that this did not meet the requirement of "mainly" using the property for residence during the two years before the transfer. Consequently, the assessee was not entitled to the exemption under Section 54.

Final Judgment:
The court answered the referred question in the negative, ruling in favor of the Revenue. It held that the assessee did not satisfy the conditions for exemption under Section 54 as interpreted by the court. The court also noted that there would be no order as to costs.

Summary:
The court clarified that for exemption under Section 54, the residential property must be "mainly" used for residence by the assessee or their parents in the two years preceding the transfer. This use need not be continuous but must be substantial. The court rejected the interpretations requiring continuous use and those allowing any use within the two years, favoring a balanced approach that considers significant residential use.