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Issues involved: Interpretation of section 54 of the Income-tax Act, 1961 regarding exemption of capital gains on sale of property used for construction of a new residential property.
Summary: The High Court of Gujarat considered a case where an assessee, a Hindu Undivided Family (HUF), sold a residential property and earned capital gains. The assessee then constructed a new residential property within two years of the sale, consisting of a ground floor and two upper floors. The ground floor was leased out, while the upper floors were used for personal residence. The assessee claimed a reduction under section 54 of the Income-tax Act, 1961, which was initially rejected by the Income Tax Officer (ITO) but allowed by the Appellate Authority (AAC) and the Tribunal. The Revenue appealed the matter, questioning the entitlement to exemption under section 54. The High Court referred to previous judgments, including CIT v. Tikyomal Jasanmal and CIT v. Natu Hansraj, to establish principles regarding the applicability of section 54. It was highlighted that the new property need not be exclusively used for residential purposes, and the predominant intention of the assessee in purchasing the new property is crucial. The Court emphasized that the immediate purpose of construction and the assessee's occupation of a substantial portion of the property are significant factors in determining eligibility for exemption. Considering the settled legal position and the subsidiary test applied by the Tribunal, the High Court upheld the assessee's entitlement to pro rata exemption from capital gains. The Court also referenced a similar view taken by the Delhi High Court in Addl. CIT v. Vidya Prakash Talwar, emphasizing that the concept of house property under section 54 encompasses all residential units, not just independent and complete houses. Therefore, the Court ruled in favor of the assessee, affirming the Tribunal's decision and directing the Commissioner to pay the costs of the reference to the assessee.
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