1970 (10) TMI 11 - HC - Income Tax

Assessee construdt a house - more than half of the building had been let out to tenants soon after the completion of construction - it cannot be said that the new building had been constructed by the assessee for the purposes of his own residence - exemption u/s 54 not given

Summary

Issues:
Interpretation of section 54 of the Income-tax Act, 1961 for exemption in capital gain resulting from the sale of a house property.

Analysis:
The judgment delivered by the High Court of Gujarat centered around the interpretation of section 54 of the Income-tax Act, 1961, regarding the exemption of capital gain from the sale of a house property. The case involved an assessee who purchased a house property, used it for personal residence, sold it, and then constructed a new building. The primary issue was whether the conditions of section 54 were met to claim exemption from tax on the capital gain. The section requires that the house property must have been used for personal residence and a new property constructed within a specified period for the same purpose.

The first condition under section 54 was established as the old house property was used mainly for the assessee's residence. However, the controversy arose concerning the fulfillment of the second condition. This condition had two aspects: the new building must be constructed within two years from the sale of the old property, and it must be constructed for the purpose of the assessee's own residence. The revenue argued that the second condition was not satisfied as the new building was not entirely constructed for personal residence.

The High Court analyzed the facts and found that while the ground floor of the new building was constructed within the specified time frame, a significant portion was immediately let out to tenants. This led to the conclusion that the ground floor was not constructed entirely for the assessee's own residence. The court emphasized that the immediate purpose of construction is crucial, and future intentions or eventual use do not fulfill the requirement of the section.

The court rejected the assessee's argument that the entire ground floor was constructed for future personal use due to growing space requirements. It was held that the immediate purpose of construction determines the applicability of the exemption provision. Since a substantial part of the ground floor was let out immediately after completion, it was deemed that the construction was not solely for personal residence, leading to the denial of the exemption claim under section 54.

In conclusion, the court answered the question of exemption eligibility under section 54 negatively, stating that the assessee did not meet the conditions required for exemption. As a result, the subsequent questions did not need to be addressed, and the assessee was directed to bear the costs of the reference to the Commissioner.