HAMEED JAFFERY VS COMMISSIONER OF INCOME-TAX
1999 P T D 2413
[227 I T R 724]
[Bombay High Court (India)]
Before Dr. B. P. Saraf and Dr. Mrs. Upasani, JJ
HAMEED JAFFERY
versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No.l of 1985, decided on 27/02/1997.
Income-tax---
----Capital gains---Exemption---Transfer of property used for residence of assessee or his parent for two years preceding date of transfer and purchase or construction of another such property within specified period---Scope of S.54---Occupation of property must have been as owner---Property occupied for part of two years period on a leave and licence basis and for other part as owner ---Assessee not entitled to exemption under S.54---Indian Income Tax Act, 1961, S.54.
Section 54 of the Income Tax Act, 1961, which grants exemption in respect of capital gains on sale of property used for residence, requires that the property in question must have been used by the assessee himself or by his parents mainly for the purpose of his own or the parents' own residence for a period of two years preceding the date of transfer. It is one of the conditions precedent for applicability of section 54. The expression "was being used by the assessee or a parent of his mainly for the purposes of his own or the parents' own residence" in the context in which it appears in section 54, clearly means that the occupation of the assessee must be occupation in the capacity of "owner". If does not contemplate occupation during the period when the property did not belong to him.
The assessee was occupying a flat in Bombay from May, 1968, on leave and licence basis. He was paying compensation for that at the rate of Rs.525 per month. He purchased the said flat on July 16, 1973, for a sum of Rs.36,375 and was in occupation of the same as its owner since then. He sold the above flat on August 11, 1974, for a sum of Rs.70,000. The assessee had purchased a flat for his residence on August 1, 1974. The assessee claimed exemption under section 54 in respect of capital gains arising from the sale of the flat for Rs.70,000 on the ground that he had been occupying the same for a period of two years prior to its sale. The Income tax Officer did not accept the claim of the assessee for exemption and this was upheld by the Tribunal. On a reference:
Held, that admittedly the assessee was in occupation of the property in question up to July 15, 1973, on leave and licence basis. He purchased the property from its owner only on July 16, 1973. The user of the same by the assessee on and from that date only was relevant for purposes of section 54. That being so, it was obvious that the property in question had not been used by the assessee or his parents for own residence in the two years immediately preceding the date of the transfer. The assessee was not entitled to claim exemption under section 54 in respect of the capital gains arising from the transfer of the residential flat in question.
S.J. Mehta with C.B. Mehta for the Assessee.
Dr. V. Balasubramanian and J.P. Deodhar instructed by H.D. Rathod for the Commissioner.
JUDGMENT
DR. B.P. SARAF, J.--- By this reference under section 256(1) of the income Tax Act, 1961, made at the instance of the assessee, the Income tax Appellate Tribunal has referred the following question of law to this Court for opinion:--
"Whether, on the facts and in the circumstances of the case, the assessee is not entitled to the exemption under section 54 of the Income Tax Act, 1961, in respect of capital gain received by him on the sale of the residential flat?"
This reference pertains to the assessment year 1975-76. The material facts of the case giving rise to this reference are as follows:-
The assessee is an individual. He was occupying Flat No.9-G of Malbar Apartment at Nepeansea Road, Bombay, since May, 1968, on leave and licence basis. He was paying compensation for that at the rate of Rs.525 per month. He purchased the said flat on July 16, 1973, for a sum of Rs.36,375 and was in occupation of the same as its owner since then. He sold the above flat on August 11, 1974, for a sum of Rs.70,000. The assessee had purchased a flat bearing Flat No.203 in Casablanca for Rs.1,10,000 on August 1, 1974. The assessee claimed exemption from capital gains tax under section 54 of the Income Tax Act, 1961 ("the Act"), in respect of capital gains arising from the sale of the flat at Malabar Apartment for Rs.70,000 on the ground that he had been occupying the same for a period of two years prior to its sale. The Income-tax Officer did not accept the claim of the assessee for exemption under section 54 of the Act as, according to him, the assessee was not even the owner of the flat sold by him for two years. On appeal by the assessee, the Appellate Assistant Commissioner of Income-tax accepted the claim of the assessee and allowed exemption under section 54 of the Act. Aggrieved by the above order of the Appellate Assistant Commissioner, the Revenue appealed to the Income-tax Appellate Tribunal. The Tribunal reversed the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. While doing so, the Tribunal held that for getting exemption under section 54 of the Income-tax Act, the assessee must reside in the residential house as an owner for a period of two years prior to its sale. Hence, this reference at the instance of the assessee.
Mr. S.J. Mehta, learned counsel for the assessee, submits that for the purpose of exemption under section 54 of the Act it is not necessary that the assessee should occupy the premises for his own residence as an owner. According to him, it is sufficient if the assessee was in occupation of the premises for a period of two years in any capacity.
We have carefully considered the above submission of learned counsel of the assessee. The admitted position in this case is that the assessee purchased the flat in question on July 16, 1973, and sold the same on August 11, 1974. Obviously, the flat in question was the property of the assessee only for a period of a little over one year. Section 54 of the Act which grants exemption in respect of capital gains on sale of property used for residence, requires that the property in question must have been used by the assessee himself or by his parents mainly for the purpose of his own or his parents' own residence for a period of two years preceding the date of transfer. It is one of the conditions precedent for applicability of section 54 of the Act. Section 54 of the Act, as it stood at the material time, so far as relevant, reads as follows:--
"54. Profit on sale of property used for residence.--- Where a capital gain arises from the transfer of a capital asset to which the provisions of section 53 are not applicable, being buildings or lands appurtenant thereto the income of which is chargeable under the head Income from house property, which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date constructed a house property for the purposes of his own residence, then, instead of the capital gain being charged to income-tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions of this section, that is to say ...."
It is clear from a plain reading of the above section that exemption from tax on profits from the sale of a building under the above section is dependent on fulfilment of the conditions set out therein. One of the conditions precedent is that the property in question should have been used by the assessee mainly for the purposes of his own residence in the two years immediately preceding the date on which the transfer took place. This expression, in the context in which it appears in section 54, clearly means that the occupation of the assessee must be occupation in the capacity of the owner. It does not contemplate occupation during the period when the property even did not belong to him.
In the instant case, admittedly, the assessee was in occupation of the property in question up to July 15, 1973, on leave and licence basis. He purchased the property from its owner only on July 16, 1973. The user of the same by the assessee. on and from that date only is relevant for the purposes of section 54. That being so, it is obvious that the property in question had not been used by the assessee or his parents for own residence in the two years immediately preceding the date of the transfer. In view of the above, in our opinion, in the instant case, the Tribunal was right in holding that the assessee was not entitled to claim exemption under section 54 of the Act in respect of the capital gains arising from the transfer of the residential flat in question. Accordingly, the question referred to us is answered in the affirmative and in favour of the Revenue. In the facts and circumstances of this case, we make no order as to costs.
M.B.A./2075/FC Reference answered.