Income-tax---

---Capital gains---Exemption ---Assessee,, owner of house property--Sale of house property---That construction of new building was started before sale of old building is immaterial ---Assessee entitled to exemption---Indian Income Tax Act, 1961, S. 54.

The assessee and his brother owned a residential house at a place G in moiety. The said property was sold on July 10, 1963, for a sum of Rs.4,11,000. The Income-tax Officer computed the capital gains from the sale of one-half share of the assesee at Rs.1,28,477 after allowing initial exemption of Rs.5,000. The assessee contended before the Income-tax Officer that capital gains to the extent of being invested in the construction of a new house at a place S was not taxable under section 54 of the Income Tax Act, 1961.' Though the Income-tax Officer accepted the contention that the house at place G had been used for. the purpose of residence for more than two years before the sale, he rejected the contention of the assessee that the construction of the house at place S had been completed by the assessee within a period of two years from the date of sale of the house at place G. The Income-tax Officer, therefore, held that section 54 was not applicable to the case of the assessee. The assessee alternatively contended before the Income-tax Officer that he started the construction of another residential house at Agra on March 10, 1963, and that came to be completed within two years of the sale of the house at place G and that the capital gains to the extent of being invested in the construction of the house at Agra was not taxable under section 54 of the Act. The Income-tax Officer, however, took the view that the assessee had started construction of the Agra house prior to the sale of the house at place G and, therefore, rejected the assessee's alternative contention also. On appeal, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. On further appeal, the Tribunal found that a perusal of section 54 showed that it did not lay down that the construction of any house must be begun only after the sale of the old residential house and that the sale proceeds of the old residential house must be used for the construction of the new residential house, that the assessee had complied with the requirement of section 54 in respect of the construction of the house at Agra and that he was entitled to the exemption out of the capital gains from the sale of the house at place G to the extent of the cost of construction of the house at Agra. On a reference:

Held, affirming the decision of the Tribunal, that it was immaterial that the construction of the new building was started before the sale of the old building. Therefore, the Appellate Tribunal was right in holding that capital gains arising from the sale of the house at place G to the extent it got invested in the construction of the house at Agra would be exempt under section 54 of the Act.

CIT v. J. R. Subramanya Bhat (1987) 165 ITR 571 (Kar.) fol.

JUDGMENT

On the application of the Revenue made under section 256(1) of the Income Tax Act, 1961, (briefly, "the Act"), the Appellate Tribunal referred the following questions for the opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the- case, the Income-tax Appellate Tribunal was correct in. law in holding that the assessee had complied with the requirements of section 54 of the Income Tax Act, 1961, in respect of the construction of the house at 64, Surya Nagar, Agra, and that he was entitled to exemption out of the capital gain from the sale of the house at Golf Link to the extent of the cost of construction of the house at 64, Surya Nagar, Agra?

(2) Whether, 'on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that for availing of the benefits under section 54 of the Income Tax Act, 1961, it is not necessary that the construction of the new house should begin after the sale of the old house?

(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that for availing of the benefits under section 54 of the Income Tax Act, 1961, it is not necessary that the sale proceeds of the old residential house must be used in the construction of the new residential house?"

The facts are that the assessee and his brother owned a residential house at Golf Link in moiety. The said property was sold on July 10, 1963, for a sum of Rs.4,11,000. The Income-tax Officer computed the capital gains from the sale of one half share of the assessee at Rs.1,28,477 after allowing the initial exemption of Rs.5,000.

The assessee pleaded before the Income-tax Officer that capital gains to the extent of being invested in the construction of a new house at Safdarjang Enclave, New Delhi was not taxable under section 54 of the Act. Whereas the Income-tax Officer accepted the contention that the Golf Link house had been used for the purpose of residence for more than two years before the sale, he rejected the contention of the assessee that the Safdarjang Enclave, New Delhi house, had been completed by the assessee within a period of two years from the date of sale of the Golf Link House. The Income-tax Office: was, therefore, of the view that section 54 was not applicable.

In the alternative, the assessee pleaded before the Income-tax Officer ,that he started the construction of another residential house at 64, Surya Nagar, Agra, on March 10, 1963, and that came to be completed within two years of the sale of the Golf Link House and that the capital gains to the extent of being invested in the construction of the Surya Nagar House was not taxable under section 54 of the Act. The Income-tax Officer, however, took the view that the assessee had started construction of this house prior to the. sale of the Golf Link House. He, therefore, rejected the alternative contention,, too, of the assessee.

On appeal, the Appellate Assistant Commissioner had agreed with the Income-tax Officer.

On further appeal, the Appellate Tribunal reproducing section 54 in its order found as follows:

"A perusal of the above provision will show that it does not lay down that the construction of any house must be begun after the sale of the old residential house and that the sale proceeds of the old residential house must be used for the construction of the new residential house. We are, therefore, of the opinion that the assessee complied with the requirement of section 54 in respect of the construction of the house at 64, Surya Nagar, Agra, and that he is entitled to the exemption out of the capital gains from the sale of the house at Golf Link to the extent of the cost of construction of the house at 64., Surya Nagar, Agra. We, therefore, direct the' Income- tax Officer to modify the assessment accordingly. "

The question for consideration is whether exemption on capital gains could be refused to the assessee simply on the ground that the construction of the Surya Nagar, Agra house, had begun before the sale of the Golf Link House. Similar question came up for consideration before the Karnataka High Court in the case of CIT v. J. R. Subramanya Bhat (1987) 165 ITR 571. In the case before the Karnataka High Court, the date of the sale of the old building was February 9, 1977. The completion of the construction of the new building, was in March, 1977, although the commencement of construction started in 1976. On these facts, the Karnataka High Court held that it was immaterial that the construction of the new, building was started before the sale of the old building. We fully agree with the view taken by the Karnataka High Court. The Appellate Tribunal was right in holding that capital gains arising from the sale of the Golf Link House to the extent it got invested in the construction of the Surya Nagar House, will be exempted under section 54 of the Act.

Coming to question No. 3, it will suffice to say that it is misconceived. The Tribunal did not record any finding that the assessee did not invest the capital gains in the construction of the new house. Exemption was refused for the simple reason that -the assessee had started the construction of the Surya Nagar House before the sale of the Golf Link House. Therefore, the question that for availing of the benefit under section 54 of the Act it is not necessary that the sale proceeds of the old building must be used in the construction of the new building, was not before the Appellate Tribunal.

We, therefore, answer questions Nos. 1 and 2 in the affirmative, that is in favour of the assessee and against the Revenue, and so far as question No. 3 is concerned, the same being misconceived is, returned unanswered.

M.B.A/3379/FCOrder accordingly.