1. The departmental appeal relates to the assessment year 1973-74. The question is whether for eligibility to Section 54 relief (profit on sale of property used for residence), the assessee should stay in the newly constructed house for a minimum period of three years. The assessee sold a residential house. Later she, within a period of two years, constructed a house for the purpose of her own residence. It was constructed in 1974. It was then let out from November 1975 onwards.
Thus, the assessee stayed for slightly more than a year. The ITO interpreted Section 54 of the Income-tax Act, 1961 to state that the property should have been occupied by the assessee after its construction in the two years. He, therefore, held that the property was in the occupation of the assessee only till October 1975 and thereafter it was let out and, therefore, the period of occupation falls out of the statutory period fixed under Section 54 and that in the circumstances, the assessee is not entitled to the benefits of Section 54.
2. The AAC held that the section does not say anywhere that the new house property also should have been used for the purpose of residence in the two years after the date of sale and that the ITO's interpretation of this section is not correct. So, he allowed the relief to the assessee. Hence, the departmental appeal.
3. The ITO while preferring this appeal has developed his case still further. He seems to have now realised that two years' residence insisted by him is too short a period and that actually it should be three years. In ground 4 before us, it is stated as follows : The AAC failed to appreciate that the assessee should have continuously used the newly constructed building for a period of three years so as to be eligible for relief under Section 54 of the Income-tax Act.
We found no substance in this departmental appeal. We examined and re-examined all the relevant provisions of the Act with great care and attention to find out whether there is any such requirement, which no one has till now discovered even after several years of administration of the income-tax law. We found none. We, therefore, readily agree with the reasoning and conclusions of the AAC which is as follows : ...But then, the section does not say anywhere that the new house property also should have been used for the purpose of residence in the two years after the date of sale. The Income-tax Officer's interpretation of the section is not correct.
6. In this connection Section 155(8) may be referred to. There also there is nothing to support the Income-tax Officer's view ....
4. It is not known whether the case of the department is that three years continuous residence is a requirement of law for eligibility of relief under Section 54, or whether it is only a factual element or a factual ingredient to test the question as to whether the house property newly constructed is for his own residence. We understood the tenor of the fourth ground and the agreement of the departmental representative in support of that ground to mean that it is a requirement of law. Whatever that may be, we found no substance in it because even to test whether the newly constructed house is for the assessee's own residence, we need only say that three years continuous residence therein is not at all necessary. Even without it, it will be possible for an assessee to establish that the newly constructed house is for his own residence.
6. We asked the departmental representative to enlighten on us on the material on which this case of two years or, as the case may be, three years minimum residence is sought to be sustained. He pointed out that Section 54(1)(i), which provides that for the purpose of computing, in respect of the new asset, any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil. We fail to understand how this provision could be relied on to insist on two or three years residence in the newly constructed house. It only lays down a procedure to estimate the cost in the event of sale within a period of three years, and the expression "within", we may point out, even permit a sale of property even the next day after construction.