1. Though a very interesting question arises in this income-tax reference, we think that in the ultimate analysis it is only a question of fact and the conclusion of the Tribunal should prevail. We may briefly state the facts.
2. The assessed, an individual, was residing in house property bearing 101, Darya Ganj, Delhi. He sold it eventually on December 29, 1964. It is common ground that the assessed had been residing in the above property from 1957 to 1964.
3. On December 1, 1963, the assessed entered into an agreement of sale in respect of the property with one Shanti Devi and also received an earnest money of Rs. 25,000 from her. Under the terms of the agreement, the assessed had to deliver vacant possession of the said house to Shanti Devi. But this could not be done for reasons to be referred later and the sale fell through.
4. Soon after the agreement with Shanti Devi, i.e., on December 17, 1963, the assessed purchased a plot at South Extension in New Delhi. He also constructed a residential house on this plot commencing in March, 1964. Apparently he expected the house to be completed soon and he anticipated that he would be able to move into this house an deliver vacant possession of the Darya Ganj house to Shanti Devi. But Shanti Devi was not willing to wait until the house was completed which was only in December, 1964, and so the agreement with Shanti Devi fell through.
5. The assessed was, thereforee, obliged to negotiate afresh for the sale of the property and it was eventually sold to one S. P. Bhargava on December 29, 1964. It is common ground that on the sale of the property effected on December 29, 1964, a capital gain of Rs. 42,550 was released by the assessed.
6. It has been accepted by the department that on December 28, 1964, the assessed shifted his residence from Darya Ganj to the newly constructed house in South Extension. He lived in this house till April 1, 1965, on which date this portion of the house, namely, the ground floor, was leased out by the assessed to Bank of Baroda. In the meantime, the assessed had also started construction of a first floor and a barsati on the ground floor which was already existing. The total cost of construction of the barsati and the first floor came to Rs. 91,694. Of this, Rs. 15,000 was spent up to December 31, 1964, and the balance of Rs. 79,694 was spent between January, 1965, and November, 1966. In other words, the amount invested by the assessed after December 31, 1964, on the construction of the first floor and the barsati exceeded the amount of capital gains of Rs. 42,550. On April 1, 1965, after the ground floor had been let out to the Bank of Baroda, the assessed shifted to the first floor and the barsati and it is common ground that he occupied it as his residential premises.
7. On the above facts, the department had to consider the assessed's claim for exemption under s. 54 of the I.T. Act, 1961. The ITO denied the assessed the benefit of the exemption but the claim was accepted by the AAC as well as the Appellate Tribunal. The Tribunal pointed out that there was no dispute that the Darya Ganj property had been used by the assessed mainly (indeed wholly) for the purpose of the assessed's own residence for the statutorily required period. The only further requirement to render the assessed eligible for exemption under s. 54 was that the assessed should have, within a period of 2 years after the date of sale of the earlier property, constructed a house property for the purposes of his own residence. So far as this condition was concerned it was not necessary that the new house constructed should be occupied by the assessed either exclusively or mainly for the purposes of his residence. What had to be seen was whether the construction was for the assessed's residence. After discussing the evidence placed before it, the Tribunal came to the conclusion that the ground floor had been constructed for the purposes of residence and that the assessed's decision to shift to the first floor was taken only later. The assessed's eligibility to exemption had to be determined with reference to the point of time of the sale and immediately thereafter and this condition was satisfied. That apart, the ground floor and the first floor had independent existences of their own and, if a requirement is imported into the section that the new construction should be solely and exclusively into the section that the new construction should be solely and exclusively occupied by the assessed, even that condition can be said to have been satisfied having regard to the fact that the upper floors had been exclusively under the occupation of the assessed for the purposes of his residence. The Tribunal, for the reasons mentioned above, dismissed the department's appeal and the aggrieved Commissioner of Income-tax has sought for a reference to this court of the following question of law :
'Whether the Tribunal was justified in exemption the capital gains of Rs. 42,550 from taxation in terms of section 54, notwithstanding the fact that only a portion of the newly constructed property in South Extension came to be occupied for the assessed's own residence ?'
8. Section 54 confers an exemption from capital gains in certain cases in respect of the sale of house property. The section runs as follows :
'54. 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 assessed or a parent of his mainly for the purposes of his own or the parent's own residence, and the assessed 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, -
(i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and 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; or
(ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new assets any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may by be, the cost shall be reduced by the amount of the capital gain.'
9. In order to understand the real purport of the section it is necessary to read the main part of the section along with subsequent paragraphs which outline the extent of the exemption available. A perusal of the entire section will show that where an assessed disposes of a property in which he is residing and invests the amounts of capital gains derived thereby, within the stipulated period, in a new residential house property either purchased or constructed by him, he will be exempted from tax in respect of the capital gains realised by him. The legislative object of the provision has been explained in the decision of the Gujarat High Court in CIT v. Natu Hansraj : 105ITR43(Guj) .
10. So far as the presents case is concerned, we think, it clearly falls both within the intendment and language of s. 54 if two important considerations are kept in mind. The first is that when the section talks of house property it does not mean an independent and complete house in the sense in which the term used to be understood once upon a time. House property for the purposes of s. 54 has the same meaning as the concept of house property under ss. 22 to 27 which make it clear that the expression 'house property' takes into account an independent residential unit. In fact, there can be no doubt, that the section takes into account all independent residential units particularly in these days when multi-storeyed flats are becoming the order of the day. That the expression 'house property' would also take into account a unit of house property has also been accepted in CIT v. Tikyomal Jasanmal : 82ITR95(Guj) . Here for the purpose of the present case, the two units comprising the house in South Extension could be occupied independently. The second consideration to be kept in mind in the light of the above is that we are not concerned here with what happened prior to December 29, 1964, when the house at Draya Ganj was sold but only with what constructions the assessed put up thereafter. The ground floor which had been constructed before December 29, 1964, was a separate independent unit and its construction cannot affect the applicability of s. 54 because it was anterior to the date of sale of the Darya Ganj property. On the other hand, the first floor and the barsati constituted a separate independent residential unit, the construction of which was no doubt started in March, 1964, but gained momentum towards the end of that year and was eventually completed in November, 1966. So far as this residential unit is concerned it was constructed by the assessed within a period of two years from the date on which Darya Ganj property was disposed of It has also been found as a fact by the Tribunal that the investment by the assessed in this property was to the extent of Rs. 76,694 between January, 1965, and November 1966, and this was more than sufficient to absolve the capital gains realised by the assessed on the sale of the Darya Ganj property. If these two aspects of the case are kept in mind it seems to us pretty plain that in the present case the conditions for exemption under s. 54 are clearly fulfillled. To us, up : the assessed sold the Darya Ganj property on December 29, 1964 : he realised a capital gain of Rs. 42,550; he invested an amount more than the amount of this capital gain in the construction of a house property which was completed within a period of two years after that date; and the house property so completed was admittedly used by the assessed for the purposes of his own residence.
11. In the fact of the above findings, we are of opinion that the assessed was entitled to the exemption under s. 54. The question, as referred to us, proceeds on the basis that the assessed had constructed 'a portion' of a house property in South Extension but as already pointed out by us the two residential units of the South Extension property should be considered separate and the real question that arises in the present case is :
'Whether, on the facts and in the circumstances of the case, the assessed is entitled to the exemption of the capital gains of Rs. 42,550 under section 54 of the Act ?'
12. We make the slight modification in the frame of the question and answer it in the affirmative and in favor of the assessed. As the Commissioner has failed, he will pay the costs of the assessed. Council's fee Rs. 350.
13. Question reframed and answered in the affirmative.