P.D. Desai, J.
1. In the year 1957, the assessee purchased a house property (hereinafter referred to as the 'old property') for a consideration of Rs. 5,850. At the time of its purchase, the old property consisted of a ground floor only. In the years 1958 and 1959, two more floors were constructed thereon by the assessee. The ground floor was then let out and the upper two floors were used by the assessee for the purposes of his own residence.
2. In Samvat year 2023, that is, in the year of account relevant to the assessment year 1968-69, the assessee sold the old property for a consideration of Rs. 27,011. In the same year, he purchased another house property (hereinafter referred to as the 'new property') for a consideration of Rs. 43,000 and spent a sum of Rs. 3,000 on repairs thereof. He then occupied a major portion of the new property but let out some portion thereof to a tenant.
3. In the course of proceedings for assessment to income-tax for the assessment year 1968-69, the assessee claimed before the Income-tax Officer that the profit arising to him on the sale of the old property was no chargeable to tax under the head 'capital gains' under section 45 of the Income-tax Act, 1961 (hereinafter called 'the Act'), since it was within the exempting provisions contained in section 54. The Income-tax Officer computed the cost of the old property (including the cost of improvement) in the hands of the assessee at Rs. 6,430 and on that basis held that the capital gain arising on sale of the said property was Rs. 20,581 (Rs. 27,011 minus Rs. 6,430 = Rs. 20,581). He negatived the claim for exemption primarily on the ground that the transaction was an adventure in the nature of trade and that profit arising therefrom was liable to be taxed as business profit. Accordingly, a sum of Rs. 20,581 was brought to tax in the hands of the assessee.
4. On appeal, the Appellate Assistant Commissioner recomputed the cost of the old property in the hands of the assessee at Rs. 13,850 (Rs. 5,850, being the cost of acquisition plus Rs. 8,000 being the cost of improvement made thereto = Rs. 13,850). He also found that a major portion of the old property was used for residence by the assessee since only the ground floor was let out and that, therefore, the old property could be said to have been used by the assessee mainly for the purpose of his own residence. So far as the new property was concerned, he found that its cost of acquisition was Rs. 46,000. He further found that a major portion, namely, nearly seventy-five per cent, of the total area thereof, was in the occupation of the assessee for the purposes of his own residence and only a portion thereof, namely, about twenty-five per cent. of the total area, was let out to a tenant. According to the Appellate Commissioner, the transaction in question was not an adventure in the nature of trade and the profit arising from the sale of the old property could not, therefore, be taxed as business profit. However, he negatived could not, therefore, be taxed as business profit. However, he negatived the assessee's claims or exemption on the ground that in order to claims the benefit of section 54 the assessee must show that the new property was purchased by him exclusively for the purposes of his own residence and that since that condition was not satisfied in the present case inasmuch as a portion of the said property was let out, the assessee was not entitled to claim exemption. Accordingly, the capital gain of Rs. 13,161 (Rs. 27,011 minus Rs. 13,850 = Rs. 13,161) was held chargeable to tax in the hands of the assessee under section 45.
5. On further appeal, the Income-tax Appellate Tribunal held that since section 54 nowhere used the word 'exclusively' while dealing with the newly acquired property, it was necessary for the assessee to show that the new property was purchased by him with the end in view of using it only for the purposes of his own residence and that having regard to the fact that nearly seventy-five per cent. of the total area of the new property was used by the assessee for the purpose of his own residence and all other conditions were also complied with, the requirements of section 54 were satisfied and the assessee was entitled to the benefit of exemption. The Tribunal accordingly allowed the appeal of the assessee in respect of the capital gain resulting from the sale of the old property.
6. The matter has now come up before us on a reference at the instance of the revenue and the question which has been referred for our opinion is in the following terms :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the capital gain earned by the assessee was exempt from tax under section 54 of the Income-tax Act, 1961 ?'
7. Under section 45, as it stood at the material time, any profits or gains arising from the transfer of a capital asset effected in the previous year were, save as otherwise provided in sections 53 and 54, chargeable to income-tax under the head 'capital gains' and were deemed to be the income of the previous year in which the transfer took place. Section 48 lays down the mode of computation of capital gains and provides for certain deductions. section 53 is not relevant for the purposes of this case and no reference needs to be made to its contents. section 54 enacts an exemption provision and it reads as under :
'54. Profit on sale of property used for residences. - 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 apparent of his mainly for the purpose 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, -
(i) if the amount of the capital gain is grater than the cost of the new asset, the difference between the amounts 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 amounts 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 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 reduced by the amount of the capital gain.'
8. It is manifest on a bare reading on this provision that full exemption in respect of capital gain arising from the sale of a property used for residence would be available to the assessee provided three conditions are satisfied;
(i) the house property must have been used by the assessee or a parent of his, mainly for the purposes of his own or the parent's own residence during the period of two years immediately preceding the date on which the sale took place;
(ii) the assessee must have, within a period of one year before of after such date purchased or, within a period of two years after such date, constructed a house property for the purpose of his own residence; and
(iii) the capital gain must be equal to or less than the cost of the new house property. The question then is whether these conditions are satisfied in the present case.
9. Now, it was not disputed before the Tribunal, and the Tribunal has found it, as a matter of fact, that the old property sold by the assessee was used mainly for the purpose of his own residence during the period of two years immediately preceding the date on which it was sold and, therefore, the first condition above-mentioned is satisfied. The third condition is also manifestly satisfied because the capital gain arising on the sale of the old property (Rs. 13,161) is less than the cost of the new property (Rs. 46,000). The only controversy between the parties is as to whether the second limb of the second condition, namely, whether the new property was purchased by the assessee for the purpose of his own residence, is satisfied in the present case. In other words, the question in the context of the circumstances prevalent in the present case is whether, having regard to the fact that the assessee actually occupied only seventy-five per cent. of the total area of the new property for the purposes of his own residence and not the whole of it, can he be said to have purchased such property for the purposes of his own residence within the meaning or section 54 the answer to the question depends upon the true construction of the relevant part of the said section.
10. It is clear that in that part of section prescribes the first condition of exemption, the legislature has used in connection with the house property on the sale of which capital gain arises, the expression 'a capital asset.... which was being used by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence', whereas, while laying down the second condition of exemption, it has used a different expression while dealing with the newly acquired house property, namely, 'the assessee has... purchased, or has.... constructed, a house property for the purpose of his own residence'. There are two significant department so far as the latter expression is concerned. First, the word 'mainly' used, while prescribing the first condition, in conjunction with the expression 'for the purposes of... residence', which is common to both conditions, has been omitted. Secondly, the user of the old property by a parent of the assessee for the purposes of his or her own residence for the prescribed period would satisfy the first condition but, so far as the newly acquired property dealt with in the second condition is concerned, it must have been purchased or constructed for the purposes of the assessee's own residence. We are concerned in the present case with the effect of the first departure and need not say anything more about the second departure. The apparent change in the terminology of these two expressions, according to the revenue, clearly indicates that the concept of main user of the house property for the purposes of residence is confined merely to the first conditions of exemption and that the context and collocation inevitably leads to the conclusion that the second condition would be satisfied only if the newly acquired house property has been purchased or constructed 'exclusively' or 'wholly' for the purposes of the assessee's own residence. From the significant omission of the word 'mainly' in the latter expression, the revenue contends it is necessarily implied that the newly acquired property must have been purchased or constructed by the assessee entirely for his own residence and not partly for such residence and partly for letting. The assessee contends, on the other hand, that too much cannot be read into the omission of the word 'mainly' in the latter expression and that it does not necessarily warrant the construction suggested by the revenue. In any case, according to the assessee, the construction for which the revenue contends cannot be placed upon the latter expression unless the word 'exclusively' or 'wholly' or 'entirely' is added and it is not permissible to do so unless the provision as it stands is meaningless which it is not in the present case. The question them is as to which out of the two rival constructions is preferable and how to resolve that conflict.
11. It is well settled that words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the legislature has in view. Their meaning is found not so much in a strictly grammatical or etymological propriety of language, nor even in its popular use, as in the subject or in the occasion on which they are used, and the object to be attained. (See Workmen of Dimakuchi Tea Estate v. Management of Dimakuchi Tea Estate The expressions used in a statute should ordinarily be understood in a sense in which they best harmonise with the object of the statute and which effectuate the object of the legislature (See New India Sugar Mills v. Commissioner of Sales Tax. It is necessary, therefore, to read section 54 in the context of the subject-matter and its setting in the scheme of capital gains and the object of exemption and then to ascertain the true import of the relevant part thereof.
12. Now, section 45 read With section 48 treats the profits or gains arising from the transfer of a capital asset as income and brings them to tax in the hands of the assessee after deducting from such gross profits or gains firstly, the expenditure incurred Wholly and exclusively in connection with such transfer, and, secondly, the cost of acquisition of the capital asset and the cost of any improvement thereto. By enacting section 54, however, the legislature has provided that profit or gains derived from each and very transfer of a capital asset is not to be brought to tax. If a house property, which was used mainly for the purpose of the assessee's or his parent's own residence during the prescribed period, is transferred and the assessee, within the stipulated time-limit, purchases or constructs a new property for the purpose of his own residence, them, he surplus resulting upon the sale of the old house property is not to be brought to tax, for the transaction is in reality a case merely of change of capital asset without change of purpose and the resultant profit is ploughed back into the acquisition of a new capital asset of same of nature for a similar purpose. The legislative object in enacting the exemption provisions is thus clear that when an assessee utilises the surplus money realised on the sale of the old house property, which was mainly in his or his parent's self-occupation, for acquiring a new house property, which he the end in view of his own immediate residential purpose, then, he should not be made subject to the charge of capital gains. In order to effectuate this object, therefore, what the legislature could have intended to provide is that the new property must have been really an substantially purchased or constructed by the assessee for the immediate purpose of his own residence.
13. Certain other aspects which have a bearing on the question of construction of the provision in question might also be noted In the first place, it is significant to note that even while prescribing the first condition of exemption, the legislature has not provided that the house property sold should have been exclusively or wholly used by the assessee or his parent for his own residence. If is sufficient if it was mainly used for such purpose by either of them, since this is the requirement of the first condition, it is difficult to ascribe to the legislature, while laying down the second condition of exemption, the intention to provide that the new property must be purchased or constructed by the assessee entirely or solely for the purposes of his own residence. This question turns primarily upon the ascertainment of the assessee's state of mind at or about the time of purchase of construction, as the case may be, in the attendant circumstances and his immediate or proximate conduct, for 'it is the immediate purpose of construction (or purchase) which is relevant and not the remote, future of ultimate purpose' (bracketed portion supplied) (see Commissioner of Income-tax v. Tikyomal Jasanmal). If the assessee, therefore, himself occupies a major portion of the new property immediately of within a reasonable timed after its purchase or construction, it would ordinarily provide a clue that he acquired the new property really and substantially for the purposes of his own residence and to that extent that circumstance may be relevant and useful only as a subsidiary test. In the last place, as earlier stated, this question has to be decided in each case on an integrated view of all the relevant circumstances and the predominant intention of the assessee in purchasing the new property has to be ascertained on an overall picture of all the material facts. No single factor including whether or not the property newly acquired was wholly or substantially occupied by him for the purposes of his own residence after purchase or construction, as the case may be, could be determinative of the matter. Even if the new property was not substantially put to use for his own residential purposes by the assessee within a reasonable time and if the failure to do so was without an fault on his part, that is, by reason of some unforeseen subsequent events or supervening circumstances, it might still be possible to hold in a given case, provided other circumstances point in that direction, that the real belief, intention or motive entertained or motive entertained by the assessee at or about the time of purchase or construction as regards the use of the newly acquired house property was to occupy it himself. If would thus appear that there is no warrant for construing the relevant expression in the manner suggested by the revenue.
14. The departure in the language and omission of the word 'mainly' in the clause prescribing the second condition is explainable on the ground that whereas for the satisfaction of the first condition what has to be ascertained is a per-existing fact-stipulation, so far as the fulfilment of the second condition is concerned, the ascertainment of the state of mind of the assessee being not an algebraic or mathematical problem, the quantum of area which the assessee ultimately occupies in the building for the purposes of his own residence, though a relevant or guiding factor was not intended to be treated as a conclusive circumstance. In our opinion, therefore, it is for that reason the legislature has omitted the word 'mainly' and it has not used it in conjunction with the expression 'for the purposes of his won residence' in that part of section 54 which prescribes the second condition of exemption. Any other construction would not only warrant the addition of words such as 'exclusively' or 'wholly' or 'entirely' but would also militate against the legislative object and tend to over-emphasise the importance of what is but one of the relevant factors.
15. There is no direct authority on the point under consideration, none at least has been cited before us. However, in Commissioner of Income-tax v. Tikyomal Jasanmal the provisions of section 54 came up for construction before this court in the context of the following facts. The assessee in that case purchased a house property at an auction and used the same mainly for the purpose of his own residence up to 1962. He then sold it and the sale resulted in a capital gain. The assessee immediately thereafter purchased a piece of land and started constructing a building on it. As soon as the construction of the ground floor was completed, the assessee occupied the whole of it. However, some time later, the assessee let out a substantial portion of the ground floor and thereafter started construction of the first floor. After completing the construction of the first floor, he occupied it for his personal residence, the question which arose in that case was whether in the circumstances above-mentioned the profit arising to the assessee from the sale of the old building was chargeable to tax under the head 'capital gains'. The assessee's claim that the provisions of section 54 were attracted was negative by the Income-tax Officer and Appellate Assistant Commissioner of the ground that the new building was not constructed within the statutory time-limit and that it could not be said to have been constructed by the assessee for the purpose of his own residence. The Income-tax Appellate Tribunal, however, reversed these findings and upheld the claim. This court, on a reference, held that since the ground floor was constructed within the statutory period of two years, it could be treated as a unit for the purpose of the applicability of section 54. However, since more than fifty per cent of the area of the ground floor of the new building was let out by the assessee to tenants as soon as the construction was completed, it was difficult to hold that it was constructed by the assessee for the purpose of his own residence. It was observed :
'If the purpose of for which the ground floor was constructed by the assessee was his own residence, it is inexplicable why the assessee should have let out a major portion of the area of the ground floor to tenants. It was not the case of the assessee that the ground floor was originally constructed by him for the purpose of his own residence but by reason of subsequent event of supervising circumstances it became impossible or impracticable for him to occupy a part of the ground floor for the purpose of his own residence and it was, therefore, let out to tenants... More than 50 per cent. of the portion of the ground floor was let out to tenants immediately on completion of the construction and there was, therefore, no question of any change of circumstances arising by reason of subsequent events which might induces the assessee not to utilise such portion of the ground floor for the purpose for which it was constructed, namely, his own residence and to let it out. It is, in the circumstances, impossible to say that the assessee constructed the ground floor of the new building for the purpose of his own residence. He constructed a part of it for the purpose of his own residence and the other part for the purpose of letting it out in order to earn rent. That is not sufficient compliance with the requirements of the section.'
16. Though the point which arises for our determination in the present case was not directly touched in that case, the reasoning underlying the decision supports the view which we are taking inasmuch as the court did not throw out the claim for exemption on the ground that the ground floor was not exclusively used by the assessee for his own residence but negative it on account of the fact that since more than fifty per cent. of the area was let out, there was no sufficient compliance with the condition for exemption. The test whether by reason of some subsequent events or supervening circumstances it became impossible for the assessee to immediately occupy a major portion of the property was also applied and that too is in consonance with our view.
17. Turning now to the facts of the present case it has been found as a matter of fact that the old building on the sale of which the capital gains arose mainly occupied by the assessee for the purpose of his own residence for a period of nearly one decade. When, therefore, the assessee sold the said property, it must have become imperative for him to find alternative accommodation. Of course, he owned another house property. However, the said property was fully let out. He the purchased the new property and after making some important therein he occupied nearly seventy-five per cent. of the total area of the said property. Only twenty-five per cent. of the total area comprised in the new property was let out by him. The Appellate Assistant Commissioners has found and that finding was not challenged before the Tribunal, that the assessee had to borrow a load purchasing the new property since his other funds were licked up and that because he ultimately found that he could not afford to live in a house, the cost of acquisition of which was so high, he sold away the new property within a year and purchased another house property of lesser value for residence, these circumstances might also explain as to why the whole of the new property was not actually used for his own residence by the assessee and why about twenty-five per cent. of the total area of the said house was let out. It would thus appear, in the light of the circumstances aforementioned, that the only conclusion possible is that the new property was purchased by the assessee in reality and substance for the purpose of his own residence and that he is entitled to the benefit of exemption under section 54.
18. From the foregoing discussion it follows that we are of the view that the Tribunal was right in law in holding that the capital gain earned by the assessee was exempt from tax under section 54. The question referred to us is, therefore, answered in the affirmative and in favour of the assessee and against the revenue. The Commissioner will pay the costs of the reference to the assessee.