Pedantic construction of section 54 rejected; instalment payments under government housing scheme count as construction steps

HC allowed the assessee's appeal, holding the Tribunal erred in a pedantic construction of section 54. Substantial instalment payments toward a residential flat under a government scheme constitute sufficient steps toward construction within the two-year period; completion need not be absolute. The court found the departmental circular persuasive and requiring sympathetic application to grant relief. The question was answered in favour of the assessee and against the Revenue.

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Issues involved: Interpretation of exemption u/s 54 of the Income-tax Act for surplus realized on sale of residential property and investment in a flat.

Summary:
The High Court of Madhya Pradesh considered a reference application u/s 256(1) regarding denial of exemption u/s 54 of the Income-tax Act to the assessee. The assessee sold a property in Jabalpur, realizing capital gains of Rs. 31,980, and invested Rs. 71,256 in a flat in Delhi. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal denied the exemption claimed by the assessee. The Tribunal referred the question of law to the High Court.

Upon review, the Court found that the Tribunal's strict interpretation of section 54 was unwarranted. The Court noted that the investment in the flat exceeded the capital gains and cited a Circular by the Central Board of Direct Taxes stating that cases of flat allotment by the Delhi Development Authority should be treated as construction for capital gains purposes. The Court emphasized that section 54 requires construction within two years, but completion within that timeframe may not always be feasible, especially under government schemes. The Court held that substantial investment in construction should suffice to meet the requirements of section 54.

In conclusion, the Court ruled in favor of the assessee, stating that the Tribunal should have considered the Circular and granted the exemption, as substantial investment in construction satisfied the provisions of section 54.

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