Section 54 exemption denied where capital gains were invested in perpetual tenancy rights, not ownership of a new residential house.

Section 54 exemption requires capital gains to be invested in the purchase or construction of a new residential house acquired by the assessee as owner. A perpetual tenancy or leasehold interest does not satisfy that test, because it confers only limited rights of use and occupation while ownership remains restricted. Provisions deeming certain leasehold interests as ownership for house-property taxation apply only to computation under the head income from house property and do not extend to section 54. The exemption provision was construed strictly, and the claim was disallowed.

---

---

Issues: Whether exemption under section 54 of the Income-tax Act, 1961 was available when the assessee invested capital gains in perpetual tenancy rights in a flat instead of purchasing or constructing a new residential house as owner.

Analysis: Section 54 grants exemption only where capital gain from transfer of a residential house is invested in the purchase or construction of another residential house. The assessee acquired only tenancy rights with limited incidents of use, assignment, subletting and mortgage, while rent remained payable and structural and proprietary rights continued to be restricted. The provisions treating long leasehold interests as deemed ownership for house-property taxation under section 27(iii)(b) and related provisions were held to be confined to computation under the head income from house property and not to exemption under section 54. The provision being an exemption provision, it had to be construed strictly, and the expression purchase was understood as acquisition as owner, not as tenant.

Conclusion: Exemption under section 54 was not ible on acquisition of perpetual tenancy rights, and the disallowance of the claim was upheld.

Ratio Decidendi: For claiming exemption under section 54, the new residential house must be acquired by the assessee as owner through purchase or construction, and a mere perpetual tenancy or leasehold interest does not satisfy that requirement.

---