Purposive reading of section 54 allows exemption for substantial investment in an under-construction residential flat without completed title.

Section 54 relief was interpreted purposively: "purchase" is not confined to a registered sale deed or completed legal title, and substantial investment in an under-construction residential flat within the prescribed period was sufficient for exemption. Payments made to cancel an earlier agreement to sell and to a broker were also treated as expenditure directly connected with the transfer because they were genuine and proximate to completing the sale transaction. On that basis, the capital gains exemption and the related expenditure claim were sustained, with no substantial question of law arising.

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Issues: (i) Whether investment in a residential flat under construction, without completion of legal title within the stipulated period, amounted to a "purchase" for the purpose of section 54 of the Income-tax Act, 1961. (ii) Whether payments made to cancel an earlier agreement to sell and to the broker in relation to the sale transaction were allowable as expenditure connected with the transfer.

Issue (i): Whether investment in a residential flat under construction, without completion of legal title within the stipulated period, amounted to a "purchase" for the purpose of section 54 of the Income-tax Act, 1961.

Analysis: Section 54 grants exemption where the assessee purchases or constructs a residential house within the prescribed period. The statutory expression "purchase" is not confined to execution of a registered sale deed or immediate vesting of legal title. The provision was construed purposively, in light of the object of relieving a taxpayer who reinvests capital gains in another residential house. The fact that the flat was under construction and payments had been substantially made within the relevant period supported the conclusion that the assessee had sufficiently acquired the new residential asset for the purposes of section 54. Sub-section (2) also indicates a wider meaning of purchase by treating amounts already utilized towards the new asset as part of its cost.

Conclusion: The assessee satisfied the requirement of purchase under section 54, and the exemption was allowable.

Issue (ii): Whether payments made to cancel an earlier agreement to sell and to the broker in relation to the sale transaction were allowable as expenditure connected with the transfer.

Analysis: The payments were found on facts to be genuine, made by cheque, and directly linked to removing obstacles created by the earlier agreement so that the sale transaction could proceed. The tribunal's factual findings were not shown to be perverse. Since the expenditure had a direct and proximate connection with the sale that gave rise to capital gains, it was treated as expenditure incurred wholly in relation to the transfer.

Conclusion: The payments were allowable as connected expenditure against the sale transaction.

Final Conclusion: No substantial question of law arose, and the assessee's claim for exemption under section 54, together with the connected expenditure claim, was sustained.

Ratio Decidendi: For section 54, "purchase" has a broad, purposive meaning and is satisfied by substantial investment in a residential house acquired through an under-construction flat, even if legal title is not completed within the statutory period.

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