Capital gain exempt under section 54: New property need not be exclusively for residence.

The High Court held that the capital gain earned by the assessee was exempt from tax under section 54 of the Income-tax Act. The Court emphasized that the new property need not be used exclusively for residence, and the predominant intention of the assessee at the time of purchase was crucial. The decision favored the assessee, and the Commissioner was directed to pay the costs of the reference to the assessee.

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Issues Involved:

1. Whether the profit from the sale of the old property was chargeable to tax under the head "capital gains" u/s 45 of the Income-tax Act, 1961.
2. Whether the assessee was entitled to exemption u/s 54 of the Income-tax Act, 1961.

Summary of Judgment:

Issue 1: Chargeability of Profit as Capital Gains u/s 45

The Income-tax Officer computed the cost of the old property (including the cost of improvement) at Rs. 6,430 and determined the capital gain arising from the sale of the old property as Rs. 20,581. He denied the exemption claim, treating the transaction as an adventure in the nature of trade, thereby taxing the profit as business profit. On appeal, the Appellate Assistant Commissioner recomputed the cost of the old property at Rs. 13,850 and held that the capital gain of Rs. 13,161 was chargeable to tax u/s 45.

Issue 2: Entitlement to Exemption u/s 54

The Tribunal held that section 54 did not require the new property to be purchased exclusively for the assessee's own residence. Since nearly seventy-five per cent of the new property was used by the assessee for his own residence, the requirements of section 54 were satisfied, and the assessee was entitled to exemption. The High Court agreed with this interpretation, stating that the legislative intent behind section 54 was to provide relief when the surplus from the sale of an old residential property was reinvested in a new property for the assessee's own residence. The Court emphasized that the new property need not be used exclusively for residence, and the predominant intention of the assessee at the time of purchase was crucial.

Conclusion:

The High Court concluded that the Tribunal was right in holding that the capital gain earned by the assessee was exempt from tax u/s 54. The question referred was answered in the affirmative, in favor of the assessee, and against the revenue. The Commissioner was ordered to pay the costs of the reference to the assessee.

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