Capital gains exemption on residential house investment depends on utilisation, not completed construction, while bogus share loss needs proof.

Capital gains exemptions under sections 53 and 54 are linked to the gain computed under section 48(1)(a), so the further deduction under section 48(2) is not superimposed before working out those exemptions. Section 54 relief is available where the capital gain is substantially utilised for purchase or construction of a residential house and the balance is deposited in the notified account; completion of construction within three years is not a strict condition precedent. The same capital gain cannot be used to claim simultaneous exemption for two residential properties. Documentary evidence supported the share transactions, so the short-term capital loss could not be disallowed as bogus on suspicion alone.

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Issues: (i) whether, for the purpose of sections 45, 48, 53 and 54 of the Income-tax Act, deduction under section 48(2) is to be computed after first giving effect to exemptions under sections 53, 54 and 54E; (ii) whether exemption under section 54 was available in respect of the NOIDA house even though the construction was not complete within three years, but the assessee had appropriated amounts towards purchase and construction and deposited the balance in the notified account; (iii) whether the assessee could simultaneously claim exemption for investment in the NOIDA house and for purchase of the Kailash Hills flat under section 54; and (iv) whether the short-term capital loss on sale of shares was bogus and therefore disallowable.

Issue (i): whether, for the purpose of sections 45, 48, 53 and 54 of the Income-tax Act, deduction under section 48(2) is to be computed after first giving effect to exemptions under sections 53, 54 and 54E.

Analysis: The relevant scheme of the Act shows that capital gains are first computed under section 48(1)(a), and the Explanation to section 53, which applies equally to sections 54, 54B, 54D, 54E, 54F and 54G, makes it clear that references to capital gains in those provisions mean the amount computed under section 48(1)(a). The further deduction contemplated by section 48(2) is therefore not to be superimposed before working out the exemptions under the specified provisions.

Conclusion: The computation adopted by the appellate authority was upheld, and the assessee's challenge on this point failed.

Issue (ii): whether exemption under section 54 was available in respect of the NOIDA house even though the construction was not complete within three years, but the assessee had appropriated amounts towards purchase and construction and deposited the balance in the notified account.

Analysis: The provision is directed to utilisation of the capital gain in purchase or construction of a residential house and, read with sub-section (2), it does not require completed construction within three years as a condition precedent. Where the assessee has substantially utilised the amount for construction and deposited the unutilised balance in the notified account, the benefit cannot be denied merely because finishing work remained incomplete at the end of the stipulated period.

Conclusion: Exemption under section 54 was held allowable for the NOIDA house to the extent directed, in favour of the assessee.

Issue (iii): whether the assessee could simultaneously claim exemption for investment in the NOIDA house and for purchase of the Kailash Hills flat under section 54.

Analysis: The statutory language permits exemption where the capital gain is invested in purchase or construction of a residential house, but the alternatives are mutually exclusive for the same transfer. The assessee having sold one residential house could not obtain double benefit for two different properties in respect of the same capital gain.

Conclusion: The claim to simultaneous exemption for both properties was rejected.

Issue (iv): whether the short-term capital loss on sale of shares was bogus and therefore disallowable.

Analysis: The share transactions were supported by documentary material, cheque payments, share certificates, allotment records and stock exchange quotations. Suspicion arising from unusual allotment and subsequent sale was not enough to establish a sham transaction; the revenue had to prove by evidence that the loss was fictitious. On the material on record, genuineness was not disproved.

Conclusion: The loss on sale of shares was directed to be allowed, in favour of the assessee.

Final Conclusion: The appeal succeeded only to the extent of relief on section 54 in respect of the NOIDA house and allowance of the share loss, while the other contentions relating to the capital gains computation and dual exemption claim were rejected.

Ratio Decidendi: For capital gains exemptions under sections 53 and 54, the relevant capital gain is that computed under section 48(1)(a), and section 54 relief turns on utilisation or appropriation of the capital gain for a residential house, not on completion of construction within three years; a sham share transaction cannot be inferred from suspicion alone and must be proved by evidence.

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