Section 54 exemption and cost of improvement claims: habitable-flat expenses and capital gains deposit protection upheld.

Expenditure incurred to make a newly acquired flat habitable, supported by invoices and evidence of civil and electrical work, was treated as cost of improvement and the disallowance was deleted. On Section 54, the unamended provision was applied as beneficial legislation: exemption was not confined to one residential house, so investment in multiple residential properties could still qualify where statutory conditions were met. Amounts deposited in the capital gains account scheme remained protected under Section 54(2) and could not be taxed merely because further investments were also made. The assessee was therefore granted relief on both issues.

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Issues: (i) Whether the disallowance of expenditure claimed as cost of improvement for making the newly purchased house habitable was justified. (ii) Whether deduction under Section 54(1) and Section 54(2) of the Income-tax Act, 1961 could be denied on the ground that the assessee had already claimed exemption in respect of one house and subsequently invested the balance in multiple properties and the capital gains account scheme.

Issue (i): Whether the disallowance of expenditure claimed as cost of improvement for making the newly purchased house habitable was justified.

Analysis: The materials on record showed that the newly acquired flat was not in a habitable condition and that the expenditure was incurred on civil and electrical works. The supporting invoices and the interior designer's letter indicated that the works were undertaken to render the flat habitable. The departmental finding that the expenditure was not related to such works was not borne out by the record.

Conclusion: The disallowance was not sustainable and was directed to be deleted, in favour of the assessee.

Issue (ii): Whether deduction under Section 54(1) and Section 54(2) of the Income-tax Act, 1961 could be denied on the ground that the assessee had already claimed exemption in respect of one house and subsequently invested the balance in multiple properties and the capital gains account scheme.

Analysis: For the assessment year in question, the unamended Section 54(1) permitted exemption on investment in a residential house, and judicial interpretation treated the expression as not confined to a single residential house. The provision was held to be beneficial in nature and capable of covering multiple residential houses where the statutory conditions were otherwise satisfied. The amount deposited in the capital gains account scheme remained protected under Section 54(2) and could not be taxed in the year of deposit merely because further investment was also made in other properties.

Conclusion: The assessee was entitled to deduction under Section 54(1) and protection under Section 54(2), and the disallowance was deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded in full and the assessee was granted the claimed relief on both the cost of improvement issue and the capital gains exemption issue.

Ratio Decidendi: Under the unamended Section 54(1) of the Income-tax Act, 1961, the expression referring to a residential house is not restricted to a single house, and the capital gains account scheme amount under Section 54(2) cannot be denied in the year of deposit merely because the assessee also invested in multiple residential properties within the permitted framework.

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