Commissioner of Income Tax vs A.R. Mathavan Pillai

V.V. Kamat, J.—The Income Tax Appellate Tribunal has referred the following two questions :

" 1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to the exemptions under Sections 54 and 54(2) of the Income Tax Act, 1961 ?

Whether, on the facts and in the circumstances of the case and also in view of the construction and remodelling of an existing building, the assessee is entitled to any exemption u/s 54(2) of the Income Tax Act, 1961 ?"

If the two questions are seen the position relates to exemption as a result of the computation of capital gains. The Tribunal has granted claim for exemption as prayed and has preferred to make reference with regard to the above questions. The short facts necessary for the purpose show that the assessee purchased the property on May 14, 1975, for an amount of Rs. 52,000. Another property became the subject-matter of acquisition process, when 8.25 cents of the land came to be acquired on May 4, 1976, though taking of possession on the same day by application of the urgency clause. There is no dispute that the amount of compensation was received by the assessee on August 17, 1976 -- two days after the account closing of the assessment year 1977-78. There is also no dispute that the reference court granted enhanced compensation amounting to Rs. 1,51,914 by an award of the reference court dated November 1, 1978. In regard to this award, the enhanced amount was actually received on October 27, 1980.

It appears that the assessee did not place on record any capital gains for the assessment year 1977-78, contending that in fact capital gains had arisen for the next year 1978-79. It was also contended by the assessee before the Income Tax Officer that even the additional compensation granted by the reference court amounting to Rs. 1,51,914 as stated above could not become taxable during the year 1977-78 or even in 1978-79, contending in regard thereto that as the amount was received only on October 27, 1980, the same could be accounted for in the appropriate assessment year. These contentions appeared to have been negative by the Income Tax Officer holding that the capital gains referred to above accrue only during the year 1977-78, additionally holding that this enhanced compensation also could be considered for the said year in question.

The appeal of the assessee before the Commissioner of Income Tax (Appeals) did not change the result and conclusion. It appears that the ground was taken before the appellate authority invoking the provision of exemption in the nature of exemption in view of the provisions of Section 54 of the Income Tax Act contending that the assessee had constructed a new building during 1979 and 1980. Even the appellate authority taking into consideration that the day that was material for considering application of Section 54 of the Act being the date of transfer and not the receipt of the amount of compensation, when the possession was taken the capital gains could be taken into consideration.

The matter was taken up before the Tribunal and in view of the questions referred, we are only concerned with the question of exemption whether it could be made available to the assessee under the provisions of Sections 54(1) and 54(2) of the Income Tax Act, 1961. This is in spite of the position that the reference framing the question as reproduced above makes no reference to Section 54(1) of the Act. In fact, the statutory provision whether it is Section 54 as it originally stood or whether Section 54(1) and Section 54(2) as amended by the Finance Act, 1978, with retrospective effect from April 1, 1974, as far as the factual matrix of this reference is concerned the position would not make any difference in regard thereto. The material position in the situation is that the income from house property, in a situation relating to the amount of sale or profit of sale arising in the nature of capital gains, being buildings or lands appurtenant thereto, which in the two years immediately preceding the date on which the transfer took place was being used by the assessee mainly for his own residence and the assessee has within the period of one year before or after the date purchased or has within a period of two years after that date constructed, a house property for his own residence, then the provision shows that instead of the capital gain being charged to Income Tax as income of the previous year in which the transfer took place, it shall be dealt with in accordance with the following provisions as specified in Clauses (i) and (ii). Additionally, Section 54(2) also enacts to deal with the situation when the transfer of the original asset is by way of compulsory acquisition under any law and also the situation where the compensation gets enhanced by the court and in regard thereto it is enacted, so far as is relevant for the purpose of this reference that if the assessee has within a period of one year before or after the date of the receipt of the additional compensation purchased or within a period of two years after that date constructed a house property for the purposes of his own residence, the question is to be dealt with as provided in the said section. It must be made clear that in this reference we are not concerned with the method of dealing with the situation but we are concerned with the factual situation as to whether the said provision become applicable entitling the assessee to claim exemption in accordance with the above provisions. As already stated above whichever is the statutory position to be taken into consideration, whether the provisions of Section 54 as amended by the Finance Act, 1978, as stated above or the provision of Section 54 as is stood really at the time of the concerned assessment year, there would be no difference whatsoever.

The Tribunal has taken up this question in two-fold manner.

The question is whether the income could be classified as "income from house property". Learned senior counsel for the Department strenuously urged that while reading Section 54 of the Act in the matter of a claim for exemption relating to the income chargeable under the head "Income from house property" one really has to understand the meaning of "house property" as is available in Section 22 of the Income Tax Act. In the process referring us to Section 22 of the Act, learned counsel submitted that the "house property" has to be understood as other than such portions of that property occupied for the purposes of any business or profession carried on by him and on the basis submitted that the house property as is understood could only be understood in the context of the provisions of Section 22 of the Act.

The canons of construction and interpretation are more than clear and they show that the meaning of the term and expression used in the section has to be understood and appreciated on the basis of intrinsic aids of meaning as are available in the section in the first instance and the court can seek resort to similar expression in the statute only in the event of there being difficulty in understanding the term and expression implied in the section itself. If we read the provisions of Section 54, what is "income from house property" is available to us in the language of the section itself. The house property as could be understood from the language of the section itself would show that the said property was being used by the assessee "mainly" for the purpose of his own residence. When the above term and expression is specified with reference to the dominant user of the house property in contradistinction with the servile user lay emphasis on the user of the house with reference to his principal character, in our judgment it is not necessary to travel around to find out as to what is understood as house property for the purposes of application of the benefits of Section 54.

Even apart therefrom, with benefit the Tribunal also has considered this question as to what has to be understood as mainly and in regard thereto has placed reliance on the decision of the Madras High Court in Commissioner of Income Tax, Tamil Nadu-III Vs. C. Jayalakshmi, to the effect that the word "mainly" is not to be confused with "wholly" and has to be understood as principally. In addition even on factual basis the Tribunal has observed that it is not disputed that one-third of the compensation received is shown as referable to the shop as against its two-thirds is shown as referable to the residential user of the building, so much so that the Income Tax Officer has proceeded with this proportion of apportionment. In view of this position, it is not possible to disturb the finding of the Tribunal in regard thereto. On the other aspect, the facts on record are not in dispute. The Tribunal has considered this aspect in paragraph 8 onwards. It is seen that the property was purchased on May 14, 1975, for Rs. 52,000. It is also seen that the award and the possession occurred on the same day--May 4, 1976, in view of the fact that it was acquisition by railways and naturally this peculiarity lays emphasis on the date on which the possession is given. Factually there cannot be any dispute, therefrom that the property was purchased within a period of one year prior to the date of accrual of capital gains. The Tribunal was, therefore, perfectly justified and right in considering the legal right of the assessee to claim exemption u/s 54 in respect of the purchase.

With regard to the second aspect, in relation to the provisions of Section 54(2) of the Act, learned counsel for the Department emphasised the terminology, "constructed a house property for the purposes of his own residence" have a legal submission that the provision can be resorted to in favour of the assessee only if what is constructed is a house property, meaning thereby that it must come into existence for the first time de hors from any other earlier construction already standing on the property in question. Learned counsel urged that this is a provision enabling the claim of exemption and as such will have to be understood in the language of the section itself. The fairness of learned senior counsel has to be appreciated on record when he stated that there is no whisper in regard to this aspect before any of the authorities below and even then chose to place it for our consideration for the purpose of considering the section, relating to only brand new construction which could be understood as house property as contended by him. Apart from the position that a new point becomes rare for entertainment in the proceedings of such nature, it is obvious that this is a mixed question of law and fact. It must also be stated that with regard to the factual matrix there is no dispute whatsoever and we have to proceed on the basis of factual matrix accepted and not disputed in any way. If the factual matrix which is placed on record is taken into consideration it is not possible to consider the submission in favour of the Department even on its own merits.

In the first instance in paragraph 9 of the order, the Tribunal has specifically recorded that the assessee had approached the municipality for construction of a building and the municipality had granted permission for the construction of the building. Obviously, the construction with prior permission is sought for is accompanied by the necessary plans. The Tribunal has also proceeded further that as per the permission granted by the municipality the assessee was to start construction by April 14, 1979, and the life of the said permission was up to April 11, 1980. The Tribunal has also recorded the factual undisputed position that the assessee had started construction which appears to have been completed by the end of 1980. In fact, there is a positive and clear cut factual finding that the construction was completed by December, 1980. Therefore, it is not possible to consider that what was constructed under lawful permission was not house property in regard to which there could be claim for exemption.

Even the submission of learned counsel with regard to the language and a consequential submission that the house property has to be understood as a newly built house property to the extent that there should be a situation that there should be no construction standing on the land as it is. Carefully considering the language it becomes more than difficult to accept the said submission to restrict it only to new construction and not constructions which are in the nature of remodelling as has been the factual situation on record.

The question is as to whether the additional compensation could be said to have been utilised in the matter of construction so as to be able to claim benefit u/s 54(2) of the Act. It obviously relates to enhanced compensation. Here again the contention of the Department that is referred to by the Tribunal answers the situation in favour of the assessee. The amount of additional compensation was received on October 27, 1980. In other words, the amount of enhanced compensation was received when the construction was in the completion process, in view of the finding that the construction was completed by December, 1980. Even the period of the municipal permission shows that the permission was granted on April 14, 1979, a time when additional compensation amount was not available. The dates stare in the face of the record and, therefore, the conclusion of the Tribunal that Section 54(2) allows deduction even in the use of purchase of a property one year before the receipt of additional compensation which has nothing to do with the actual date of the receipt of money by way of additional compensation and its consequential actual utilisation. The Tribunal cannot be said to be in any way erroneous to consider the possibility of the assessee in starting the construction in anticipation of the receipt of the amount. In this context, the above factual data which is undisputed also shows that the Tribunal is not in error in reaching the conclusion that the assessee had started construction within two years of the receipt of the additional compensation, making himself entitled to exemption u/s 54 of the Act. In view of the above discussion, we answer question No. 1 in the affirmative--in favour of the assessee and against the Revenue-Department. We also answer question No. 2 in the affirmative--in favour of the assessee and against the Department.

A copy of the judgment be caused to be sent to the Income Tax Appellate Tribunal with the seal of the court and the signature of the Registrar forthwith.