ORDER
Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income Tax Act, 1961 made at the instance of the assessee, the Income Tax Appellate Tribunal has referred the following question of law to this Court for opinion:
‘Whether on the facts and in the circumstances of the case, the assessee is not entitled to the exemption under section 54 of the Income-tax Act, 1961 in respect of capital gain received by him on the sale of the residential flat.’
2. This reference pertains to assessment year 1975-76. The material facts of the case giving rise to was reference are as follows:
The assessee is an individual. He was occupying flat No. 9-G of Malbar Apartment at Nepeansea Road, Bombay, since May 1968 on leave and licence basis. He was paying compensation for that at the rate of Rs. 525/ per month. He purchased the said flat on 16th July 1973 for a sum of Rs. 36,375 and was in occupation of the same as its owner since then. He sold the above flat on 11th August, 1974 for a sum of Rs. 70,000/-. The assesses had purchased a flat being flat No. 203 in Casablanca for Rs. 1,10,000/- on 1st August, -1974. The assessee claimed exemption from capital gains tax under section 54 of the Income-Tax Act,1961 (the Act”) in respect of capital gains arising from the sate off the flat at Malbar Apartment for Rs. 70,000- on the ground that he had been occupying the same for a period of two years prior to its sate. The Income-Tax Officer did not accept the claim of the assessee for exemption under section 54 of the Act as, according to him, the assessee was not even the owner of the flat sold by him tar 2 years. On appeal by the assessee, the Appellate Assistant Commissioner of Income-Tax accepted the claim of the assessee and allowed exemption under section 54 oft the Act. Aggrieved by the above order of the Appellate Assistant Commissioner, revenue appealed to the Income-Tax Appellate Tribunal (“Tribunal”). The Tribunal reversed the order of the Appellate Assistant Commissioner and restored that of the Income-Tax Officer. While doing so, the Tribunal held that for getting exemption under section 54 of the Income-Tax Act, the assessee must reside in the residential house as am owner for a period of two years prior to its sale. Hence this reference at the instance of the assessee,
3. Mr. S.J. Mehta Iearned Counsel for the assessee, submits that for the purpose of exemption under section 54 of the Act it is not necessary that the assessee should occupy the premises for his own residence as an owner. According to him, it is sufficient if the assessee was in occupation of the premises for a period of two years in any capacity.
4. We have carefully considered the above submission of the learned Counsel of the assessee the admitted position in this case is that the assessee purchased the flat in question on 16th July 1973 and sold the same on 11th August, 1974 . Obviously the flat in question was the property of the assessee only for a period of little over one year. Section 54 of the Act which grants exemption in respect of capital gains on sale of property used for residence requires that the property in question must have been used by the assessee himself or by his parents mainly for the purpose of his own or parents’ own residence for a period of two years preceding the date of transfer. It is one of the conditions precedent for applicability of section 54 of the Act. Section 54 of the Act, as it stood all the material time, so far as relevant, reads as follows:
“54. Profit on sale of property used for residence.—Where a capital gain arises from the transfer of a capital asset to which the provisions of section 53 are not applicable, being buildings or lands appurtenant thereto the income of which is chargeable under the head “Income from house property” which in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or a parent of his mainly for the purposes of his own or the parent’s own residency, and the assessee has within a period of one year before or after that date purchased, or has within a period of two years after that date
constructed, a house property for the purposes of his own residence, then, 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 provision of this section, that is to say-
(i) ………..
(ii) ………..”
It is clear from a plain reading of the above section that exemption from tax on profits from the sale of a building under the above section is dependent on fulfilment of the conditions set out therein. One of the conditions precedent is that the property in question should have been used by the assessee mainly for the purposes of his own residence in the two years immediately preceding the date on which the transfer took place. This expression, in the context in which it appears in section 54, clearly means that the occupation of the assessee must be occupation in the capacity of owner. It does not contemplate occupation during the period when the property even did not belong to him.
5. In the instant case, admittedly the assessee was in occupation of the property in question upto 15th July, 1973 on leave and licence basis. He purchased the property from its owner only on 16th July, 1973. The user of the same by the assessee on and from that date only is relevant for the purpose of section 54. That being so, it is obvious that the property in question had not been used by the assessee or his parents for own residence in the two years immediately preceding the date of the transfer. In view of the above in our opinion, in the instant case, the Tribunal was right in holding that the assessee was not entitled to claim exemption under section 54 of the Act in respect of the capital gains arising from the transfer of the residential flat in question. Accordingly the question referred to us is answered in the affirmative and in favor of the revenue. In the facts and circumstances of the case, we make no order as to costs.
6. Reference answered in affirmative.