P.D.DESAI, J. - (1.) THE assessee was the owner of an immovable property situate on the Juhu Road, Santa Cruz, Bombay. The immovable property consisted of a piece or parcel of land admeasuring in the aggre gate 2,084 sq. yards. The immovable property was divided into two parts, one part consisting of an open piece of land admeasuring 544 sq. yards (hereinafter referred to as the "smaller plot" ) and the other consisting of 1,540 sq. yards of land (hereinafter referred to as the "larger plot" ). Out of the larger plot, which was situated in the front, 100 sq. yards of land was acquired by the Municipal Corporation of Bombay. Ultimately, therefore, the assessee was left with 1,440 sq. yards of land out of the larger plot. There was a building constructed on the said portion of land which was partly let out and partly occupied by the assessee herself.
(2.) IT appears that on 5th June, 1967, the assessee entered into an agreement with one K.K. Vora and two others to sell to them the larger plot with the building standing thereon. A few days before the said agreement was executed, the assessee had entered into an agreement on 25th May, 1967, with a firm of contractors carrying on its business in the name and style of M/s Madhani Construction Co. for the construction of a building on the smaller plot. The agreement, amongst other things, provmded that the cost of construction was to be paid out of the said proceeds of the larger plot payable to the assessee by K.K. Vora and others. It further appears that ultimately the agreement to sell the larger plot to K.K. Vora and two others was not acted upon and that no conveyance was executed in favour of those persons. Instead, the assessee sold the larger plot to the Juhu Garden Co operative Housing Society Ltd. under a deed of conveyance dt. 20th March, 1970, for a total consideration of Rs. 2,88,000. Meanwhile, M/s Madhani Construction Co. had proceeded with the work of constructing a building on the smaller plot and the construction was, in fact, completed on 31st March, 1968. M/s Madhani Construction Co. were paid their dues in two parts, Rs.30,000 was paid on or about 9th Nov., 1969, and the balance of Rs. 99,556.93 was paid on 20th March, 1970, that is to say, on the day on which the conveyance was executed in favour of the Juhu Garden Co operative Housing Society Ltd. in respect of the larger plot. The assessee was put in actual possession of the newly constructed building on the smaller plot also on the same day. In the course of proceedings for assessment to income tax for the asst. year 1970 71, the previous year being the financial year ended on 31st March,1970, the assessee claimed before the ITO that having regard to the provisions of S. 54 of the IT Act, 1961 (hereinafter referred to as " the Act"), the cost of construction of the new building erected on the smaller plot should be deducted from the sale proceeds realised on conveyance of the larger plot with the building standing thereon and that only the difference between the capital gain arising on the transfer of the larger plot and the cost of construction of the new building should be charged under S. 45 as the income of the previous year. The ITO found that the assessee's claim could not be accepted inasmuch as the two conditions laid down in S. 54 were not satisfied, namely, (1) that the building standing on the larger plot, which was partly let to tenants, could not be said to have been used in the two years immediately preceding the date on which the transfer took place by the assessee or a parent of his mainly for the purposes of his own or the parent's own residence, and (2) that within a period of two years after the date of transfer of the larger plot the assessee had not constructed a house property for the purposes of her own residence. Consequently, the capital gains was assessed in the assessee's hands without giving the benefit of the provisions of S. 54.
(3.) ON appeal, the AAC confirmed the order of the ITO on the ground that in order to avail of the benefit of S. 54, it was necessary to show that the new house property was constructed exclusively for the purpose of the assessee's own residence and that since, in the instant case, the new building was admittedly constructed partly for the assessee's own residence and partly for letting, the benefit of the provisions of S. 54 was not available.;