JUDGMENT : STATEMENT OF CASE By this application, the Commissioner of Income-tax, Gujarat-I, Ahmedabad, requires the Appellate Tribunal to state a case on three questions, said to be questions of law arising out of the Tribunal's order dated March 4, 1968, passed in I.T.A. No. 1682 of 1967-68. Inasmuch as, in our opinion, questions of law do arise out of the Tribunal's order, we do hereby draw up a statement of the case and refer the same to the High Court of Gujarat at Ahmdeabad, under section 256(1) of the Income-tax Act, 1961. 2. The statement of the case relates to the assessment year 1963-64. 3. The assessee is an evacuee from Pakistan. He has been assessed to tax for the assessment year 1963-64 in the status of an individual. The assessee purchased a property for Rs. 6,825. It was acquired by him on allotment in settlement of his claim for compensation of his properties left in Pakistan. The said property which was acquired by him on the basis of allotment was solely occupied by him for the purpose of his residence. On June 26, 1962, the assessee sold the said property for a sum of Rs. 40,000, which resulted in a capital gain of Rs. 33,175. By the use of the sale proceeds of the said house, the assessee purchased a piece of land on July 30, 1962, and began construction of a house in August, 1962. By March, 1963, the construction of the entire ground floor was completed at a cost of Rs. 34,000. The floor area of the said ground floor was 1,389 sq. ft. Its cost of construction to the assessee was Rs. 34,000. The construction of the first floor was taken up by the assessee late in 1964 and the balance of Rs. 6,000 out of the sale proceeds of his former residence was utilised by bim for the said purpose. The built up area of the first floor was 132 sq. ft. An area of 734 sq. ft. on the ground floor was let out by the assessee to the tenants and the balance of the area of 655 sq. ft. on the ground floor was occupied by the assessee for his personal residence. The built up area of the first floor was 132 sq. ft. An area of 734 sq. ft. on the ground floor was let out by the assessee to the tenants and the balance of the area of 655 sq. ft. on the ground floor was occupied by the assessee for his personal residence. The assessee's occupation of the said ground floor of the house started in February, 1963, and the letting out of the remaining portion of the ground floor was in March, 1963. 4. On those facts, the assessee claimed exemption from payment of tax in respect of the capital gain made by him on the ground that in the two years immediately preceding the date of sale, the said house had been used by the assessee for the purposes of his own residence and that the assessee within a period of two years after the date of sale had constructed a house property for the purposes of his own residence. The Income-tax Officer rejected the assessee's claim, broadly, on two grounds : (1) the new property was not exclusively used by the assessee for his residence, and (2) the construction had not been completed but had gone beyond the period of two years from the date of sale of the property. On appeal, the Appellate Assistant Commissioner justified the Income-tax Officer's action, refusing to admit the assessee's claim of exemption. Copies of the assessment order and of the Appellate Assistant Commissioner's order form parts of the statement of the case as annexures " A " and "B". 5. Aggrieved by the order of the Appellate Assistant Commissioner, rejecting the above claim for exemption, the assessee filed an appeal to the Tribunal. Before the Appellate Tribunal, the assessee repeated his claim. 6. For the purposes of ready reference, the relevant portion of section 54 of the Income-tax Act, 1961, is reproduced below : "54. Where a capital gain arises from the transfer of a capital asset .... 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 .... mainly for the purposes of his own .... residence, and the assessee has .... 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 .... mainly for the purposes of his own .... residence, and the assessee 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 provisions of this section, that is to say,-...." In the opinion of the Tribunal, one of the conditions laid down in section 54 was that the property, which was sold, was one which was used by the assessee " mainly for the purposes of his own or the parent's own residence ", and the other condition was that the new property should be constructed within a period of two years " for the purpose of his own residence ". Since there was no dispute that the property sold by the assessee was mainly used for the purposes of his residence, the Tribunal observed that the question before it was whether the new property should have been wholly used for the purposes of his own residence. Referring to the pre-condition of the property sold being used for the purposes of the assessee's own residence, the Tribunal was inclined to think that the new property should also similarly be construed, i.e., constructed mainly for the purposes of his own residence. According to the Tribunal, the emphasis was on the purpose and not the total physical occupation for residence. In view of the fact that the assessee had acquired the property on allotment for the property that he had lost in Pakistan and that was used for his residence, the Tribunal held that when such a property was sold and a new property was constructed, it should be inferred that the main purpose for which the assessee had constructed the new building was with a view to use it for his own residence. It was, in the opinion of the Tribunal, not necessary that the assessee should have wholly occupied it for his residence. It was, in the opinion of the Tribunal, not necessary that the assessee should have wholly occupied it for his residence. The Tribunal did not agree with the department that the entire construction must be completed within a period of two years from the date of sale. In the opinion of the Tribunal, the requirement of section 54 was that the property must be constructed for the purposes of the assessee's own residence and that it did not go further that, even though the property may have been constructed for the purposes of residence and may also have been used for residence, unless the whole property was constructed, the part occupation and the part construction would not entitle the assessee to claim exemption under the above section. In the opinion of the Tribunal, there were no words in the section which could lead to the meaning that the entire property must be constructed within the period of two years and even though it may not be fully constructed and the assessee may utilise part of it for his occupation, no exemption would be available to the assessee under this section. Accordingly, the Tribunal allowed the exemption claimed by the assessee. Copies of the grounds of appeal and of the Tribunal's order form parts of the statement of the case as annexures "C" and "D", respectively. 7. On the above facts, the following questions of law arise out of the Tribunal's order: "(i) Whether, on the facts and in the circumstances of the case, was the assessee entitled to exemption of capital gain from payment of tax under section 54 of the Income-tax Act, 1961, which he had made by the sale of the property on June 26, 1962 ? (ii) Whether the Tribunal was right in holding that in order to be entitled to the benefit of section 54 of the Act it was not necessary that the property constructed out of capital gain earned by an assessee should be wholly occupied by him ? (ii) Whether the Tribunal was right in holding that in order to be entitled to the benefit of section 54 of the Act it was not necessary that the property constructed out of capital gain earned by an assessee should be wholly occupied by him ? (iii) Whether the Tribunal was right in holding that it was not necessary that the property should be constructed within a period of two years from the date of sale of a capital asset in order to be entitled to the benefit of section 54 of the Act ?" P.N. Bhagwati, J. The question which arises for determination in this reference is a narrow one and it relates to the interpretation of section 54 of the Income-tax Act, 1961. The facts giving rise to the reference are few and may be briefly stated as follows. The assessee is a refugee from Pakistan. He purchased a house property at an auction held by the rehabilitation department. The price was Rs. 6,825 and it was paid by the assessee by way of adjustment of his claim for compensation in respect of properties left in Pakistan. This house property was used by the assessee, mainly, for the purpose of his own residence right up to 26th June, 1962, when he sold it for the price of Rs. 40,000. The sale of the house property resulted in a capital gain of Rs. 33,175. The assessee by utilising the sale proceeds purchased a piece of land on 30th July, 1962, and started constructing a building on it in August, 1962. The construction of the ground floor of the building was completed by March, 1963, at a cost of Rs. 34,000. The total area of the ground floor was 1,389 sq. ft. and as soon as it was about to be ready, the assessee occupied the whole of it in February, 1963. Out of the total area of 1,389 sq. ft. the assessee let out an area of 734 sq. ft. to certain tenants in March, 1963, with the result that an area of only 655 sq. ft. remained in the occupation of the assessee. The assessee thereafter started construction on the first floor of the building towards the end of 1964 and completed construction on an area of 132 sq. ft. at a cost of Rs. 6,000 and occupied it for his personal residence. ft. remained in the occupation of the assessee. The assessee thereafter started construction on the first floor of the building towards the end of 1964 and completed construction on an area of 132 sq. ft. at a cost of Rs. 6,000 and occupied it for his personal residence. On these facts the question arose before the Income-tax Officer in the course of the assessment for the assessment year 1963-64, the relevant accounting year being Samvat Year 2018, whether the profit of Rs. 33,175 arising to the assessee from the sale of the old building was chargeable to tax under the head " capital gains ". Now, ordinarily, since this profit arose to the assessee from the transfer of the old house property which was a capital asset in the relevant year of account, it would be chargeable to tax as capital gain under section 45 but the assessee claimed that it was exempt from tax on the ground that it fell within the exempting provision contained in section 54. The Income-tax Officer did not accept this claim of the assessee : he held that the condition for the applicability of the exemption was not satisfied in the case of the assessee since the assessee did not construct the new building within a period of two years from the date of sale of the old house property and, moreover, the new building was not constructed by the assessee for the purpose of his own residence as required by section 54. The assessee carried the matter in appeal to the Appellate Assistant Commissioner but the Appellate Assistant Commissioner took the same view and rejected the appeal. The assessee thereupon preferred a further appeal to the Tribunal and before the Tribunal the assessee was successful in his claim for exemption. The Tribunal held that, on a proper construction of section 54, it was not necessary that the new building in its entirety must be constructed within a period of two years from the date of sale of the old building and it was sufficient if a part of it was constructed for the purpose of the residence of the assessee. The Tribunal held that, on a proper construction of section 54, it was not necessary that the new building in its entirety must be constructed within a period of two years from the date of sale of the old building and it was sufficient if a part of it was constructed for the purpose of the residence of the assessee. What was essential, according to the Tribunal, was that the new building should have been constructed for the purpose of the residence of the assessee and so far as this requirement was concerned, the Tribunal found that it was satisfied since the new building was constructed by the assessee mainly for the purpose of his own residence. The Tribunal stated that when the old building was sold and the new building constructed by the assessee, the main purpose of the assessee could not have been anything except to use it as his own residence and the new building was, therefore, constructed by the assessee mainly " for the purpose of his own residence. " The Tribunal accordingly allowed the claim of the assessee for exemption in respect of the capital gain resulting from the sale of the old building. Hence, the present reference at the instance of the Commissioner of Income-tax. 2. The short question which arises for consideration on these facts is : "Whether the claim of the assessee for exemption in respect of capital gain resulting from the sale of the old house property is sustainable under section 54 for that is the only section on which the claim to exemption is founded ? " 3. Section 54 enacts an exempting provision by way of exception to the general rule as to chargeability laid down in section 45 and is in these terms : "54. Profit on sale of property used for residence. " 3. Section 54 enacts an exempting provision by way of exception to the general rule as to chargeability laid down in section 45 and is in these terms : "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 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 residence, 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 that 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 of this section, that is to say,- (i) if the amount of the capital gain is greater than the cost of the new asset, the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of previous year ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be nil ; or (ii) if the amount of the capital gain is equal to or less than the cost of the new asset, the capital gain shall not be charged under section 45 ; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its purchase or construction, as the case may be, the cost shall be reduced by the amount of the capital gain." 4. The section grants exemption in respect of capital gain arising to the assessee from the transfer of a house property provided two conditions are satisfied, namely : (1) the house property must have been used by the assessee or a parent of his, mainly, for the purposes of his own or the parent's own residence, during the period of two years immediately preceding the date on which the transfer took place ; and (2) the assessee must have, within a period of one year before or after such date, purchased, or within a period of two years after such date constructed, a house property for the purposes of his own residence. It is only if these two conditions are satisfied that the assessee can lay a claim to exemption in respect of capital gain arising from the transfer of the house property. Now, it was not in dispute between the parties that the old house property sold by the assessee in respect of which capital gain was sought to be assessed by the revenue was used by the assessee mainly for the purpose of his own residence during the period of two years immediately preceding the date on which it was sold and the first condition was, therefore, satisfied. The only controversy between the parties was as to the fulfilment of the second condition. 5. The second condition consists of two limbs : one is that the new building must have been constructed by the assessee within a period of two years from the date of sale of the old house property, and the other is that such construction must have been made by the assessee for the purposes of his own residence. The revenue contended that neither of these two requirements was satisfied and the second condition was, therefore, not fulfilled. Now, so far as the first limb of the condition is concerned, it is possible to say that the requirement embodied in it was satisfied by the assessee since the ground floor of the new building was constructed by the assessee within a period of two years from the date of sale of the old house property. Now, so far as the first limb of the condition is concerned, it is possible to say that the requirement embodied in it was satisfied by the assessee since the ground floor of the new building was constructed by the assessee within a period of two years from the date of sale of the old house property. There was an interregnum of a period of more than a year and a half between the completion of construction of the ground floor and the commencement of construction of the first floor of the new building and we may, therefore, take the ground floor of the new building as a unit of house property for the purpose of determining the applicability of the exempting provision and this unit of house property was admittedly constructed before the expiration of the period of two years from the date of the sale of the old house property. But the real difficulty in the way of the assessee lies in so far as the requirement embodied in the second limb of the condition is concerned. Can it be said, on the facts of the present case, that the assessee constructed the ground floor of the new building for the purpose of his own residence ? The answer con only be in the negative. The construction of the ground floor of the new building was completed by March, 1963, and immediately on completion of the construction, the assessee let out an area of 734 sq. ft. to tenants and retained with him an area of only 655 square feet for his own occupation. When more than 50 per cent. of the area of the ground floor of the new building was let out by the assessee to tenants as soon as the construction was completed, it is difficult to see how it can be said that the ground floor of the new building was constructed by the assessee for the purpose of his own residence. If the purpose for which the ground floor was constructed by the assessee was his own residence, it is inexplicable why the assessee should have let out a major portion of the area of the ground floor to tenants. If the purpose for which the ground floor was constructed by the assessee was his own residence, it is inexplicable why the assessee should have let out a major portion of the area of the ground floor to tenants. It was not the case of the assessee that the ground floor was originally constructed by him for the purpose of his own residence but by reason of subsequent events or supervening circumstances it became impossible or impracticable for him to occupy a part of the ground floor for the purpose of his own residence and it was, therefore, let out to tenants. Such indeed could not be the case of the assessee since no period of time elapsed between the completion of the construction of the ground floor and the letting out of a portion of it to tenants. More than 50 per cent. of the portion of the ground floor was let out to tenants immediately on completion of the construction and there was, therefore, no question of any change of circumstances arising by reason of subsequent events which might induce the assessee not to utilise such portion of the ground floor for the purpose for which it was constructed, namely, his own residence and to let it out. It is in the circumstances impossible to say that the assessee constructed the ground floor of the new building for the purpose of his own residence. He constructed a part of it for the purpose of his own residence and the other part for the purpose of letting it out in order to earn rent. That is not sufficient compliance with the requirements of the section. 6. It was suggested on behalf of the assessee that he let out a portion of the ground floor to tenants since he did not require it immediately for the purpose of his own residence but he had minor children and, when they grew up, more space would be required and it was in order to provide for this anticipated requirement in future that he had constructed the whole of the ground floor, and, therefore, the entire ground floor must be held to have been constructed for the purpose of his own residence. This suggestion cannot stand scrutiny for a moment. This suggestion cannot stand scrutiny for a moment. When the section says that the house property must be constructed by the assessee for the purpose of his own residence, it refers to the immediate purpose of construction. It is not sufficient to comply with the requirement of the section to say that the assessee has constructed the house property for the purpose of occupying it for his residence after a period of ten years and in the meantime letting it out with a view to earning rent. It is the immediate purpose of construction which is relevant and not the remote, future or ultimate purpose. Here, on the facts found by the Tribunal, if we look at the immediate purpose for which the ground floor of the new building was constructed, it is evident that the ground floor unit of the house property was constructed not for his own residence and the second condition for the applicability of the exempting provision was not satisfied. The Tribunal was, therefore, in error in allowing the assessee's claim for exemption under section 54. 7. We, accordingly, answer question No. 1 in the negative. In view of our answer to question No. 1, questions Nos. 2 and 3 do not arise and need not be answered. The assessee will pay the costs of the reference to the Commissioner.