The interpretation of the language in section 54 of the Income Tax Act, 1961, particularly the terms 'in the two years' and 'was being used', was central to the court's decision.

Puttaswamy, J.— In this reference made under section 256(1) of the Income Tax Act, 1961 ("the Act"), the Income Tax Appellate Tribunal, Bangalore Bench, Bangalore ("Tribunal"), at the instance of the assessee has referred the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the exemption claimed under section 54 of the Income Tax Act, 1961, for the assessment year 1973-74 is permissible in law ?"

2. In order to appreciate the question referred to us, it is necessary to notice the facts that are not in dispute in the first instance.

3. On June 21, 1971, the assessee purchased a house situated on Park Road, Bangalore City, for his residence and was using the same as his residence from about that date. Some time in May, 1972, he sold 2/3rds portion of the said house for a sum of Rs. 30,000 and some time in February, 1973, he purchased another house at Miller Road, Bangalore City.

4. In his return filed for the assessment year 1973-74 relevant to the accounting year ending on March 31, 1973, before the Income Tax Officer, Assessment 2 (Additional) Circle-I, Bangalore, the assessee claimed total exemption from capital gains tax on the said sum of Rs. 30,000 under section 54 of the Act. On January 25, 1975, the Income Tax Officer completed the assessment rejecting the same and brought a sum of Rs. 6,667 as income from short-term capital gains and subjected that and other income to tax under the Act.

5. Aggrieved by the said order made by the Income Tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner, Bangalore Range, Bangalore who by his order dated November 22, 1976, allowed the same and accepted the said claim of the assessee.

6. Aggrieved by the order made by the Appellate Assistant Commissioner, the Revenue filed a second appeal before the Tribunal which by its order dated December 23, 1977, allowed the same, set aside the order of the Appellate Assistant Commissioner and restored the order of the Income Tax Officer. Hence, this reference.

7. Sri S. G. Shivaram, the learned advocate, appeared for the assessee. Sri G. Sarangan, learned special standing counsel for the Income Tax Department, appeared for the Revenue.

8. Sri Shivaram contends that on the facts that are not in dispute, the claim of the assessee for total exemption from capital gains tax was well-founded. In support of his contention, Sri Shivaram strongly relies on a ruling rendered by M. L. Jain J. of the High Court of Delhi in S. Harnam Singh Suri Vs. Central Board of Direct Taxes, ILR (1984) Delhi 145.

9. Sri Sarangan contends that since the residential house purchased and sold by the assessee had not been used by him for a continuous period of two years prior to the date of sale, the exemption claimed by him under section 54 of the Act was unavailable. In support of his contention, Sri Sarangan strongly relies on the Division Bench rulings of the High Court of Madras in M. Viswanathan Vs. Commissioner of Income Tax, (1979) 117 ITR 244 Mad.

10. That the assessee did not reside in his residential house for a continuous. period of two years is not in dispute. On these very facts, the controversy really turns on the construction of section 54 of the Act which stood as hereunder :

"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 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 the capital g