Scope of section 54 is not limited to acquisition of one house only. The High Court of Karnataka allowed the exemption for capital gains under section 54, on investment of the capital gains amount with respect to two houses. The intent of the assessee in case was not to evade taxes but maintain harmony among his family members. Therefore, the assessee was entitled to exemption under sec. 54 in respect of acquisition of two residential houses. Hence, scope of exemption for Capital Gains is not limited to acquisition of one house.  

Facts of the Case:

• The assessee sold his house and invested the capital gains from sale of house in purchasing two independent residential houses for his two sons and deposited the unutilized sum in the nationalized banks.
• Issues for consideration before High Court were:
  (i) Whether exemption under sec. 54 would be available in respect of two separate residential houses acquired out of capital gains?
  (ii) Whether once the assessee purchased the residential houses the investment in nationalized banks would be eligible for exemption under section 54(2)?

Held by the High Court:

On first issue:

1. It was open to the assessee to purchase a big residential house out of the sales consideration so as to accommodate his two sons and avail of exemption under section 54. Instead, he chose to purchase two small residential houses to avoid any litigation or disharmony.
2. The context in which the expression “a residential house” is used in section 54 makes it clear that it was not the intention of the Legislature to convey the meaning that it referred to a single residential house.
3. The singular ‘a residential house’ also permits use of plural by virtue of section 13(2) of the General Clauses Act. Therefore, the acquisition of two residential houses by the assessee out of the capital gains would fall within the phrase ‘residential house’ and, accordingly, the assessee would be entitled to the benefit under sec. 54(1).
4. However, while interpreting this word, the authorities have to keep in mind the facts of the particular case. When we hold ‘a’ could not be read as singular, it also could not be read as multiples and so as to avoid paying taxes.

On second issue:

1. The statute prescribes that the amount deposited in a nationalized bank is to be offered to tax only in the previous year in which the period of three years from the date of the transfer of the original asset expires and the deposit remains unutilized.
2. Therefore, the contention of revenue to tax it immediately after the purchase of the new asset in that relevant year was untenable.

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