Deduction on sales to registered dealers raises a question of law where purchasing dealers are later found bogus or fictitious.

Where a selling dealer has prima facie complied with the declaration requirement for sales to registered dealers, the question whether deduction can still be denied because the purchasing dealers were later found to be bogus or fictitious is a question of law, not a pure question of fact. The Supreme Court held that the High Court should have examined the proposed questions and directed a reference, because the statutory effect of the declarations and the absence of collusion or mala fides raised a legal controversy requiring adjudication. The refusal to refer was therefore erroneous, and the assessee succeeded.

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Issues: Whether the High Court was right in holding that no question of law arose from the Tribunal's order declining deductions claimed on sales to registered dealers.

Analysis: The assessee had produced declarations for sales to registered dealers, and the departmental authorities had proceeded on the footing that the statutory requirements were prima facie satisfied. The real controversy was whether, despite compliance with the declaration requirement, the assessee could lose the deduction if the purchasing dealers were later found to be bogus or fictitious and there was no collusion or mala fides on the assessee's part. That controversy turned on the legal effect of the statutory scheme and was not a mere question of fact. The High Court therefore ought to have examined the proposed questions and directed a reference.

Conclusion: The refusal to refer was erroneous, and the assessee succeeded.

Ratio Decidendi: Where a selling dealer has complied prima facie with the declaration requirement for sales to registered dealers, the question whether deductions can still be denied because the purchasing dealers are later found to be bogus or fictitious is a question of law requiring adjudication, not a pure question of fact.

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