Proviso to section 64(1)(ii) must be decided first before any question on amended Explanation 1 is examined.

The Orissa HC held that the reference could not be answered on the existing record because the Tribunal had not examined the central question, namely the applicability of the proviso to section 64(1)(ii) of the Income-tax Act, 1961. Since that issue was not addressed, the Tribunal had proceeded on a basis not adopted by either party, and the question concerning the amended Explanation 1 from 1 April 1980 would arise only if the proviso was first found applicable. The matter was therefore remitted to the Tribunal to rehear the appeal and decide the proviso issue before considering the amended Explanation 1, if necessary.

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Issues: Whether the reference should be answered on merits or the matter should be sent back to the Tribunal for reconsideration of the applicability of the proviso to section 64(1)(ii) of the Income-tax Act, 1961, with the amended Explanation 1 becoming relevant only if necessary.

Analysis: The Tribunal had proceeded on a basis not adopted by either side and had not examined the applicability of the proviso to section 64(1)(ii), although that question was central to the departmental authorities' reasoning. The Court held that if the proviso applied, the further question regarding the amended Explanation 1 with effect from 1 April 1980 would become only academic. Since the Tribunal had not addressed the correct issue, the reference could not properly be answered on the existing record.

Outcome: The matter was sent back to the Tribunal to rehear the appeal and decide the applicability of the proviso to section 64(1)(ii), and thereafter to consider the amended Explanation 1 if required.

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