Corpus classification and trust income questions were referable, while fact-based expenditure issues were not fit for reference.

In a section 256(2) reference application, the court treated the issue whether a donation credited to a land acquisition fund formed part of a trust's corpus, requiring interpretation of sections 11 and 12, as a referable question of law, and it similarly accepted the membership fee issue as referable. By contrast, the questions concerning expenditure on film production and exhibition, and on construction of an overhead tank, were held to be purely factual and not fit for reference. The reference application therefore succeeded only on the two legal questions and was rejected for the rest.

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Issues: Whether, in a petition under section 256(2) of the Income-tax Act, 1961, the Tribunal could be directed to refer the question whether a donation credited to the land acquisition fund formed part of the corpus of the assessee-trust; whether the question relating to membership fee as income from other sources was referable; and whether the questions relating to expenditure on production and exhibition of film and construction of an overhead tank were questions of law or questions of fact.

Analysis: The question whether the donation credited to the land acquisition fund formed corpus of the trust involved interpretation of sections 11 and 12 of the Income-tax Act, 1961, and therefore constituted a question of law fit for reference. A similar question relating to membership fee had already been directed to be referred and was also treated as referable. The remaining two questions were held to be purely factual, not giving rise to any question of law for reference under section 256(2).

Conclusion: The Tribunal was directed to state the case and refer the two questions concerning corpus treatment of the donation and taxability of the membership fee. The questions relating to expenditure on film production and exhibition and on the overhead tank were declined as they did not raise referable questions of law.

Final Conclusion: The reference application succeeded only to the extent of the two identified questions of law, and was otherwise rejected.

Ratio Decidendi: In proceedings under section 256(2) of the Income-tax Act, 1961, only questions that involve a true issue of law, including interpretation of the governing exemption provisions, are referable; questions resting purely on facts are not.

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