Reference under section 256(2) fails where the proposed question does not arise from the Tribunal's circular-based order.

A reference under section 256(2) of the Income-tax Act could not be directed unless the proposed question of law arose out of the Tribunal's order. The Tribunal had dismissed the Department's appeal on the basis of a CBDT circular and had not construed section 36(1)(viii); the Department's proposed question attacked only that section's interpretation and did not challenge the circular-based reasoning. As the question did not arise from the Tribunal's order, the statutory precondition for reference was not met and the application was rejected.

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Issues: Whether the question proposed by the Department arose out of the Tribunal's order so as to warrant a reference under section 256(2) of the Income-tax Act, 1961.

Analysis: The Tribunal had dismissed the Department's appeal by relying upon the Central Board of Direct Taxes circular and had not construed section 36(1)(viii) of the Income-tax Act, 1961. The question sought to be referred challenged the interpretation of section 36(1)(viii), but did not seek reference on the applicability of the circular, which formed the basis of the Tribunal's decision. Since the proposed question did not arise from the Tribunal's order, the statutory condition for directing a reference was not satisfied.

Conclusion: The application under section 256(2) was rejected as the proposed question of law did not arise out of the Tribunal's order.

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