Reference proceedings must stay limited to referral, not merits: High Court cannot finally interpret Section 132(4) at that stage.

In reference proceedings under the Income-tax Act, the High Court must decide only whether the proposed questions of law warrant a reference, and should not itself finally interpret Section 132(4) or its Explanation. The Supreme Court held that the High Court had gone beyond its limited role by examining the scope and ambit of the provision instead of directing a reference and leaving the merits to be considered on the statement of case. The High Court's order was set aside, and the Tribunal was directed to refer the specified questions to the High Court for proper consideration.

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Issues: Whether the High Court could decline to direct a reference under Section 256(2) of the Income-tax Act, 1961 after itself examining the scope and ambit of Section 132(4) and the Explanation thereto, and whether the matter should be remitted for consideration of the referred questions.

Analysis: The High Court, while disposing of the application for reference, effectively pronounced upon the interpretation of Section 132(4) and its Explanation instead of confining itself to deciding whether the questions of law deserved to be referred. Such an approach was not permissible in reference proceedings. The proper course was for the High Court to direct a reference and then consider the questions on the statement of case, including the competing views of the High Courts on the nature and operation of the Explanation to Section 132(4).

Conclusion: The High Court's order was set aside, and the Revenue's application under Section 256(2) was allowed in respect of questions Nos. 3 and 4, with a direction to the Tribunal to refer those questions to the High Court.

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