Reference jurisdiction under income-tax law requires the High Court to direct a case statement when a substantial question of law arises.

In reference proceedings under section 256(2) of the Income-tax Act, the High Court should confine itself to whether a referable substantial question of law arises and, if so, direct the Tribunal to state the case; it should not decide the merits of the tax issue at that stage. The proposed question concerning inclusion of agricultural income for computing accumulation under section 11 was treated as a substantial question of law, so refusal to direct a reference was unsustainable. A connected section 260A appeal also could not be dismissed merely because the reference application had been rejected, and it had to be heard on the substantial question of law. The High Court orders were set aside and the matter restored.

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Issues: (i) Whether the High Court was justified in refusing a reference under section 256(2) of the Income-tax Act, 1961, instead of directing the Tribunal to state the case on a substantial question of law concerning inclusion of agricultural income for computing accumulation under section 11. (ii) Whether the appeal under section 260A of the Income-tax Act, 1961 could be dismissed merely because the application under section 256(2) had been rejected.

Issue (i): Whether the High Court was justified in refusing a reference under section 256(2) of the Income-tax Act, 1961, instead of directing the Tribunal to state the case on a substantial question of law concerning inclusion of agricultural income for computing accumulation under section 11.

Analysis: The question proposed for reference was a substantial question of law. The High Court ought to have confined itself to the reference jurisdiction under section 256(2) and, upon finding that a referable legal question arose, directed the Tribunal to draw up a statement of case. It was not appropriate to decide the legal issue on merits while dealing with the reference application.

Conclusion: The refusal to direct a reference was unsustainable and was set aside.

Issue (ii): Whether the appeal under section 260A of the Income-tax Act, 1961 could be dismissed merely because the application under section 256(2) had been rejected.

Analysis: The appeal under section 260A also involved a substantial question of law. Once the High Court had wrongly declined to entertain the reference application by deciding the merits, the connected appeal could not be dismissed on that basis without adjudication of the substantial question of law.

Conclusion: The dismissal of the section 260A appeal was erroneous and was set aside.

Final Conclusion: The High Court orders were set aside, a reference on the identified question of law was directed, and the connected appeal was restored for hearing and disposal in accordance with law.

Ratio Decidendi: Where a substantial question of law arises in reference proceedings, the High Court must decide the question of reference in accordance with the statutory scheme and cannot dispose of the matter by adjudicating the merits in lieu of directing a reference; a connected appeal cannot be dismissed without determining the substantial question of law.

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