D.K. Kapur J.
1. The Department has sought a reference under s. 256(2) of the I.T. Act, 1961, regarding the following question :
'Whether, on the facts and in the circumstances of the case, the Tribunal is legally correct in allowing the expenditure of Rs. 18,823 incurred prior to the accounting period relevant to the assessment year 1974-75, in computing the taxable income for the assessment year 1974-75 ?'
2. The Tribunal refused to refer the question on the ground that a pure finding of fact was involved. The ground on which the reference has been refused does not appear to be a valid one, because the question is certainly not a factual one.
3. In order to understand the controversy, it may be mentioned that the company was incorporated on April 22, 1972, and closed its accounts for the first time on June 30, 1973. The accounting period was, thereforee, April 22, 1972, to June 31, 1973, as far the company's accounts were concerned. The ITO acted on the basis that the company was to be assessed for a period of twelve months starting from July 1, 1972, and ending on June 31, 1973. He, thereforee, held that expenses incurred prior to July 1, 1972, related to a different year and could not be allowed in this year. On this account, he added back Rs. 18,823 as not being relevant to this year.
4. The assessed appealed to the AAC on various other grounds as well as this one. The AAC agreed with the ITO and held that the expenses prior to July 1, 1972, could not be included in the assessment. He also held that the business commenced in July, 1972, and these expenses being pre-incorporation expenses could not be allowed. This was based on the footing that the petitioner had taken over the business of M/s. Blaze Advertising (P.) Ltd. in July, 1972, and there was no business prior to that.
5. There was a further appeal to the Tribunal, which came to the conclusion that the sum of Rs. 18,823 had been disallowed as pre-incorporation expenses. The Tribunal held that the expenses could not be described as pre-incorporation expenses because they related to the business. The Tribunal did not refer to the question whether these expenses had to be disallowed because they were incurred before July 1, 1972.
6. The problem that now facts us is whether the basic point on which the ITO decided the case can be said to have ceased to exist merely because the Tribunal did not mention it at all in the order.
7. It is urged by the learned counsel for the assessed that we have to go on the strict construction of s. 256 of the I.T. Act, 1961, relating to the power of making a reference or directing the making of a reference.
8. The bare wording of the section would indicate that a question of law can be referred when it 'arises' out of the order of the Tribunal. The question as sought to be referred is not even stated in the Tribunal's order, and, thereforee, it is urged that it does not arise our of the order. Learned counsel for the parties referred to some cases, but not one of them is remotely near to the present case.
9. The leading judgment on the question in controversy is the Supreme Court's judgment in CIT v. Scindia Steam Navigation Co. Ltd. : 42ITR589(SC) . In that case it was observed in the majority judgment as follows (at p. 611) :
'The result of the above discussion may thus be summed up :
(1) When a question is raised before the Tribunal and is dealt with by it, it is clearly one arising out of its order.
(2) When a question of law is raised before the Tribunal but the Tribunal fails to deal with it, it must be deemed to have been dealt with by it, and is, thereforee, one arising out of its order.
(3) When a question is not raised before the Tribunal but the Tribunal deals with it, that will also be a question arising out of its order.
(4) When a question of law is neither raised before the Tribunal nor considered by it, it will not be a question arising out of its order not with standing that it may arise on the finding given by it.'
10. If we merely apply these four propositions to the facts of the present case, it will be seen the the question was not raised before the Tribunal nor deal with by it as far as proposition No. 1 is concerned. However, as the question is dealt with by both the ITO and the AAC and the Tribunal was hearing an appeal, we fail to understand how the Tribunal could overlook such a question. The very basis of the decision has, thereforee, been disregarded by the Tribunal. Turning now to proposition No. 2, which is that a question of law is raised but not decided, we would be of the view that this question must necessarily have been raised before the Tribunal because it is the basis of the decision of the ITO and the AAC. The third proposition is the reverse of the second proposition and is not relevant to the present case. The fourth proposition would apply when a question of law is neither raised nor decided. We cannot say that this question was not raised nor decided for the simple reason that it was the basis of the decision of both the ITO as well as the AAC. We are, thereforee, of the view that a question of law does arise out of the tribunal's order. There is another aspect of this case that also seems to require the decision of this court. The provisions of s. 3 of the Act show how the 'previous year' of an assessed has to be settled. In the present case, the assessed set up the business in July, 1972, but in relation to the same had made expenses even before July, 1972. So, the court may have to consider whether the expenses incurred in an earlier period do not actually relate to the period July 1, 1972, to June 30, 1973. Inasmuch as the Tribunal has not dealt with the real controversy of a question which necessarily had to be decided by the Tribunal, we are of the view that the question as sought to be referred does 'arise' out of the Tribunal's order, and, thereforee, we direct the Tribunal to submit a case referring the said question to this High court for decision. In the circumstances, we do not make any order as to costs.