Hot is not unusual - although hardly normal this time of year - as hot air off the engine comes back between the gearbox and transmission tunnel.
However, sparking is definitely not normal. I can see two possibilities. The most likely is that the yellow knob is acting as the body/engine earth connection. This is not a good idea, and is likely to lead to all sorts of electrical mysteries. Should be a good earth strap between the engine/gearbox and the chassis - not sure where this is on Series 3, but the location is not critical. While the body is not insulated from the chassis by intention, rusty and corroded bolted joins may mean that it effectively is insulated, and a separate earth to the chassis from various body sections may be needed.
If this is not the case, it almost has to be that something is rubbing against the output yoke on the front of the transfer case and is sparking.
John
John
JDNSW
1986 110 County 3.9 diesel
1970 2a 109 2.25 petrol
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