Diversion of income

• The principle of diversion of income by overriding title

refers to those cases where there is an obligation on
the recipients to part with a portion of income in
favour of the beneficiary, who possesses the right to
receive such income.
• Income or portion of the income can not be taxed in
the hands of the person who diverted that income.
• Mr X inherits a property subject to a payment of
annuity to his mother Rs 1 lak pa. This amount of lack
is not taxable in the hands of mr X . However it is
taxable in the hands X’s mother.
 Application of income
• An assesee may, either on his own or otherwise,
forego his income or utilize the income for any
reason or purpose.
• This is only an application of such income.
• So he is taxable for the amount parted with. The
gross amount is taxable.
• An employee instructs employer to pay his salary
to charity. Employee is taxable subject to
deductions U/S 80 G.
• The only exemption is if a central got employee
surrenders his salary to the CG
• Sec 2 of Voluntary surrender of
salaries(exemption from taxation Act,1961
exempts such surrenders.
 Case laws
• Jit & pal X-Ray p ltd vs CIT
(2004) 267 ITR 370 (ALL)
• CIT vs Nariman B
Bharucha and sons.
(1981) 130 ITR 863(bom)
• An assessee purchased a
going concern subject to
a condition that he
should pay percentage of
profits to the vendor’s
wife. It is a diversion of
income by overriding
title.
• Payment made to the
wife of the deceased
partner is the diversion of
income by overriding
title.
• The judge held that tax could not be deducted at
source from the amount paid by the government
towards salaries if the nuns and priests were
agreeable to given an undertaking individually
that their monthly salary and all other monetary
benefits arising out of their employment could be
paid directly to the diocese or congregation with
which they were associated.
•
Lilly Varghese vs ITO TDS Madras HC 2016
 Real income
Only real income is taxable unless specifically
provided by law.
In case of deemed let out property ,income is
charged to tax on notional basis u/s 23.
Conversion of capital asset into stock in trade does
not give rise to real income but sec 2(47) defines
transfer to include such transaction as also and
fair market value is used to ascertain the capital
gain.
In the absence of any provision any attempt to tax
notional income may not be upheld.
 Sales tax
• Chowringhee sales • Sales tax collected by an
bureau p ltd vs CIT(1973) assessee is a trading
87 ITR 542(SC). receipt and taxable. Any
payment made is claimed
• CIT vs Thirumalasamy as deduction.
naidu and sons(1998) 230 • Refund of sales tax bears
ITR 534(SC) the character of revenue
and taxable. If such
refund is passed on to the
customers, it is allowed as
deduction.
•
 Change in character
• An amount may not have the character of
income when it is received but it may at a
later point of time change its character as
income. Chargeability to tax arises only when
it acquires the character of income.
• A deposit is capital receipt when it is forfeited
as it is time barred, it becomes a revenue
receipt
• CIT vs T.V.Sundaram • Any amount received in
iyengar and sons the course of a trading
ltd(1996) 222 ITR 344 transaction, even
SC though not taxable in
the year of receipt ,
changes its character
when the amount
becomes assessee’s
own money.
• CIT vs Karam chand • The amount initially
Thaper and others NOT received as trading
(1996) 222 ITR 112 SC receipt can become a
trading receipt
subsequently.