Kalpesh Classes

Income-tax is a tax on real income, i.e., the profits, arrived at on commercial principles subject to the provisions of the Income-tax Act. Real profit can be ascertained only by making permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of the profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles.​​ Under the scheme of the Act, it is the total income of an assessee, computed under the provisions of the Act, which is assessable to income-tax. So much of the income which an assessee is not entitled to receive by virtue of an overriding title created in favour of a third party would get diverted at source and cannot be added in computing the total income of the assessee.​​ The principle is simple enough but more often than not, the question arises what are the criteria to determine, and when does the income attributable to an assessee get diverted by overriding title? The determinative factor is the nature and effect of the assessee's obligation with regard to the amount in question.​​ When a third person becomes entitled to receive the amount under an obligation of an assessee even before the assessee could lay a claim to receive it as his income, there would be a diversion of income by overriding title ; but when after receipt of the income by the assessee, the same is passed on to a third person in discharge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title.​​