Diversion of income at source under a binding deed excludes the diverted amount from partners' taxable income.

A binding dissolution deed that creates an enforceable obligation in favour of a third party can divert income at source before it becomes the partners' real income. On that reasoning, the managing agency commission payable to Bhagirathibai never formed part of the partners' taxable income, because the amount was allocated under the deed before accrual to the assessees. The arrangement was treated as a diversion of income by overriding title rather than a mere application of income after receipt, so the amount had to be excluded in computing the partners' income.

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Issues: Whether the amount payable to Bhagirathibai under the deed of dissolution was part of the partners' taxable income or stood diverted before accrual so as to be excluded in computing their income.

Analysis: The managing agency commission was first received in a form that appeared to belong to the partners, but the deed of dissolution created a binding obligation in favour of Bhagirathibai out of the very commission. The decisive question was whether the sum ever became the partners' real income. The arrangement was not a mere application of income after receipt by the assessee, but an allocation of income at source in favour of Bhagirathibai. On that footing, the amount payable to her never formed part of the partners' real income and could not be treated as an appropriation of profits liable to tax in their hands.

Conclusion: The amount payable to Bhagirathibai had to be excluded before ascertaining the taxable income of the assessee partner, and the answer was in favour of the assessee.

Ratio Decidendi: Where a legally enforceable obligation created by a binding arrangement diverts income at source before it becomes the assessee's real income, the diverted amount is not taxable as the assessee's income.

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