Earmarked income for a redemption fund is application of income, not diversion by overriding title, and stays taxable.

An amount set aside by an assessee for a Government share capital redemption fund remained its own income and was not diverted by overriding title, because it never passed to another person and was merely earmarked for a future obligation. The obligation to keep the fund invested and restricted did not change its character from application of income after receipt. As nothing was actually paid out or irretrievably spent, the sum was also not allowable as business expenditure under section 37(1). The amount therefore remained taxable in the assessee's hands and could not be deducted under section 37 or section 28.

---

---

Issues: Whether the amount set apart by the assessee for a Government share capital redemption fund was deductible as business expenditure or could be excluded from taxable income on the ground of diversion of income by overriding title.

Analysis: The amount credited to the redemption fund remained the assessee's own money and never passed to any other person. An obligation to earmark income for a future purpose does not amount to diversion before receipt; it is only an application or appropriation of income after it reaches the assessee. The restriction on use of the fund and the requirement to keep it invested did not alter its ownership. Since nothing was paid out or irretrievably spent, the amount could not be treated as expenditure under section 37(1) either.

Conclusion: The claim failed. The amount was taxable in the assessee's hands and was not deductible under section 37 or section 28.

Ratio Decidendi: A sum retained by the assessee and merely earmarked for a future statutory or contractual obligation is an application of income, not a diversion of income by overriding title, and cannot be deducted as business expenditure unless it is actually paid out or irretrievably spent.

---