Court finds payments as diversion of income by overriding title, not capital expenditure. Decision references prior cases.

The court determined that the payments in question constituted a case of diversion of income at source by an overriding title. As a result, the issue of whether the payments constituted expenditure on capital account or revenue expenditure did not need to be addressed. The court referenced previous decisions to support its finding that the agreements with the lenders were akin to a sub-partnership, leading to diversion by overriding title. The judgment concluded by answering the reference accordingly, with no order as to costs.

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Issues: Determination of whether certain payments constituted application of income or diversion of income at source by an overriding title, and whether the payments constituted expenditure on capital account or a revenue expenditure.

Analysis:
The judgment pertains to an individual assessee for the assessment year 1970-71 who borrowed amounts from two lenders and invested in a firm where he had a 60% share. The assessee claimed that the amounts paid to the lenders should not be treated as income but as diversion under an overriding title. The Income-tax Officer and the first appellate authority rejected this claim, but the Tribunal accepted it as a case of diversion by overriding title. The agreements with the lenders were akin to a sub-partnership where the lenders were entitled to a share of the income. The court cited precedents to establish that diversion by virtue of a partnership or sub-partnership agreement constitutes diversion by overriding title. Notably, the court referenced the decision in CIT v. Arumugham Pillai and L. Hans Raj Gupta v. CIT to support this principle.

The court answered the first question by stating that the payments in question constituted a case of diversion of income at source by an overriding title. Consequently, the second question did not require an answer based on the response to the first question. The judgment concluded by stating that the reference was answered accordingly, with no order as to costs.

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