Contractual obligation to pay third parties does not reduce taxable income where no charge exists on the source of receipt.

Where managing agents receive business receipts and are only under a contractual covenant to pay part of those sums to third parties, the entire receipt remains taxable income because no charge is created on the source itself. The article distinguishes cases involving a true charge on property and applies the principle that an obligation to apply income in a particular way does not reduce assessable income. It also states that, absent a specific statutory allowance, payments made to third parties under such a covenant are not deductible as admissible outgoings. On that basis, the receipt was brought to tax in full and no deduction was allowed.

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Issues: (i) Whether the amounts received by the assessees as managing agents, including the sums paid over to third parties under their agreement, formed part of their taxable income under the Indian Income-tax Act, 1922. (ii) Whether the sums paid to third parties were allowable as a deduction from the assessees' income.

Issue (i): Whether the amounts received by the assessees as managing agents, including the sums paid over to third parties under their agreement, formed part of their taxable income under the Indian Income-tax Act, 1922.

Analysis: The amounts were received by the assessees as part of their business receipts and were paid away under a covenant to third parties. The arrangement did not create a charge on the source of income. The governing principle was that where money is received as income and there is only an obligation to apply part of it in a particular way, the whole receipt remains assessable as income. The earlier authority concerning payment of a proportion of profits was treated as applicable, while the case involving a charge on property was distinguished.

Conclusion: The entire amount received was assessable as the assessees' income, and this issue was decided against the assessees.

Issue (ii): Whether the sums paid to third parties were allowable as a deduction from the assessees' income.

Analysis: No specific statutory deduction covered the amounts paid away. Since the sums were held to be part of the assessees' taxable income and the payments were made only under a contractual obligation, they could not be deducted as an admissible outgoing under the Act.

Conclusion: The claim for deduction was rejected, and this issue was decided against the assessees.

Final Conclusion: The reference was answered in favour of the Revenue, with the assessee's entire receipt brought to tax and no deduction allowed for the amounts paid to third parties.

Ratio Decidendi: Where income is received by the assessee and there is merely a covenant to pay away part of it to third parties, without any charge on the source itself, the whole receipt remains taxable and no deduction is allowable unless specifically provided by the taxing statute.

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