Application of income after accrual does not escape tax where royalty is directed to satisfy the assessee's own debt.

Where royalty had already accrued to the assessee, a direction that part of it be retained and applied towards discharge of his own debt was only an application of income after accrual, not a diversion at source by overriding title. The full royalty therefore remained taxable in the assessee's hands, including the amount used to satisfy the liability. The arrangement was distinguishable from a true external charge on income before it reached the assessee.

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Issues: Whether the entire royalty payable by the lessee, including the part applied in discharge of the assessee's debt to the lessee, formed taxable income of the assessee.

Analysis: The arrangement did not amount to an external charge on the revenue before it reached the assessee. The assessee had merely directed that part of the royalty, instead of being paid over to him and then repaid by him, should be retained and applied towards liquidation of his own liability. That was an application of income after it accrued to him, not an allocation of income before it became his income. The situation was distinguishable from a case where a portion of the revenue is diverted at source by an overriding title.

Conclusion: The whole royalty was taxable as the assessee's income, including the amount used to discharge his debt, and the question was answered against the assessee.

Ratio Decidendi: Where income has already accrued to the assessee, a direction that part of it be applied in satisfaction of his own debt is only an application of income and does not prevent that amount from being taxable in the assessee's hands.

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