Diversion of income at source distinguished from voluntary family payments made after receipt; recipient not taxed on the amounts.

Amounts paid by a Maharaja to his adopted son and daughter-in-law from privy purse funds were examined on the test of diversion of income at source versus application of income after receipt. The exemption attached to the privy purse in the Maharaja's hands did not control the tax character of later family payments. Because there was no custom, usage, statutory duty, or enforceable obligation to make those payments, and the sums varied at his discretion, they were treated as voluntary payments made after receipt of income. On that basis, the payments were not taxable as income in the hands of the recipients.

---

---

Issues: Whether amounts paid by the Maharaja to his adopted son and daughter-in-law out of the privy purse constituted taxable income in their hands.

Analysis: The amounts received by the Maharaja as privy purse were exempt in his hands under the constitutional and statutory scheme, but that exemption did not by itself determine the character of later payments made by him to members of his family. The decisive test was whether the income was diverted before it reached the recipient or whether it was merely applied after receipt to discharge a personal or moral obligation. On the facts found, there was no custom, usage, statutory duty, or enforceable obligation binding the Maharaja to make the payments. The amounts varied from time to time and depended on his discretion, showing that they were voluntary family payments made out of the funds received by him. Such payments were an application of income after receipt and not a diversion of income at source.

Conclusion: The payments were not taxable as income in the hands of the assessee.

---