Diversion of income at source rejected where 25% of medical fees was only an application of income after receipt.

25% of the professional fees received by a State medical officer from Central Government employees was not diverted by an overriding title. The governing arrangement required 25% to be credited to Government and the balance paid to the officer, but it created no statutory charge on the source of income or direct legal obligation on the practitioner. The direction operated only as a post-receipt division of fees already earned, so it amounted to an application of income rather than diversion at source. The 25% share therefore accrued as part of the officer's taxable professional receipt and was taxable in his hands; the contrary view of the Tribunal was not sustainable.

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Issues: Whether 25% of the fees received by a State medical officer from Central Government employees was diverted at source so as to exclude that amount from his taxable income.

Analysis: The governing rule provided that 25% of the fee should be credited to Government and the balance paid to the officer, but it did not create a statutory charge on the source of income or impose a direct legal obligation on the medical practitioner. The direction was treated as one operating on the patient and as a post-receipt division of fees already earned for professional services. The principle applied was that only where income is diverted before it reaches the assessee by an overriding title can it be excluded from taxation; a mere obligation to apply income after receipt is only an application of income. On the facts, the 25% portion accrued as part of the assessee's professional receipt and there was no overriding title in favour of Government.

Conclusion: The 25% share was income of the assessee and was taxable in his hands; the contrary view of the Tribunal was not sustainable.

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