Diversion by overriding title excluded land acquisition compensation paid directly to secured creditors from taxable capital gains.

Compensation arising from acquisition of the assessee's land was directed to secured creditors and financial institutions under a pre-existing joint equitable mortgage and High Court directions. Because the amount was deposited and disbursed directly to those creditors, the assessee did not effectively receive that portion as its own income. On that basis, the principle of diversion by overriding title applied and the amount was excluded from taxable capital gains. The alternative objection that it should nevertheless be treated as transfer-related expenditure was not accepted, and the exclusion claim was allowed.

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Issues: Whether the amount of compensation paid directly to secured creditors and financial institutions towards discharge of the assessee's loan liability could be excluded from computation of capital gains on the footing of diversion by overriding title or as expenditure incurred for transfer.

Analysis: The compensation arose from acquisition of the assessee's land, but the record showed a pre-existing charge and interest in favour of secured creditors by reason of a joint equitable mortgage and the directions of the High Court. The amount in question was deposited and disbursed directly to the secured creditors pursuant to those directions, leaving the assessee without effective receipt of that portion as its own income. Applying the principle that income diverted before it reaches the assessee does not form part of its taxable income, the amount could not be brought to tax in the assessee's hands. The alternative objection based on the earlier reasoning of the lower authorities was not accepted.

Conclusion: The claim of exclusion was allowed, and the amount paid to the secured creditors was held not includible in the assessee's taxable capital gains.

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