Diversion of Income: directions to pay third parties do not prevent inclusion of profits in settlor's income.

Deeds granted one-fourth of the settlor's share of firm profits "payable to him" to his wife and daughters for a fixed period, but the firm first credited those amounts to the settlor's account and then transferred them to the disponees under his directions. The analysis applies partnership and income-tax principles to hold that a third party cannot acquire a direct claim to partnership profits before those profits accrue to the settlor, and that such settlements operate as post accrual directions for payment; therefore the transferred profits were includible in the settlor's total income.

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Issues: Whether the inclusion in the assessee's total income of the profits settled by him on his wife and two daughters is justified in law.

Analysis: The Court examined the deeds of settlement and the accounting entries and applied principles governing partnership law and income taxation. The settlements assigned to the disponees one-fourth of the settlor's share of profits "payable to him" for a fixed period, and the firm credited the amounts first to the settlor's account and thereafter transferred them to the disponees' accounts under his directions. The Court considered precedent distinguishing cases where income is diverted by an overriding title so that it never becomes the settlor's income, and cases where the income first accrues to the settlor and is subsequently applied for payment to others. The Court held that a stranger or assignee cannot have a direct claim to partnership profits prior to accrual and that the deeds operated as directions for payment out of the settlor's income rather than as a diversion of income before accrual.

Conclusion: The inclusion of the transferred profits in the assessee's total income is justified and the issue is decided against the assessee (in favour of Revenue).

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