Assignment of future dividends to a spouse was treated as application of income, not transfer of the source.

An assignment of future dividends to the assessee's wife did not transfer the source of income because the shares remained the assessee's property and the instrument operated only as a covenant to pay over dividends when declared. The dividend first accrued to the assessee as registered shareholder and was then paid to the wife under the arrangement, so the payment was an application of income after accrual rather than a diversion of income before accrual. The special deeming provisions did not alter that position, and the dividend remained assessable in the assessee's hands.

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Issues: (i) Whether the reference question concerning the nature of the dividend arrangement arose out of the Tribunal's order. (ii) Whether the deed assigning future dividends to the assessee's wife effected a transfer of income or merely amounted to an application of income, so that the dividend remained assessable in the assessee's hands.

Issue (i): Whether the reference question concerning the nature of the dividend arrangement arose out of the Tribunal's order.

Analysis: The reference was part of the Tribunal's statement of case, the question had been raised before the Tribunal and treated as decided against the Department by implication, and no objection was taken in the High Court to the reference on this ground. In these circumstances, the objection that the question did not arise out of the Tribunal's order could not be accepted.

Conclusion: The objection was rejected and the reference question was held to be properly before the Court.

Issue (ii): Whether the deed assigning future dividends to the assessee's wife effected a transfer of income or merely amounted to an application of income, so that the dividend remained assessable in the assessee's hands.

Analysis: The shares themselves were not assigned and remained the assessee's property. The instrument operated only as a contract to make over future dividends when declared, not as a transfer of existing property or of the source of income. Since the company could pay dividend only to the registered shareholder or under his directions, the income first accrued to the assessee and was thereafter paid over to the wife under the covenant. That constituted an application of income after accrual, not a diversion of income before accrual, and the special deeming provisions did not assist the assessee.

Conclusion: The dividend was assessable in the hands of the assessee and the answer was against the assessee.

Final Conclusion: The arrangement did not divest the assessee of the source of income, and the subsequent payment to his wife did not prevent the dividend from being taxed as his income.

Ratio Decidendi: Where the source of income remains with the assessee and only the income, after accrual, is covenanted to be paid to another, the arrangement is an application of income and not a diversion of income before accrual.

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