Diversion of income at source versus application of income: rent remained taxable, but valid trust income was exempt.

Income remains taxable where a self-imposed charge merely directs rent after it accrues to the owner, because that is an application of income and not a diversion at source; the Rs. 10,000 directed to the college was therefore assessable in the assessee-family's hands. By contrast, where a trust deed clearly dedicates property income to religious and charitable objects and the settlor has effectively divested beneficial interest, the property is treated as held under a valid trust and the income is exempt. The trust-income claim was accordingly supported, while the rental-income diversion claim failed.

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Issues: (i) Whether Rs. 10,000 out of the annual rent of Rs. 21,000 was diverted to the college by overriding title and was therefore not taxable in the assessee-family's hands; (ii) Whether the properties covered by the trust deeds were validly held in trust so that the income derived from them was exempt from tax.

Issue (i): Whether Rs. 10,000 out of the annual rent of Rs. 21,000 was diverted to the college by overriding title and was therefore not taxable in the assessee-family's hands.

Analysis: The assessee remained the owner of the properties and had leased them for an annual rent of Rs. 21,000. The arrangement that Rs. 10,000 should be paid directly to the college, and the additional charge created in its favour, did not prevent the rent from first accruing to the assessee. The obligation was self-imposed and operated only as a mode of application of income, not as a diversion at source. A mere right to recover the amount directly from the lessee did not alter the character of the receipt as the assessee's income.

Conclusion: The amount of Rs. 10,000 was taxable in the hands of the assessee-family, and the contention of diversion by overriding title failed.

Issue (ii): Whether the properties covered by the trust deeds were validly held in trust so that the income derived from them was exempt from tax.

Analysis: The trust deed manifested a clear intention that the income from the properties should be devoted exclusively to religious and charitable objects. Where the author himself is the sole trustee, a separate conveyance is not essential if the declaration of trust and accompanying conduct show a complete divestment of beneficial interest. On that footing, the properties were held under a legal obligation for charitable purposes, attracting the statutory exemption for income from property held in trust.

Conclusion: The trust was valid, and the income from the properties was not assessable in the hands of the assessee-family.

Final Conclusion: The assessee succeeded on the trust-income issue but failed on the rental-income issue, so the appeals were disposed of by granting relief only to the extent of the exempt trust income.

Ratio Decidendi: Income is taxable in the hands of the recipient where a voluntary charge or direction merely applies income after it accrues, but income is exempt where a valid trust or legal obligation diverts it at the source and the settlor has effectively divested beneficial interest in the property.

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