Diversion of income by overriding title failed where the gift deed created only an application of income after accrual.

A payment required under a gift deed was not deductible from business income as diversion of income by overriding title. The obligation was payable only out of income after accrual, so it operated as an application of income rather than a pre-accrual diversion. The alleged gift was also found to be incomplete because the sum was not effectively delivered or placed beyond the assessee's control, and the deed did not create an enforceable charge on the business profits. On that basis, the deduction claim failed and the disallowance was sustained.

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Issues: Whether the amount of Rs. 1,80,000 payable to the charity under the gift deed could be deducted from the assessee's business income on the footing that it represented diversion of income by overriding title, or whether it was only an application of income after accrual.

Analysis: The payment stipulated in the gift deed was to be made out of income accruing or arising to the assessee and the charge operated only after such income had accrued. The arrangement therefore did not divert income before accrual. The alleged gift of Rs. 30 lakhs was also found to be incomplete, as the amount had not been effectively delivered or placed under the assessee's control even after several years, and the liability under the deed was not shown to be an enforceable charge on the profits of the yarn business. The obligation was thus not one that could be attached to the business income so as to qualify for deduction.

Conclusion: The claim for deduction failed; the payment was held to be an application of income and not diversion of income by overriding title, and the disallowance was restored.

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