Overriding title fails where reserve transfers are only book entries and income is merely earmarked after receipt.

Amounts credited to an effluent disposal reserve under a price control order were treated as an application of income, not diversion by overriding title. The sale proceeds were received in full, then transferred only by journal entry to a reserve account; no cash left the assessee's control and the related assets remained with the assessee. Because the obligation was merely to earmark funds after receipt, the reserve did not create a superior title in favour of any third party. The sums were therefore not deductible as revenue expenditure and remained taxable as the assessee's income.

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Issues: Whether the sums credited to the effluent disposal reserve under the price control order were deductible as income diverted by overriding title or were merely an application of income.

Analysis: The amounts were first received in full as part of the sale proceeds and were transferred only by journal entries to a reserve account. No cash was paid out to any third party, and the assessee retained control over the amounts as well as the related assets. The obligation to earmark funds for effluent disposal was therefore an obligation to apply income after receipt, not a superior title diverting income before it reached the assessee. The Tribunal also followed earlier contrary decisions on the same issue and applied the principle that such earmarking does not amount to diversion of income by overriding title.

Conclusion: The sums credited to the effluent disposal reserve were not revenue deductible and were taxable as the assessee's income.

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