Diversion of income by overriding title distinguished from mere application of income in tarwad maintenance arrangement.

A maintenance arrangement in a karar was held to be an application of tarwad income, not a diversion by overriding title, because the junior members received the income only after it accrued to the tarwad and as a means of discharging its existing maintenance obligation. Section 9(1) of the Agricultural Income-tax Act, 1950 was treated as applying only where income is diverted at source, not where income is merely applied after accrual. The income paid to the junior members was therefore assessable in the hands of the tarwad, and the substantive tax question was answered in favour of the Revenue.

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Issues: (i) Whether the maintenance arrangement in the karar resulted in a diversion of tarwad income; (ii) whether section 9(1) of the Agricultural Income-tax Act, 1950 applies only where there is diversion of income.

Issue (i): Whether the maintenance arrangement in the karar resulted in a diversion of tarwad income.

Analysis: The arrangement did not transfer the tarwad properties to the junior members or create an overriding charge in their favour. The junior members received the income only as a method of discharging the tarwad's pre-existing obligation to maintain them. The income first accrued to the tarwad and was then applied for maintenance, which made the arrangement an application of income and not a diversion of income.

Conclusion: The arrangement did not result in a diversion of tarwad income; it was an application of income. The issue is decided against the assessee.

Issue (ii): Whether section 9(1) of the Agricultural Income-tax Act, 1950 applies only where there is diversion of income.

Analysis: Section 9(1) was treated as dealing with income arising by virtue of settlement or disposition from assets remaining the settlor's property, and the saving in the third proviso was considered relevant to diversions of income, not to mere applications of income. Since the karar did not divest the tarwad of the income at source, the section was held not to assist the assessee.

Conclusion: Section 9(1) applies only where there is diversion of income, and not to a mere application of income. The issue is decided against the assessee and in favour of the Revenue.

Final Conclusion: The income received by the junior members was assessable in the hands of the tarwad, and the reference was answered in favour of the department on the substantive tax questions decided.

Ratio Decidendi: A maintenance arrangement that merely directs income, after it accrues to the assessee, for discharge of an obligation is an application of income and not a diversion by overriding title; only income diverted before it reaches the assessee falls outside the assessee's total income.

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