Real income doctrine governs share income where a binding overriding obligation diverts profits at source before accrual.

Tax is chargeable only on real income, not on a notional gross amount, and a genuine overriding obligation can divert profits at source before they accrue to the nominal recipient. Applying that principle, the arrangement dated 15 August 1951 was held to be binding and to require division of the profits before they reached the assessee as his own income. Accordingly, only one-third of the share income was includible in the assessee's assessment, and the balance was not taxable in his hands.

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Issues: Whether the assessee's entire share income from the firm was includible in his assessment, or only one-third thereof on the footing that the balance was diverted at source under a binding arrangement among the partners of the other firm.

Analysis: Income tax is attracted only to real income earned in the commercial sense, not to notional income. In the case of a partner in a registered firm, the revenue must ascertain whether, after apportionment under the statutory scheme, there exists an overriding obligation by which a part of the profit is diverted before it becomes the partner's real income. On the facts, the arrangement dated 15 August 1951 was genuine and created a binding obligation to share the profits of the source firm among the partners of the other firm. The source of the profits and the mode of their division were contemporaneously linked, so the profits were diverted before reaching the assessee as his own income.

Conclusion: Only one-third of the share income was includible in the assessee's assessment, and the balance was not taxable as his real income.

Final Conclusion: The reference was answered in favour of the assessee on the principle that taxation must be on real income and that a genuine overriding obligation can divert profits at source before they become taxable in the hands of the nominal recipient.

Ratio Decidendi: Where a genuine and binding overriding obligation diverts profits at source before they reach the assessee as his real income, tax can be levied only on the income actually accrued to him and not on the notional gross amount.

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