Diversion of income at source under a partnership deed keeps later-business profits out of the partner's taxable income.

A partnership deed clause diverting profits from any later business started without the other partners' written consent was treated as an overriding obligation that diverted income at source to the firm. On that construction, the partner's earnings from the later concern were not his real income and were not taxable in his hands. Because the deed vested those profits in the firm, the same amount was assessable in the firm's hands, and the alternative deduction claim under section 10(2) did not survive. The article distinguishes diversion at source from mere application of income after accrual.

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Issues: (i) Whether the sum of Rs. 55,664 arising from the partner's later business was diverted at source to the firm by virtue of clause 12 of the partnership deed, so that it was not taxable in the partner's hands. (ii) Whether the same amount was properly included in the assessment of the firm and whether any relief survived on the alternative deduction claim.

Issue (i): Whether the sum of Rs. 55,664 arising from the partner's later business was diverted at source to the firm by virtue of clause 12 of the partnership deed, so that it was not taxable in the partner's hands.

Analysis: The controlling distinction is between an amount that is merely applied after it reaches the assessee and an amount that never reaches him as his income because it is diverted before accrual by an overriding obligation. Clause 12 provided that profits from any new business started without the written consent of the other partners would belong to the firm. On that construction, the partner's earnings from the later concern were diverted at source in favour of the firm and could not be treated as his real income.

Conclusion: The amount was diverted by an overriding title and was not taxable in the partner's hands.

Issue (ii): Whether the same amount was properly included in the assessment of the firm and whether any relief survived on the alternative deduction claim.

Analysis: Once the income was held to belong to the firm under the partnership deed, it was assessable in the firm's hands. The alternative claim for deduction under section 10(2) did not survive after the finding on diversion of income, and the contention that the inclusion in the firm's assessment amounted to an impermissible enhancement was not accepted.

Conclusion: The amount was properly included in the firm's assessment, and the alternative deduction claim failed.

Final Conclusion: The decision treated the profits from the later business as income diverted to the firm under the partnership deed, while also upholding assessment of that income in the firm's hands rather than the individual partner's hands.

Ratio Decidendi: Where a binding obligation under a deed diverts income at source before it becomes the assessee's real income, the amount is not taxable in the assessee's hands; but where the income is only applied after accrual, it remains taxable in the hands of the recipient.

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