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- Whether there is a diversion of income by the assessee before it has reached her hands or an application of income by the assessee after it was received by her. Analysis: The judgment of the High Court of Bombay, delivered by KANTAWALA C.J., pertains to a case involving the diversion of income by the assessee before it reached her hands. The case involved a deed of settlement dated July 1, 1947, where certain shares were settled upon trust for the benefit of the assessee, Kamlabai Juthalal. Subsequently, on May 5, 1956, the assessee executed a deed of assignment and gift, transferring her right to receive income from the trust to her grandsons. The Income-tax Officer, Appellate Assistant Commissioner, and Tribunal all had differing views on whether the income should be included in the assessee's assessment. The Tribunal ultimately held that the deed of assignment resulted in a diversion of income before it reached the assessee's hands, as the trustees were obligated to pay the income directly to the assignees. The judgment extensively discussed the legal principles governing the diversion of income. Referring to the Indian Trusts Act, the court highlighted the provisions allowing beneficiaries to renounce or transfer their interests in a trust. The court emphasized the distinction between an obligation to apply income before it reaches the assessee and an obligation after the income has accrued to the assessee. Citing Supreme Court decisions, the court reiterated that if income is diverted before reaching the assessee, it is deductible, whereas if the income is applied after receipt, it is not deductible. The court specifically referenced the case law of Commissioner of Income-tax v. Sitaldas Tirathdas and Commissioner of Income-tax v. Imperial Chemical Industries (India) (P.) Ltd. to establish the legal test for determining the diversion of income by an overriding title. Ultimately, the court analyzed the deed of assignment and gift executed by the assessee and concluded that it resulted in a complete diversion of the source of income before it accrued or arose to the assessee. The court found that the trustees were obligated to pay the income directly to the assignees, indicating a clear divestment of the assessee's right to receive the income. Therefore, the court upheld the Tribunal's decision that the income was diverted before reaching the assessee's hands. Consequently, the answer to the question posed in the reference was that the provisions of the deed of assignment resulted in a diversion of income before it reached the assessee's hands, and the revenue was directed to pay the costs of the assessee.
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