Diversion of Income By Overriding Title - Income Tax - Ready Reckoner - Income Tax

Diversion of Income By Overriding Title CONCEPT: If an assessee voluntarily diverts his income to some other person ,then the income so diverted shall be included in the income of the person who diverted the income and shall not be taxable in the hands of the recipient. Same is not the case where income is diverted by overriding title. Diversion of income by overriding title means that the income is diverted because of legal obligation .The source of income is subject to a legal obligation .In case the income is diverted because of a legal obligation ,then the income shall not be included in the income of the person who has diverted the income but shall be taxable in the hands of recipient. Section 4 recognises the principles of diversion of income by overriding title. Where income is diverted before it reaches the hands of the assessee, it amounts to diversion at source. FOR EXAMPLE: In case of a lottery, as per the lottery agreement certain percentage of the first prize is to be paid to the state government and the lottery agent.In this case, the lottery income is subject to a legal obligation and therefore the amount paid to the state government and lottery agent is on account of a legal obligation. Therefore ,the said amount is not taxable in the hands of winner. APPLICATION v/s. DIVERSION OF INCOME Where a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be diversion of income by overriding title; but when after receipt of the income the same is passed on to a third person, in discharge of the obligation of the assessee, it will be a case of application of income and not diversion of income.