Law: Income Tax Act, 1961

Section: 4,66A(2)

Law: Income Tax Act, 1922

Section: 3

Section 4 of the Income-tax Act, 1961 [Corresponding to section 3 of the Indian Income-Tax Act, 1922] - Income - Diversion of at source by overriding title or application of income - Assessment years 1953-54 and 1954-55 - Whether where by obligation income is diverted before it reaches assessee, it is deductible; but where income is required to be applied to discharge an obligation after such income reaches assessee, no deduction can be allowed - Held, yes - Assessee claimed deduction of amount paid under a consent decree as maintenance to his wife and children - Whether instant case was one of application of a portion of income to discharge an obligation after assessee had received income as his own - Held, yes - Whether therefore, same was not deductible - Held, yes FACTS The assessee claimed deduction from his total income of the amount paid under a consent decree as maintenance to his wife and children. The ITO however disallowed said deduction and same was confirmed by the AAC and the Tribunal. On reference, the High Court held that the income to the extent of the decree must be taken to have been diverted to the wife and children, and never became income in the hands of the assessee and hence, was an allowable deduction. On appeal to the Supreme Court: HELD Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of…

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