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Differences...

CA. Megha Topiwala (Job) (1534 Points)

26 December 2009

can any 1 explain me the difference between application of income and diversion of income ????

plz explain with example....

thnx in advance

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4 Replies

MOHIT MAHAJAN (LCS, ACA) (2050 Points)
Replied 26 December 2009

Refer following article, you will have an idea about difference between the two

https://incometax.indlaw.com/search/articles/?e56a5852-13d9-4a20-99f0-86224a691f0b

https://www.legalserviceindia.com/article/l85-Application-of-Income.html

You can study case laws given in these articles for stand of judiciary on these topics

(Guest)

An obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee results in the diversion of the income.On the other , an obligation to apply income which has accrued or arisen or has been received amounts merely to the appotionment of the income and not to its diversion...

Diversion of income is not regarded as income but when an assessee applies an income to discharge his obligation after the income reaches the hands of the assessee it would be an application of income and hence taxable.

Example:- Mr.A and Mr. B jointly write an article for its publication in a magazine on the understanding that the remuneration is to be shared equally. On its publiucation, Mr, A receives the entire amount say 5000. Mr A pays Mr.B 2500 as per the agreement. The amount so paid by Mr. A is a diversion of income.Since the sum paid to Mr B never accrued to Mr. A as income, it will not regarded as his income and there fore not taxable. Out of Rs. 2500, Mr A pays rs 2000 towards rent. This 2000 is an application of income- as it is a discharge of obligation out of the income of the assessee.

(Guest)

DISTINCTION BETWEEN APPLICATION OF INCOME AND DIVERSION OF INCOME:

APPLICATION OF INCOME:

AFTER EARNING THE INCOME, IF IT IS REQUIRED TO TO BE APPLIED TO DISCHARGE AN OBLIGATION, IT IS MERELY AN APPLICATION OF INCOME AND CHARGEABLE TO TAX.

DIVERSION OF INCOME:

*WHERE INCOME OR PORTION OF INCOME IS DIVERTED AT THE SOURCE OF INCOME BY AN OVERRIDING TITLE BEFORE IT REACHES THE ASSESSEE, IT IS DIVERSION OF INCOME AND NOT TAXABLE.

*IT MUST BE NOTED THAT THE OBLIGATION IS ON SOURCE OF INCOME AND NOT ON THE RECEIVER.

*INCOME IS TAXABLE IN THE HANDS OF PERSON TO WHOM INCOME IS DIVERTED BY OVERRIDING TITLE AND NOT IN THE HANDS OF PERSON WHO FIRST RECEIVE IT.

HOW TO DETERMINE WHETHER A PARTICULAR INCOME IS AN APPLICATION OF INCOME OR DIVERSION OF INCOME?:

IN ORDER TO DECIDE WHETHER A PARTICULAR INCOME IS AN APPLICATION OF INCOME OR DIVERSION OF INCOME, IT HAS TO BE DETERMINED WHETHER THE AMOUNT SOUGHT TO BE DIVERTED REACHES THE ASSESSE'S HANDS AS HIS/ HER OWN INCOME OR NOT.