Certain basic concepts play a very basic role in calculating income tax. One such concept is income seeking. Closely related to this is another key concept called Priority Revenue Management.
Application of income
A careful reading of S.60 of the Act reveals that if an asset intended to generate income is not transferred, the income from that asset is included in the transferor’s income to calculate tax.
In Life Insurance Company v. Commissioner of Income-tax, Bombay City, the question was whether under S.28 of the Life Assurance Undertakings Act, 1956.
The appellant claimed that it was a diversion of revenue due to force majeure because part of the surplus had to be compulsorily paid to the central government. S.28 operates only after the surplus reaches the company and therefore the income is not diverted due to force majeure.
S.28 provides how the surplus is distributed after its proper determination. The first mode of payment is exempt under the Income Tax Act, while the second is not.
Basic charges Rs. 5,537 of those expenses and claimed a deduction from the amount of assessable income. The trial panel denied the deduction. He opined that the expenses were incurred after receipt of the income in the hands of the assessee and by the duty imposed on them by the testator. It was not about income diversification.
The court rejected the contention of the assessee and held that since the assessee did not transfer the shares to her husband, she therefore retained the right to share in the profits of the company. He did not waive that right.
Diversification of income
The concept of revenue application cannot be fully appreciated without understanding the concept of revenue management priority.
The following jurisprudence sheds light on the issue. In Raja Bejoy Singh Dudhuria Vs. The Commissioner of Income–tax, Bengal entered into a settlement decree between the stepmother and the Raja awarding a sum of Rs. 1,100 euros per month had to be paid for his maintenance.
The court found that the amount paid by Raja to the stepmother was not his income. This was a case where the income was distributed on a preferential basis because the court was required to pay the entire resource of a Raja with a special charge to his stepmother.
Assessing Officer in Commissioner of Income Tax, Bombay v. C. N. Patuck, received consent to divorce his wife. As a result of the settlement, the assessee made certain arrangements in favor of his two unmarried daughters.
The decree dealt with a tripartite agreement between Messrs. Patrick and Sons, the assistant himself, and his two daughters.
Raja Bejoy Singh Dudhuria Vs. The Commissioner of Income-tax
The judge stated that the amount paid to the daughter was not her income and was not taxable. He claimed that the amount was diverted from the source and ceased to be his income when his daughter became privileged.
On the other hand, the Department argued that the benefits were first paid to the assessee and then the assessee herself distributed the benefits to her two daughters. The whole arrangement was made only to ensure the upkeep of the two daughters.
The district court gave the decision to the judge. The decision of the District Court was based on three reasons.
First, the very fact that the parties considered paying the secured debt or the defendant’s debt in favor of their two daughters would lead to a collection of the payment immediately after the asset securing the payment was determined.
The fact that they were parties to the agreement and that they agreed to pay each daughter from their wages the amount of maintenance owed to them and one-third of the profits of the partnership clearly shows that this was the intention of the parties. Which the source or benefits relate to.
Therefore this part of the profit could never become the income of the assessee.
The investigator agrees with the decision of the court. It has to be seen whether the income reached the assessee or not. When it reaches his hands, there can be no deviation.
But if he acts only as a collector of income, or because of some payment the income goes elsewhere, he cannot be taxed on that amount.
Conclusion
Income comes from a source. According to the Income Tax Act, income is taxed when it arises. A taxable event is a source of income. When I earn income, I put it aside for certain things. Any income obligation is not taken into account when calculating the tax.
Thanks to the ingenuity of the people, § 60 was established in the law. The purpose of the section is to curb vandalism, where individuals try to escape tax responsibility by transferring income.