Direct Taxes for CA Final
CHAPTER 1 – BASIC CONCEPTS
Question 1 - Mr. Bhargava, a leading advocate on corporate
law, decided to reduce his practice and to accept briefs only
for paying his taxes and making charities with the fees
received on such briefs. In a particular case, he agreed to
appear to defend one company in the Supreme Court on the
condition that he would be provided with ₹ 5 lacs for a public
charitable trust that he would create. He defended the
company and was paid the sum by the company. He created a
trust of that sum by executing a trust deed. Decide whether
the amount received by Mr. Bhargava is assessable in his
hands as income from profession.
Answer
In the instant case, the trust was created by Mr. Bhargava
himself out of his professional income.
The client did not create the trust. The client did not impose
any obligation in the nature of a trust binding on Mr.
Bhargava. Thus, there is no diversion of the money to the
trust before it became professional income in the hands of
, Mr. Bhargava. This case is one of application of professional
income and not of diversion of income by overriding title.
Therefore, the amount received by Mr.
Bhargava is chargeable to tax under the head “Profits and
gains of business or profession”.
Question 2- XYZ Ltd. took over the running business of a
sole-proprietor by a sale deed. As per the sale deed, XYZ Ltd.
undertook to pay overriding charges of ₹ 15,000 p.a. to the
wife of the sole-proprietor in addition to the sale
consideration. The sale deed also specifically mentioned that
the amount was charged on the net profits of XYZ Ltd., who
had accepted that obligation as a condition of purchase of the
going concern. Is the payment of overriding charges by XYZ
Ltd. to the wife of the sole-proprietor in the nature of
diversion of income or application of income? Discuss.
Answer
This issue came up for consideration before the Allahabad
High Court in Jit & Pal X-Rays (P.) Ltd. v.
CIT (2004) 267 ITR 370 (All). The Allahabad High Court
observed that the overriding charge which had been created
in favour of the wife of the sole-proprietor was an integral
part of the sale deed by which the going concern was
CHAPTER 1 – BASIC CONCEPTS
Question 1 - Mr. Bhargava, a leading advocate on corporate
law, decided to reduce his practice and to accept briefs only
for paying his taxes and making charities with the fees
received on such briefs. In a particular case, he agreed to
appear to defend one company in the Supreme Court on the
condition that he would be provided with ₹ 5 lacs for a public
charitable trust that he would create. He defended the
company and was paid the sum by the company. He created a
trust of that sum by executing a trust deed. Decide whether
the amount received by Mr. Bhargava is assessable in his
hands as income from profession.
Answer
In the instant case, the trust was created by Mr. Bhargava
himself out of his professional income.
The client did not create the trust. The client did not impose
any obligation in the nature of a trust binding on Mr.
Bhargava. Thus, there is no diversion of the money to the
trust before it became professional income in the hands of
, Mr. Bhargava. This case is one of application of professional
income and not of diversion of income by overriding title.
Therefore, the amount received by Mr.
Bhargava is chargeable to tax under the head “Profits and
gains of business or profession”.
Question 2- XYZ Ltd. took over the running business of a
sole-proprietor by a sale deed. As per the sale deed, XYZ Ltd.
undertook to pay overriding charges of ₹ 15,000 p.a. to the
wife of the sole-proprietor in addition to the sale
consideration. The sale deed also specifically mentioned that
the amount was charged on the net profits of XYZ Ltd., who
had accepted that obligation as a condition of purchase of the
going concern. Is the payment of overriding charges by XYZ
Ltd. to the wife of the sole-proprietor in the nature of
diversion of income or application of income? Discuss.
Answer
This issue came up for consideration before the Allahabad
High Court in Jit & Pal X-Rays (P.) Ltd. v.
CIT (2004) 267 ITR 370 (All). The Allahabad High Court
observed that the overriding charge which had been created
in favour of the wife of the sole-proprietor was an integral
part of the sale deed by which the going concern was
