**DIVERSION OF INCOME AND APPLICATION OF INCOME** DIVERSION OF INCOME-- Income never reaches to the assessee as his own income. By virtue of an obligation, the income is diverted at source before it reaches the assessee. APPLICATION OF INCOME-- income reaches to the assessee as his own income and is subsequently applied to discharge an obligation. DIVERSION OF INCOME-- here the obligation is on the source of income. APPLICATION OF INCOME-- here the obligation is on the receipt of incoem ie. after income reaches to the assessee. DIVERSION OF INCOME-- There is an overriding title by virtue of which diversion of income takes place. APPLICATION OF INCOME--There is no over riding title in this case. DIVERSION OF INCOME-- In case of diversion, the income is not included in the income of the assessee. APPLICATION OF INCOME-- In case of application, income is included in the income of assessee. Thanks
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.
Hi Uma, An application of income is an obligation to apply income, which has accrued or has arisen or has been received amounts to merely the apportionment of income. Therefore the essentials of the concept of application of income under the provisions of the Income Tax Act are: (i) Income accrues to the assessee (ii) Income reaches the assessee (iii) Income is applied to discharge an obligation, whether self-imposed or gratuitous. Diversion of Income is an obligation to apply the income in a particular way before it is received by the assessee or before it has arisen or accrued to the assessee results in diversion of income. The source is charged with an overriding title, which diverts the income. Therefore the essentials are the following: (i) Income is diverted at source, (ii) There is an overriding charge or title for such diversion, and (iii) The charge / obligation is on the source of income and not on the receiver. Examples of diversion by overriding title are - (i) Right of maintenance of dependents or of coparceners on partition (ii) Right under a statutory provision (iii) A charge created by a decree of a Court of law. Regards Vinod.P