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.
