JHN Ltd. took over the running business of Vimal, a sole-proprietor by a sale deed. As per the sale deed, JHN Ltd. undertook to pay overriding charges of ₹15,000 p.a. to Vimal's wife in addition to the sale consideration

Answer 6A(ii) The facts of the case are similar to that of the case Jit & Pal X-Rays (P.) Ltd. v. CIT (2004) 134 Taxman 62 (All), where 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 transferred to the assessee. This is obligation, therefore, was attached to the very source of income i.e. the going concern transferred to the assessee by the sale deed. The sale deed also specifically mentioned that the amount in question was charged on the net profits of the assessee company and the assessee company had accepted that obligation as a condition of purchase of the going concern. Hence, it is clearly a case of diversion of income by an overriding charge and not a mere application of income. Thus, the payment of overriding charges by JHN Ltd to Vimal's wife is a case of diversion of income and hence allowed to be deducted from Income of JHN Itd.