XYZ Ltd took over the running business of a sole-proprietor by a sale deed. As per terms of the sale deed, XYZ Ltd required to pay overriding charges of ₹75,000 p.a. to the wife of the sole-proprietor for ten years in ad

This issue came up for consideration before the Allahabad High Court in the case of Jit & Pal X-Rays (P) Ltd. vs. CIT (2004) 267 ITR 370 . 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. The 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.