AHMAD FAREED, A.M.: ORDER These two appeals by assessee directed against order of CIT(A) Kolhapur, dt. 24th July, 1998 for asst. yr. 1992-93 and dt. 3rd Sept., 1998 f o r asst. yr. 1994-95 were heard together and therefore, these are being disposed of by common order for sake of convenience. 2. only issue involved in these appeals is about disallowances of Rs. 5,36,234 and Rs. 3,33,771 made by AO in asst. yrs. 1993-94 and 1994- 95 respectively and confirmed by CIT(A). 3 . assessee company was deriving income from diagnostic centre having facilities of CT scan, ultrasound and X-ray. assessee made claim for deduction of Rs. 5,36,254 on account of professional charges paid to three directors who were also directors of assessee company as under : Amount Name Period (Rs.) Dr. S.M. Karnawat 1-4-1990 to 31-3- 78,846.20 (MD) 1991 Dr. C.P. Mehta -do- 78,846.20 Dr. K.B. Patankar -do- 78,846.20 Sub-total 2,36,538.60 1-4-1991 to 31-3- Dr. S.M. Karnawat 99,898.28 1992 Dr. C.P. Mehta -do- 99,898.28 Dr. K.B. Patankar -do- 99,898.29 Sub-total 2,99,694.45 Total 5,36,233.85 4 . Shri K.A. Sathe, learned Authorised Representative submitted that Dr. C.P. Mehta, Dr. S.M. Karnawat and Dr. K.B. Patankar were carrying on medical profession specializing in Radiology (CT scan, ultrasound and X-ray) in partnership under name and style of M/s Kolhapur Diagnostic Center and Dr. Mehta, in addition had proprietary X-ray clinic under name of M/s Mehta X- ray Clinic at Kolhapur. assessee company entered into agreement on 1st April, 1990 with three doctors for taking over professional activities carried on by them in city of Kolhapur by purchasing machinery and equipments belonging to Dr. Mehta and also said partnership firm M/s Kolhapur Diagnostic Center for agreed price. In terms of this agreement, Dr. Mehta, Dr. Karnavat and Dr. Patankar agreed that they shall not carry on aforesaid professional activities either individually or collectively and shall not do or omit to do any act which will be competing to or detrimental to interest of assessee company. restrictive covenant was to be operative for period of five years from date of agreement by which time assessee company expected to build its own goodwill in city of Kolhapur. In consideration of restrictive covenants, assessee company agreed to pay to three doctors as under : "(a) To M/s Kolhapur Diagnostic Center (I) Rs. 1.50 lakhs for transfer of tenancy rights of premises situated (at) 615 Shahupuri, 2nd lane, Kolhapur (II) Rs. 40,000 towards cost of furniture fittings electrical connections, etc. (III) Rs. 10,000 for user of telephone bearing No. 28601 which is presently standing in name of Dr. C.P. Mehta. company was free to get same transferred in its own name and at its own cost. (b) company was to pay following amounts to three doctors in consideration of restrictive covenants undertaken by them. (I) Dr. C.P. Mehta Rs. 5 lakhs (II) Dr. S.M. Karnawat Rs. 3 lakhs (III) Dr. K.B. Patankar Rs. 1 lakh." 5. assessee company entered into another agreement with three doctors on 31st July, 1991. In terms of this agreement, assessee company agreed to pay to each one of three doctors, at rate of 1.66 per cent of total collection on CT scan, ultrasound and X-ray, w.e.f. 1st April, 1990, for duration of 25 years. Shri Sathe, learned Authorised Representative reiterated that three doctors had merged their professional activities, that impugned payment was made in consideration thereof and that it was allowable expenditure. He also raised alternative plea saying that agreement dt. 31st July, 1991 had created overriding charge. He submitted that liability arose at source and that it related to receipts and consequently it did not become receipt in hands of assessee company. He placed reliance on decisions in following cases : (i) Jit & Pal X-rays (P) Ltd. vs. CIT (2004) 186 CTR (All) 541 : (2004) 267 ITR 370 (All); (ii) CIT vs. C.N. Patuck (1969) 71 ITR 713 (Bom); (iii) Raja Bejoy Singh Dudhuria vs. CIT (1933) 1 ITR 135 (PC). 6. Shri M.M. Shrivastava learned Departmental Representative placed reliance on orders of lower authorities and vehemently argued saying that order of CIT(A) needed to be upheld. 7 . We have considered rival submissions in light of material on record and precedents cited. It is seen that for services rendered by them doctors were paid salaries as under : Asst. Dr. Dr. Dr. yr. Mehta Karnawat Patankar 1991- 1,17,600 1,17,600 1,17,600 92 1992- 1992- 1,09,200 1,09,200 1,02,200 93 1993- 1,39,000 1,39,000 1,39,000 94 8. Also in respect of restrictive covenant vide agreement dt. 1st April, 1990, doctors received payments as mentioned in para 4 above. And then after more than one year yet another agreement was entered into on 31st July, 1991. In terms of this agreement each one of them are to be paid by assessee company at rate of 1.66 per cent of total collections in respect of CT scan, ultrasound and X-ray w.e.f. 1st April, 1990 and for duration of 25 years and in event of death or insolvency of any one of them same payment shall be made to their legal heirs. terms of agreement dt. 31st July, 1991 leave no doubt in our mind that impugned payment does not qualify conditions mentioned in s. 37(1) of Act. CIT(A) has rightly observed that there is no connection between impugned payments and services rendered and that this expenditure could not be treated as business expenditure under s. 37(1). 9. Shri Sathe, learned Authorised Representative, however, raised alternative plea saying that agreement dt. 31st July, 1991 had created overriding charge. He submitted that liability in respect of impugned payment arose at source, that it related to receipts and consequently it did not become receipt in hands of assessee company. Since this was legal plea it was admitted for adjudication. Before proceeding to examine this plea we need to discuss legal position with regard to question whether amount paid is application of income or diversion by overriding title. 1 0 . question whether amount paid is application of income or diversion by overriding title is vexed question in IT law. principles on this point have been laid down by various decisions. 11. In Raja Bejoy Singh Dudhuria (supra), Privy Council (per Macmillan L.J.) held that where amount had to be paid to step-mother in pursuance of decree creating charge on assessee s resources it was not application of assessee s income but rather allocation of sum out of his revenue before it becomes income. diversion of income by overriding title need not necessarily be by decree of Court or by statutory or customary law, but may be under provisions of Will, or agreement, or deed e.g. deed of sale or gift or partnership or sub-partnership or partition of joint family property member. 12. It was held by Supreme Court in case of Provat Kumar Mitter vs. CIT (1961) 41 ITR 624 (SC) that fundamental principle is that application of income is allocation of one s own income after it accrues or has arisen, although such application may be under contract or obligation, whereas diversion of income is that which diverts away or deflects before it accrues to or reaches assessee, and it is received by him only for benefit of person who is entitled to income under overriding charge or title. 13. In case of Motilal Chhadami Lal Jain vs. CIT (1991) 94 CTR (SC) 195 : (1991) 190 ITR 1 (SC), it was explained by Supreme Court that what has to be seen is nature of obligation by reason of which income becomes payable to person other than one receiving it. Where obligation flows out of antecedent and independent title it effectively slices away part of corpus of right to receive entire income and thus it would be case of diversion. 14. In case of CIT vs. Imperial Chemical Industries (India) (P) Ltd. (1969) 74 ITR 17 (SC), it was pointed by Supreme Court that where there is obligation to apply income in particular way before it is received by assessee or before it has accrued or arisen to assessee, it is case of diversion of income. 15. principle which can be culled out from above rulings is that where assessee received amount of money but it is for benefit of some other person under some antecedent obligation then it is case of diversion of income by superior title and not application of income. There is distinction between obligation to spend money in particular manner attached to income, and similar obligation attached to source of income. In other words, to be overriding charge obligation must be attached to source of income. 16. We now proceed to apply above principles to present case. assessee company having three doctors as its directors had taken over professional activities carried on by them. company had entered restrictive covenant with doctors vide agreement dt. 1st April, 1990. consideration paid by assessee company to doctors in respect of restrictive covenants is mentioned in para 4 above. doctors are directors of assessee company and are paid salary as per details mentioned in para 7 above. It was after more than year on 31st July, 1991 that another agreement was entered into between assessee company and three doctors providing for impugned payment to them at rate of 1.66 per cent of total collection of CT scan, ultrasound and X-ray to each one of three doctors for period of 25 years w.e.f. 1st April, 1990. In view of these facts and legal position enunciated in above paras, it cannot be said that obligation to make impugned payments to doctors as per agreement dt. 31st July, 1991 represented obligation which was attached to very source of income of assessee company. decisions relied upon by Shri Sathe, learned Authorised Representative, do not render any help to case of assessee. In circumstances, therefore, we are of opinion that impugned payment made in terms of agreement dt. 31st July, 1991 was not case of diversion by overriding charge. We do not find any infirmity in orders of CIT(A) and accordingly we uphold his orders. 17. In result, appeals filed by assessee for both years are dismissed. *** I.D.O.R.I. (P) LTD. v. DEPUTY COMMISSIONER OF INCOME TAX