2021 (8) TMI 435 - HC - Income Tax

TDS u/s 192 - Liability of tax deduction at source from the salary paid to teachers who are nuns or priests of the religious congregations - Whether the writ petitions were maintainable? - HELD THAT - The religious congregations are not in receipt of any amount as salary. In the eyes of law and that of the income tax department tax deduction at source is to be effected from the salary paid to the employee of the Government. The religious congregations have no role in that whatsoever. The religious congregations are not employees. In such circumstances we are of the firm view that the writ petitions filed by the religious congregations were not maintainable except for those filed by the nun and priests individually. Taking into perspective the importance of the questions raised and the fact that the maintainability of the writ petitions was not questioned seriously we consider the questions raised in these appeals on merits. We are also persuaded to consider the questions not only due to their importance but also because a nun and three individual priests are even otherwise before this Court raising the same challenge. We hold the writ petitions to be maintainable in the peculiar circumstances of the cases. Whether salaries paid to nuns and priests who are employees of educational institutions are liable for tax deduction at source? - Section 192 of the Act does not contemplate any exemption from the liability to deduct tax at source on the basis of the nature of calling profession or vocation of the person who receives the salary. The statute makes it an obligation upon the person who pays the salary to deduct tax at the time when payment of salary is made. As per the statutory scheme the sole focus under section 192 of the Act upon the person paying the salary is whether the income is chargeable under the head Salaries . If the income payable will fall under the head Salaries the statute attaches an obligation to the person paying the salary to deduct TDS. While deducting the TDS under section 192 of the Act the person deducting it is not obliged to or required to ascertain the nature of calling or vocation of the assessee or utilization or application of the income by the assessee. Chargeability to tax is not dependent on the manner of utilization of the income. The utilization of a person s income may be a window for claiming a deduction or a refund but it is irrefutably not a ground to claim an exclusion from deduction of tax at source. At the time of deducting tax at source the exigibility to tax or the quantum to be taxed are not matters of relevance. Under the scheme of the Act those are matters to be considered subsequently after the annual returns are filed. Thus we hold that section 192 of the Act obliges every person who makes a payment under the head Salaries to deduct tax at source at the rates prescribed without fail. Whether the principle of diversion of income by overriding title applies to the salary received by nuns and priests? - They act as managers of educational institutions hospitals and other establishments. They enter into contracts for manifold purposes. In all these spheres they act like any other living human. In such a scenario we are of the firm view that the concept of civil death under the canon law not only stands eclipsed but has no relevance vis-a-vis the taxing statutes. We are a nation governed by the rule of law. The concept of civil death is alien to the Income Tax Act and the same cannot be incorporated into the statute book through any mode of interpretation. The civil death contemplated under our rule of law is only the civil death provided for in section 108 of the Indian Evidence Act 1872. Thus the reliance upon the concept of civil death of nuns and priests under canon law to avoid deduction of tax at source cannot be of avail to the appellants. After the coming into force of the Constitution the exigibility to tax is governed and controlled by the respective taxing statutes and not by the canon law. Canon law cannot relieve the legal obligations/duties created under the various legislations enacted by the legislature. We are therefore in complete agreement with the learned Single Judge that the principle of diversion of income by overriding title has no application to the salary paid to nuns or priests by the Government or any other employer. Whether the circulars of 1944 and 1977 are valid? If yes do they exclude salaries of nuns or priests from TDS? - The contention that the practice had the effect of recognizing an underlying principle according to us has no basis. As mentioned earlier under the scheme of the Act there cannot be an exemption or exclusion of income from chargeability otherwise than by the taxing statute. Since the statute has not provided for any such exemptions or exclusions for a certain category of persons like nuns or priests the circulars cannot exclude or exempt the obligation created under section 192 of the Act. We are therefore of the firm view that the 1944 circular or even the 1977 circular cannot be construed as excluding tax deducted at source from the salaries received by the nuns or priests from their respective. Whether deduction of tax at source from the salaries payable to nuns or priests violates Article 25 of the Constitution of India? - While considering this contention we bear in mind the perspective that the right under Article 25 is not an absolute or an unfettered right. Article 25 does not provide any immunity from taxation on the basis of religion. The right is subject to public order which term has a wide connotation. One of the facets of public order is the law of the land. A valid piece of legislation and its compliance is part of public order under Article 25 of the Constitution. Payment of taxes imposed under a validly enacted legislation is an essential attribute of public order. Thus if a valid law permits deduction of tax at source we find ourselves at a loss to assimilate the scope of the contention that deduction of tax at source violates the fundamental right to freedom of religion. We reject the said contention. Whether the non-deduction of tax at source from the salaries of nuns or priests for more than 76 years confers a right against such deduction? - The appellants contended that the non collection of TDS all these years have vested a legitimate expectation and a right upon them - We are afraid that we cannot agree with the contentions put forward by the appellants. Since we have already found that the mandate of section 192 of the Act is clear that TDS has to be deducted from the salaries payable to nuns or priests a contrary practise which was contrary to the law of the land cannot be permitted to be continued. As held in the decision in Joshi Technologies International Inc. v. Union of India and Others 2015 (5) TMI 521 - SUPREME COURT and several other decisions there cannot be any estoppel against law. Hence we reject the said contention too. As referred to the decision of the Madras High Court in Union of India v. Society of Mary Immaculate (Tamil Nadu) Madras 2019 (3) TMI 1253 - MADRAS HIGH COURT where after taking note of the judgment of the learned Single Judge impugned in these appeals agreed with the learned Single Judge of this Court. We too agree with the conclusions reached by the learned Single Judge in the impugned judgment as well as in the aforecited decision of the Madras High Court. We hold that this judgment shall apply only with prospective effect and not for any earlier periods. This direction is issued not on the basis of any proclaimed right of the nuns or priests but solely on account of the admission of the department that they had not by a mistake/omission failed to properly instruct the collection of TDS at source prior to 2014. From 2014 till date this Court had interdicted collection of tax at source also.

Summary

Issues Involved:
1. Maintainability of the writ petitions.
2. Liability of tax deduction at source (TDS) from salaries paid to nuns and priests.
3. Application of the principle of diversion of income by overriding title to the salary received by nuns and priests.
4. Validity and applicability of the 1944 and 1977 CBDT circulars regarding TDS exemption.
5. Violation of Article 25 of the Constitution of India due to TDS deduction.
6. Impact of the historical non-deduction of TDS on the salaries of nuns and priests.

Detailed Analysis:

Q.(i) Whether the writ petitions were maintainable?

The court noted that most appeals were filed by religious congregations, which are not the direct recipients of the salaries. Only four appeals were filed by individual nuns and priests. The court concluded that the writ petitions filed by the religious congregations were not maintainable as they are not the assessees. However, considering the importance of the questions raised and the fact that the maintainability was not seriously questioned, the court decided to address the merits of the case.

Q.(ii) Whether salaries paid to nuns and priests, who are employees of educational institutions, are liable for tax deduction at source?

The court emphasized that income tax is levied on the total income of every person as per Section 4 of the Income Tax Act. Section 192 mandates the deduction of tax at source from salaries without any exemptions based on the nature of the recipient's vocation. The court held that the statutory obligation to deduct TDS applies to all salaries, including those paid to nuns and priests, irrespective of how the income is utilized or applied by the recipient.

Q.(iii) Whether the principle of diversion of income by overriding title applies to the salary received by nuns and priests?

The appellants argued that their income is diverted to their religious congregations due to their vow of poverty, invoking the principle of diversion of income by overriding title. The court referred to the Supreme Court's rulings, which state that income tax is attracted when income is earned, not based on its utilization. The court concluded that the salary received by nuns and priests does not get diverted before it reaches them and thus is subject to TDS.

Q.(iv) Whether the circulars of 1944 and 1977 are valid? If yes, do they exclude salaries of nuns or priests from TDS?

The court analyzed the 1977 CBDT circular and concluded that it pertains to fees received by missionaries, not salaries received by nuns or priests. The court further noted that the CBDT's clarification in 2016 explicitly stated that the circulars do not exempt salaries and pensions received by nuns or priests from TDS. The court held that the CBDT cannot issue circulars that override statutory provisions, and thus, the circulars do not provide an exemption from TDS for salaries.

Q.(v) Whether deduction of tax at source from the salaries payable to nuns or priests violates Article 25 of the Constitution of India?

The appellants contended that TDS deduction infringes on their right to profess, practice, and propagate religion under Article 25. The court rejected this argument, stating that Article 25 does not provide immunity from taxation and is subject to public order, which includes compliance with valid laws. The court held that TDS deduction does not violate Article 25.

Q.(vi) Whether the non-deduction of tax at source from the salaries of nuns or priests for more than 76 years confers a right against such deduction?

The court acknowledged the historical non-deduction of TDS but stated that this practice, based on a mistaken notion, does not confer any right against deduction. The court emphasized that there cannot be any estoppel against the law and upheld the statutory obligation to deduct TDS. The court agreed with the Madras High Court's decision that TDS is applicable to the salaries of nuns and priests and directed that the judgment applies prospectively, not affecting the past periods.

Conclusion:

The court dismissed the appeals, affirming that TDS must be deducted from the salaries of nuns and priests. The judgment applies prospectively, considering the department's previous failure to instruct proper TDS collection. The court emphasized compliance with statutory obligations and rejected the applicability of canon law and historical practices against TDS deduction.