2015 (8) TMI 431 - HC - Income Tax

Requirement to deduct tax at source from payments by way of salary/pension made by the Government, to persons who are members of religious congregations - Held that - while there may be instances where the receipt of fees or other earnings by members of religious congregations do get diverted by overriding title to the congregation, the proposition is by no means an absolute one that is applicable in all cases of earnings by a member of the religious congregation. The applicability of the concept would have to be tested on the facts of each case, by examining the nature of the receipt by the assessee. Viewed in that light, the impugned instructions of the Income-tax Officers, in these cases, to deduct tax at source from payments by way of salary and pension to members of the religious congregations, cannot be said to be contrary to the Circulars and Instructions issued by the Central Board of Direct Taxes. They are simply instructions issued in situations not covered by the Central Board of Direct Taxes Circular/Instructions. Further, the Central Board of Direct Taxes Circulars/Instructions cannot be treated as encompassing receipts by way of salary and pension, as that would render the said Circulars and Instructions contrary to the law declared by the courts on the concept of diversion of income by way of overriding title. For reasons that as already stated, the payments involved in the instant cases accrued to the members of the religious congregations as their income and the subsequent diversion of that income to the religious congregation concerned was only a case of application of that income. The impugned instructions of the Income-tax Officers that direct the persons responsible for paying salary and pension to the members of religious congregations, to deduct tax at source in accordance with section 192 of the Income-tax Act cannot be said to be illegal. The writ petitions, in their challenge against the said instructions, fail and are accordingly dismissed. The petitioners had, taking note of the instructions issued by the Income-tax Officers to deduct tax at source from salary payments, approached the Income-tax Officers under section 197 of the Income-tax Act for a certificate for non-deduction of tax at source. When the said application was rejected, the petitioners approached the Commissioner of Income-tax through a revision petition filed under section 264 of the Income-tax Act. The said revision applications were, however, rejected by holding that the salary of the teachers was received by them and formed part of their income for the purposes of the Income-tax Act. It was found that the voluntary foregoing of the income in favour of the religious congregation of which they were members, was an instance of application of income and not a diversion of income by overriding title. In the aforementioned writ petitions, the petitioners impugn the said orders passed by the authorities under the Income-tax Act. In the light of my findings on the issue, these writ petitions also fail, and are accordingly dismissed. All the writ petitions are dismissed and the stand of the Income-tax authorities that tax is required to be deducted at source from payments by way of salary/pension effected to persons who are members of religious congregations, is upheld. - Decide against assessee.

Issues Involved:
1. Whether tax is required to be deducted at source from payments by way of salary/pension made by the Government to members of religious congregations.
2. Whether the amounts received by members of religious congregations should be treated as income in their hands or as diverted by overriding title to the congregation.
3. Applicability and interpretation of Circulars and Instructions issued by the Central Board of Direct Taxes (CBDT) regarding tax exemption for members of religious congregations.
4. Whether there is a diversion of income by overriding title or application of income in the context of payments made to members of religious congregations.

Detailed Analysis:

Issue 1: Tax Deduction at Source (TDS) on Salary/Pension Payments
The core question in these writ petitions is whether the Government is required to deduct tax at source from salary/pension payments made to members of religious congregations. The petitions were filed in response to instructions from the Income-tax authorities to District Treasury Officers to deduct tax at source from such payments.

Issue 2: Income Treatment and Overriding Title
The members of religious congregations employed as teachers or receiving pensions argue that their earnings should not be treated as their personal income but as diverted by overriding title to the congregation. This argument is based on the precepts of canon law, which obligate members to make over their earnings to the congregation, effectively diverting the income before it reaches the individual.

The respondents, however, argue that the instructions issued by the CBDT in 1977 dealt only with fees and not salary income. They contend that the salary income accrues to the members for services rendered by them and any subsequent transfer to the congregation is merely an application of income.

Issue 3: Applicability of CBDT Circulars and Instructions
The petitioners rely on CBDT Circular dated January 24, 1944, and Instructions dated December 5, 1977, which indicate that fees received by missionaries and made over to the congregation are not taxable in their hands due to an overriding title. They argue that these instructions are binding under Section 119 of the Income-tax Act and should exempt their salary/pension from tax.

The respondents counter that these Circulars and Instructions apply only to fees and not to salary income. They argue that the nature of the receipts must be examined to determine if they constitute the income of the member, and in this case, the salary and pension payments are income for services rendered by the members.

Issue 4: Diversion of Income by Overriding Title vs. Application of Income
The court examined whether the income received by members of religious congregations is diverted by overriding title or is an application of income. The court noted that for the concept of diversion by overriding title to apply, the income must be diverted at the source due to a pre-existing legal obligation, making it non-taxable in the hands of the assessee.

The court found that the salary and pension payments accrue to the individuals for services rendered in their individual capacities and not to the congregation. The obligation to make over these amounts to the congregation is based on personal law and does not create a legal right for the congregation to receive the payments directly from the Government. Consequently, the transfer of these amounts to the congregation is an application of income, not a diversion by overriding title.

Conclusion:
The court held that the payments involved in these cases accrued to the members of the religious congregations as their income, and the subsequent transfer to the congregation was an application of income. Therefore, the instructions to deduct tax at source from salary and pension payments to members of religious congregations were upheld as legal.

The court also addressed the petitioners' applications for certificates for non-deduction of tax at source under Section 197 of the Income-tax Act, which were rejected by the authorities. The court dismissed these writ petitions, upholding the authorities' decisions that the salary received by the teachers formed part of their income and that the voluntary transfer to the congregation was an application of income.

Result:
All writ petitions were dismissed, and the stand of the Income-tax authorities that tax is required to be deducted at source from payments by way of salary/pension to members of religious congregations was upheld.

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