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2019 (3) TMI 1253 - HC - Income TaxDeduction of TDS on salary u/s 192 - Nuns, Sisters, Missionaries and Fathers are bound by the Canon Law for their vows of poverty to the Christ and that they cannot be taxed in respect of the Grant-in-Aid or salary received from the State Government by respective school or educational institutions - Ld. Single Judge held that Assessee Institutions and the Missionaries, discussing the Canon Law in detail and held that no income tax can be deducted at source from the salaries and other monetary benefits paid to these persons - religious denomination under Article 26 of the Constitution of India - right to practice a religion as guaranteed under Articles 25 and 26 of the Constitution of India HELD THAT - provisions of Income Tax Law are dry, plain and simple, a-political, a-religious in character. In fact, except the provisions contained in Section 11 which provides for income from property held for charitable or religious purposes to be exempt, subject to compliance of the conditions and registration by the registered Trusts etc., there is no exemption available even to the charitable or religious institutions themselves, who have to secure registration as such and then, their income and application of income for charitable or religious purposes only is regulated strictly in accordance with the provisions contained in Chapter III of the Act. These provisions have no application to the individual Nuns, Sisters or Missionaries so as to claim any exemption from income tax. As far as the provisions with which we are concerned, namely Sections 15 and 192 of the Act, we do not have an iota of doubt that these provisions have nothing to do with religion or any other special status of the person receiving the income described to be salary by the payer of the same. Diversion of income at source - Religious binding character of the Nuns and Missionaries to make over even their salary receipts to the Institution, Church or Diocese amounts to diversion of income at source, by overriding title in favour of the Institution, Church or Diocese towards such religious obligations or is merely an application of their salary income taxable in their hands and such application of income can obviously be made only after meeting their tax obligations under the Income Tax Act a priori - applicabilty of old Circular issued on 24th January 1944 prior to Independence HELD THAT - salary in question was not directly received by the Congregation or Religion by overriding diversion of title, but were paid by the State to the Teachers who are Nuns or Missionaries and thereafter, it might have been applied or made over to the Church or Diocese or the Institution run by them. Merely by illustrative view of the entry shown as deposit of salary in common bank account or such Nuns or Missionaries not signing the receipt of salary in the Registers maintained by the Institution itself is not sufficient to prove such facts for all such persons belonging to the said class and the same cannot be taken as a proof of diversion of their salary income by overriding title in favour of the Institution or the Religion. The salary is paid under the contract of employment with which Educational Institution or the Church or Diocese is not even a privy to such contract of employment qua the State Government. State Government as a Payer of salary under Income Tax Act is not bound by any Religious tenets or provisions of Canon Law. It has nothing to do with the Religious freedom as guaranteed under Articles 25 and 26 of the Constitution of India. In the present case, the State Government cannot be said to be bound to pay such salary in favour of the Church or Diocese in place of Teachers concerned who may be Nuns or Missionaries and who may even leave and come out of such Religious Order on their own volition. On the other hand, the State Authorities, if they do not deduct tax at source on such salary payments, may be held guilty of not following the provisions of Income Tax Act rendering them to pay penalty and even face prosecution. Therefore, neither the Income Tax Department nor the State Government have anything to do with the religiious character of the Institution, may be Teachers or Nuns or Missionaries and therefore, they cannot take a stand for not making the tax deduction at source in view of the Canon Law. In our opinion, with great respects, the learned Single Judge has taken an impermissible route of Canon Law to interpret the provisions of Income Tax Law and holding such Tax Law to be of secondary importance, vis-a-vis the Canon Law applicable to the individual Teachers belonging to the class of Nuns, Missionaries or Sisters. Therefore, we are of the considered opinion that the present writ appeals filed by the Union of India deserve to be allowed and the order of the learned Single Judge under the appeal deserves to be set aside.
Issues Involved:
1. Taxability of income received by Nuns, Sisters, Priests, or Fathers working as teachers in religious institutions. 2. Applicability of Section 192 of the Income Tax Act, 1961, regarding tax deduction at source (TDS) on salaries. 3. Interpretation of Canon Law vs. Income Tax Law. 4. Validity of old Circulars and Instructions issued by the Central Board of Direct Taxes (CBDT). 5. Diversion of income by overriding title vs. application of income. Issue-wise Detailed Analysis: 1. Taxability of Income Received by Nuns, Sisters, Priests, or Fathers: The primary issue was whether the salaries received by Nuns, Sisters, Priests, or Fathers, who are teachers in religious institutions, are taxable. The court held that the character of the recipient does not determine the taxability of the income. The income received as salary from the State Government is taxable under the head "Salaries" as per Section 192 of the Income Tax Act, 1961. The religious vows taken by these individuals do not affect the taxability of the salary received by them. 2. Applicability of Section 192 of the Income Tax Act, 1961: Section 192 mandates that any person responsible for paying any income chargeable under the head "Salaries" shall deduct income tax at the time of payment. The court emphasized that this provision applies uniformly, irrespective of the religious character of the recipient. The State Government, as the payer of the salary, is obliged to deduct income tax at source, and the religious affiliations or vows of poverty taken by the recipients do not exempt them from this obligation. 3. Interpretation of Canon Law vs. Income Tax Law: The court clarified that the provisions of the Income Tax Law are secular and apolitical. The religious tenets or Canon Law do not influence the taxability of income under the Income Tax Act. The court rejected the argument that the religious vows taken by the recipients result in a civil death and therefore exempt them from taxability. The taxability of the salary is determined by the Income Tax Act, not by Canon Law. 4. Validity of Old Circulars and Instructions Issued by CBDT: The court examined various old Circulars and Instructions issued by the CBDT, including Circular No. 5 of 1940, Circular No. 1 of 1944, and Circular dated 5th December 1977. These Circulars were interpreted to apply primarily to fees received by missionaries and not to salaries. The court noted that the later Instructions issued in 2016 clarified that these old Circulars do not exempt salaries from taxability. The court held that Circulars and Instructions are not binding on the courts and cannot override the statutory provisions of the Income Tax Act. 5. Diversion of Income by Overriding Title vs. Application of Income: The court distinguished between diversion of income by overriding title and application of income. It held that the salary received by the teachers is first taxable in their hands, and any subsequent application of this income to the religious institution is irrelevant for tax purposes. The court rejected the argument that the salary was diverted at source by overriding title in favor of the religious institution. Instead, it was considered an application of income after it accrued to the recipients. Conclusion: The court allowed the appeals filed by the Union of India and the Income Tax Department, setting aside the judgment of the learned Single Judge. It held that the salary received by Nuns, Sisters, Priests, or Fathers is taxable under the Income Tax Act, and the State Government is obliged to deduct tax at source under Section 192. The court directed that this judgment be applied prospectively to avoid practical complications for the past period.
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