2019 (4) TMI 298 - HC - Income Tax

State liability to deduct TDS u/s 192 - making payment of salary from the Grant-in-Aid, to the Teachers in the respondents Societies/Schools, who may be Nuns or Sisters or Missionaries working as Teachers in such Institutions - scope of Canon Law - HELD THAT - The controversy in the present appeals is squarely covered by a recent decision in Union of India Vs. The Society of Mary Immaculate (Tamil Nadu) and others 2019 (3) TMI 1253 - MADRAS HIGH COURT wherein this Court held that the State is liable to deduct income tax at source under Section 192 of the Income Tax Act, 1961, while making payment of salary from the Grant-in-Aid, to the Teachers in the respondents Societies/Schools, who may be Nuns or Sisters or Missionaries working as Teachers in such Institutions. 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. 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. - Decided in favour of revenue

Summary

Issues:
Interpretation of Income Tax Act regarding deduction at source for salary payments to teachers in educational institutions run by religious organizations.

Analysis:
The High Court of Madras, in a common judgment delivered by Dr. Justice Vineet Kothari, addressed the issue of whether the State is liable to deduct income tax at source under Section 192 of the Income Tax Act, 1961, while making salary payments to teachers in educational institutions run by religious organizations. The Court referred to a recent decision of a Division Bench in a similar case and highlighted that the salary payments were made by the State to the teachers who may be Nuns, Sisters, or Missionaries working in such institutions. The Court emphasized that the State Government, as the payer of the salary, is not bound by any religious tenets or provisions of Canon Law. It clarified that the State's obligation to deduct tax at source is independent of the religious character of the institution or the teachers. Failure to deduct tax could lead to penalties and prosecution for the State authorities. The judgment emphasized that the Income Tax Department and the State Government cannot prioritize Canon Law over Income Tax Law in matters of tax deduction at source.

The Court further elaborated that the State Government is not required to pay the salary in favor of the Church or Diocese, even if the teachers are Nuns or Missionaries, as the contract of employment is with the State Government and not the religious institution. The judgment stressed that the State Government's role as the salary payer is distinct from any religious affiliations of the teachers. The Court criticized the interpretation of the Income Tax Law based on Canon Law by a learned Single Judge and held that Tax Law takes precedence over religious considerations in this context. Consequently, the writ appeals filed by the Union of India were allowed, and the order of the learned Single Judge was set aside, with no costs imposed.

Acknowledging the potential practical complications arising from the reversal of the Single Judge's order, the Court directed that the judgment would apply prospectively and not for the past period. The judgment also addressed respondents who were not represented in the appeals, allowing them to apply to the Court if their cases differed in nature from the judgment, emphasizing the need to point out any factual distinctions. Overall, the Court's decision clarified the State's obligation to deduct tax at source for salary payments to teachers in educational institutions, irrespective of their religious affiliations, and underscored the primacy of Income Tax Law over religious considerations in such matters.