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TMI Blog2015 (8) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... e deducted at source, from payments by way of salary/pension made by the Government, to persons who are members of religious congregations. The writ petitions were filed in the wake of instructions, issued by the Income-tax authorities to the District Treasury Officers in the State, calling upon them to deduct tax at source from such payments made to the members of the religious congregations. While in most of the writ petitions, the religious congregation concerned is the petitioner, in W. P. (C). No. 10/ 2015, an individual member of the religious congregation is the petitioner. 2. The brief facts necessary for a disposal of these writ petitions is as follows : The members of the religious congregations concerned are employed as teachers in various aided educational institutions in the State. The remuneration that they draw, for the teaching services rendered by them, is in the nature of salary that is paid to them by the State Government. In one case, the payment made is of pension, subsequent to the retirement of the member from service. The payments are made to them through the educational institution in question pursuant to a disbursal of the amounts through the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department. 5. The submissions of the learned counsel for the petitioners can be summarised as follows : The Central Board of Direct Taxes had, by its Circular dated January 24, 1944, followed by its Instructions dated December 5, 1977, clearly indicated that, in so far as the fees and other earnings received by the missionaries are to be made over to the congregation concerned, there is an overriding title to fees which would entitle the missionaries to exemption from payment of tax and, consequently, such fees or earnings would not be taxable in their hands. The said Circular and instructions of the Central Board of Direct Taxes were binding on the Income-tax authorities under the Income-tax Act by virtue of section 119 of the Income-tax Act. It followed, therefore, that an Income-tax Officer could not have issued instruc tions to deduct tax at source from salary payments that were effected from the Government to the members of religious congregations. The decisions of the Supreme Court in R and B Falcon (A) Pty. Ltd. v. CIT [2008] 12 SCC 466, State of Tamil Nadu v. India Cements Ltd. [2011] 13 SCC 247 and CCE v. Ratan Melting and Wire Industries [2008] 13 SCC 1 are relied upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 (SC) ; [2003] 1 SCC 660. 6. Per contra, the submissions of the learned senior counsel appearing on behalf of the Revenue in these cases, briefly put, is as follows : The Circular dated January 24, 1944 of the Central Board of Direct Taxes, as well as the Instructions dated December 5, 1977, refer only to fees and other income earned by "missionaries", and not to all members of religious congregations. It is contended that the term "missionaries" would apply only to those engaged in the dissemination of religious knowledge, and not to the members of a religious congregation engaged in general vocations, including the teaching profession. The Circular could not, therefore, be treated as having universal application to all cases of receipts, by way of fees or other earnings, of members of religious congregations. It is pointed out that the nature of the receipts, in the instant cases, would have to be looked into to determine whether they constituted the income of the member of the religious congregation who received it. It is contended that, in so far as the receipts were by way of salary and pension, and were payments made to the recipients for services rendered by them in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the transaction is ignored and the assessee in whose hands the income accrues becomes liable to tax. The test to be applied is to see whether the amount in question ever reached the assessee as his/her income. Under the Income-tax Act, every income that accrues or arises is liable to be taxed, irrespective of what happened to it afterwards. If, however, the income does not reach the assessee but, on account of a legal obligation, is diverted before it reaches him/her, then he/she cannot be taxed on such income. A classic statement of the law is to be found in the judgment of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC), where the principle was succinctly stated as follows (page 374) : "These are the cases which have considered the problem from various angles. Some of them appear to have applied the principle correctly and some, not. But we do not propose to examine the correctness of the decisions in the light of the facts in them. In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the institute, unless the institute's own law decrees otherwise. 4 When the nature of an institute requires members to renounce their goods totally, this renunciation is to be made before perpetual profession and, as far as possible, in a form that is valid also in civil law ; it shall come into effect from the day of profession. The same procedure is to be followed by a perpetually professed religious who, in accordance with the norms of the institute's own law and with the permission of the supreme moderator, wishes to renounce goods in whole or in part. 5 Professed religious who, because of the nature of their institute, totally renounce their goods, lose the capacity to acquire and possess goods ; actions of theirs contrary to the vow of poverty are, therefore, invalid. Whatever they acquire after renunciation belongs to the institute in accordance with the institute's own law. 9. The legal consequences that ensue from an adoption of the religious way of life have been discussed in a Division Bench decision of this court in Mother Superior, Adoration Convent v. DEO [1977] KLT 303. The said case considered the issue of whether the head of a religious congre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the perpetual vow is taken the pro fessed must renounce in favour of the person whom he or she likes, all the property which he or she actually possesses on condition how ever of his solemn profession subsequently taking place. After the solemn profession is taken all property which may come to the religious in any manner whatsoever accrues to the Order according to the constitution and if the order cannot acquire or own any property it becomes the property of the Holy See. The effect of taking a perpetual vow and becoming a nun is described thus in Pollock and Maitland's History of English Law, volume I, page 434 : 'A monk or nun cannot acquire or have any proprietary rights. When a man becomes "professed in religion", his heir at once inherits from him any land that he has, and, if he has made a will, it takes effect at once as though he were naturally dead. If after this a kins man of his dies leaving land which according to the ordinary rules of inheritance would descend to him, he is overlooked as though he were no longer in the land of the living ; the inheritance misses him and passes to some more distant relative. The rule is not that what descends to him belongs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igious profession as set forth in the Canon Law are stated with reference to those who take temporary vows and who take the perpetual vow. It is stated at page 330 that any 'religious' in simple minor vows, must before joining the profession make a will disposing of all his or her property and cannot retain any property which later comes to them. It automatically becomes the property of the order to which he or she belongs. This principle was followed in Avasarala Kondol Row v. Iswara Sanyasi Swamulavaru, AIR 1918 Mad 402, to describe the status of a sanyasi under Hindu law also. In the case of a sanyasi entrance to a religious order generally operates as a civil death The man who becomes an ascetic severs his connection with the members of his natural family and being adopted by his preceptor becomes, so to say, a spiritual son of the latter In Sital Das v. Sant Ram, AIR 1954 SC 606 Justice Mukherjea stated the law thus at page 613, paragraph 20 : 'It is well known that entrance into a religious order generally operates as a civil death. The man who becomes an ascetic severs his connection with the members of his natural family and being adopted by his preceptor beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the benefit of the holy order. In other words, the said cases dealt with the issue of what had to be done with amounts that accrued to a member of the religious congregation, after her death. In was in that context, that the obligation of the member vis-a-vis the congregation, based on the precepts of canon law, were analysed and applied. The said cases did not have to consider the issue of whether, at first instance, the amounts ever reached the member or accrued to him/her. In the instant cases, the question to be considered is precisely that : whether, notwithstanding the obligation of a member of the religious congregation to make over any amount, received by him/her by way of remuneration or other earnings, to the congregation concerned, the amount could be treated as having accrued to him/her for the purposes of the Income-tax Act ? As already noted, under the Income-tax Act, every income that accrues or arises is liable to be taxed, irrespective of what happened to it afterwards. If, however, the income does not reach the assessee or accrue to him/her but, on account of a pre-existing legal obligation, is diverted before it reaches him/her, then the assessee cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creates a superior title and results in diversion of the income from the main firm to the sub-partnership before the same becomes the income of the partner concerned. In such a case, even if the partner receives the income from the main partnership, he does so not on his behalf but on behalf of the sub-partnership. Distinguishing K. A. Ramachar it was observed (page 332 of 62 ITR) : "In that case, it was neither urged nor found that a sub-partnership came into existence between the assessee who was a partner in a firm and his wife, married daughter and minor daughter. It was a pure case of assignment of profits (and not losses) by the partner during the period of eight years. Further, the fact that a sub-partner can have no direct claim to the profits vis-a-vis the other partners of the firm and that it is the partner alone who is entitled to profits vis-a-vis the other partners does not show that the changed character of the partner should not be taken into consideration for Income-tax purposes." 14. In CIT v. Sunil J. Kinariwala [2003] 1 SCC 660, the assessee, who was a partner of a firm holding ten per cent. share therein, settled fifty per cent. of his ten per cent. right, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossession of junior members of the tarwad, based on an agreement (karar) that was entered into among the members of the tarwad, could be treated as having been diverted by overriding title to the junior members for whose benefit the income was to be applied. It was held that the case was one where the tarwad received the income from the properties allotted to the junior members and applied the same for the purposes of the tarwad and not a case of diversion of income. There was no transfer of the properties from the tarwad to the allottees. The junior members of the tarwad had a right to be maintained out of the income from the properties of the tarwad, and the arrangement in the karar was only a method for discharging the obligation of the tarwad in the matter of payment of maintenance to the junior members. The members received the income from the properties allotted, in their capacity as members of the tarwad and in discharge of the obligation of the tarwad to maintain them. Even assuming that the karar was a settlement or disposition of the income, it was a case of application of the income of the tarwad, even though the assessee had entered into a legal obligation to apply it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bt, the precepts of canon law might require them to entrust the amounts so received to the religious congregation of which they form a part, but, in my view, the said obligation of the member, which is only an obligation based on personal law, would not clothe the religious congregation with a legal right to receive salary/pension payments directly from the Government/employer, and without involving the member. Consequently, the entrustment of the amounts received by the member to the congregation would tantamount only to an application of income by the member in favour of the congregation. It will not be a case of diversion of income by way of overriding title. 17. I must now deal with the contention of the petitioners with regard to the Circular issued by the Central Board of Direct Taxes, that allegedly obliges the authorities under the Income-tax Act to treat all receipts by way of earnings of members of religious congregations as the income of the religious congregation and not as the income of the individual member. The Instruction dated December 5, 1977, which is based on an earlier Circular dated January 24, 1944 of the Central Board of Direct Taxes, reads as under : "F. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o ensure that, while issuing directions to the officer concerned, to act in accordance with the instructions of the Board, this court does not inadvertently direct him to act contrary to the provisions of the statute. To that effect is the caveat that was issued by a Constitutional Bench of the Supreme Court in CCE v. Ratan Melting and Wire Industries [2008] 13 SCC 1 where it was observed as follows : "5. Learned counsel for the Union of India submitted that the law declared by this court is supreme law of the land under article 141 of the Constitution of India. The circulars cannot be given primacy over the decisions. 6. Learned counsel for the assessee on the other hand submitted that once the circular has been issued it is binding on the Revenue authorities and even if it runs counter to the decision of this court, the Revenue Authorities cannot say that they are not bound by it. The cir culars issued by the Board are not binding on the assessee but are binding on the Revenue authorities. It was submitted that once the Board issues a circular, the Revenue authorities cannot take advan tage of a decision of the Supreme Court. The consequences of issuing a circular are that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation. 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. 21. For reasons that I have already stated, I am of the view that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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