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TMI Blog2019 (3) TMI 1253X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken 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. - Writ Appeal Nos.391 to 402, 569 to 583, 585 to 596, 598, 599 & 603 of 2019 (Reserved on 04.3.2019) & W.A.Nos.817, 819 to 827, 829, 832, 833, 837 to 844, 846, 836, 897 to 906 of 2019 (Reserved on 15.3.2019) - - - Dated:- 20-3-2019 - Dr. Justice Vineet Kothari And Mr. Justice C.V. Karthikeyan For the Appellant : Mr.Karthik Ranganathan Standing Counsel For the Respondent : Mr.Arvind Datar, S.C., Fr. Xavier Arulraj, S.C., Assisted by Ms.A.Arul Mary, Fr. Xavier Associates And Mrs. Poornima ORDER DR.VINEET KOTHARI, J. Whether the Income Tax Law is a-political, a-religious in character, whether the character and attributes of the recipient of an income determines the taxability or the charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said writ petitions upholding the aforesaid contention of the 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, who are the Members of the Religious Congregation and it would be sufficient, if the Head of the Institution concerned certifies the names of the staff Members, who were Members of the Religious Body and the period during which they have served and the designation of the post. While doing so, the learned Single Judge held that in terms of Article 26 of the Constitution of India, there is a guarantee to religious denomination, a right to acquire its own property and to administer such property in accordance with law and that the administration of the property by a religious denomination has thus been placed on a different footing from the right to manage its own affairs in matters of religion. The latter is a fundamental right which no legislature can take away, whereas the former can be taken away by law which the legislative can validly impose. The learned single Judge proceeded to hold that an action by an authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ENTRAL BOARD OF REVENUE New Delhi, the 2nd January 1940 . ----- Circular Liability to tax - Fees received by Missionaries and subsequently made over to their Society ----- Medical fees, examination fees or any other kind of fees received by the missionaries are taxable in the hands of the missionaries themselves even though under the terms of their employment or the rules of the Society to which they belong the fees have to be made over to the Society. These fees are earned by the missionaries for professional or other services rendered by them and the fees are paid to them and not the Missionary Societies. Not only is there an element of accrual of the fees to the missionaries but there is an actual receipt by them. The fact that they are, by the terms of their contracts, required to make over the fees to the societies does not affect the liability ( cf. 2 I.T.C. 286 ) . Sd/- First Secretary, Central Board of Revenue. All Commissioners of Income-tax. All Appellate Assistant Commissioners. The Income-Tax Adviser to the Board. II - Circular of Central Board of Revenue, No.1 of 1944 dated 24th January 1944 Ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Sub: Acquittance for salaries paid on behalf of members belonging to the Catholic Religious Order Read: Replies from the Inspecting Officers to Director's circular Procs.C.No.387/D/46, dated 10.4.46 ----- The Director is of opinion that there is no justification for insisting on the members of teaching staff belong to the Catholic Religious Orders who have taken the vow of poverty , passing acquittances in respect of their monthly salaries from the educational institutions for what are purely fictitious amounts . He therefore directs that it would be sufficient if the head of institutions concerned certifies as follows each month : Certified that the following members of the Religious body of.............. were on duty in the ( Name of the Institution ) ..............in the month of ..............19... during the period noted against each and that the salaries assigned to them for purposes of financial statements due to the Education Department are as shown against each:- S.No. of Post Designation Post of of Post Name of names of incumbents Periods for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of the fees received by them . The question for consideration is whether the fees or the other earnings of the missionaries be assessed as their income, although the same is to be made over to the congregation to which they belong under the rule there of. The Board have examined this issue and have decided that since the fees received by the missionaries are to be made over to the congregation concerned there is an overriding title to the fees which would entitle the missionaries to exemption from payment of income tax . Hence, such fees or earnings are not taxable in their hands . These instructions may be brought to the notice of all the officers working in your charge. Yours faithfully ( Signed ) J.F.Sharma Secretary Central Board of Direct Taxes Note: This exemption is restricted only to the individual missionary and not to the income of the missionary per se . Taxability of such an income gets transferred to the institution from the individual provided the entire income for the missionary is assessed with the income of the institution and satisfies all the rules governing Income Tax exemption given to the institution u/s. 12A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... you are requested to comment as why exemption from TDS may not be applicable in respect of payments received by missionary teachers in their individual capacity as remuneration for services rendered by them on the basis of their individual qualifications and experience which do not have the character of fees collected in a fiduciary capacity and, therefore, not exempt from tax as per the Board's Circular/Instruction of 1944 and 1977. 4. The comments in this regard may please be furnished to the Board on priority basis and positively by 8th March, 2016 so that the decision can be taken by the Board and the same can be submitted to the Hon'ble Court before the next date of hearing on 17.03.2016. Yours faithfully, Encl: As above Sd/- ( Sandeep Singh ) Under Secretary to the Govt. of India Tele: 23094182 VI - Proceedings of the DS (IT - Budget), Department of Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the members of the congregation in lieu of services rendered by them in their individual capacity are taxable in the hands of the members themselves even if the same are made over the congregation. 3. In view of the above, no exemption from TDS is envisaged under the Circulars and Instructions of the Board under reference in respect of payments received by members of religious congregations in their individual capacity as remuneration for services rendered by them on the basis of their individual qualifications and experience which do not have the character of fees collected in a fiduciary capacity. This issues with the approval of Chairman, CBDT. Yours faithfully, Sd/- SHAILESH THAKUR DS ( IT-Budget ) , Department of Revenue Tel: 011-23092641 Email: [email protected].... Copy to: Principal CCIT, Kerala with request to apprise the Hon'ble High Court of the Board's considered opinion as outlined in the letter above. 7. The learned counsel for the Revenue, Mr.Karthik Ranganathan, has raised the following contentions on behalf of the Appellant Revenue before us. 8. Mr.Karthik Ranganathan submitted that Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act and the payer of such salary, namely the State Government, is obliged to deposit such amount of tax deducted at source with the Treasury in the account of Income Tax Department, and of course the credit of such TDS can be taken by the recipient of such income against his tax liability, including the said receipt of salary from the State Government, depending upon the final tax liability of the person concerned. The tax deducted at source made under Section 192 of the Act is nothing but an advance tax on behalf of the Assessee, namely the recipient of the salary, with the Income Tax Department subject to adjustment upon the final assessment of tax liability in the hands of the recipient. 12. The learned counsel submitted that though no such assessment proceedings had been undertaken against the Teachers belonging to said class of Nuns, Missionaries etc. so far, but the Income Tax Department authorities are free and reserve their right to do so and the obligation of filing returns and subjecting themselves to assessment as provided in the Income Tax Act, is applicable to this class of Teachers of the Assessees also. 13. Mr.Karthik Ranganathan also questioned the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Direct Taxes that any payment other than fees received in fiduciary capacity on behalf of Congregation was taxable in the hands of Members themselves, even if the same are made over to the Congregation or Religious Order and no exemption from income tax deducted at source provision, is envisaged under those old Circulars. In other words, tax deducted at source is required to be made on payment of such salary to the Teachers. These clarifications, he urged, were issued in view of similar controversy decided by Kerala High Court in favour of the Assessees against which the Department has filed Writ Appeals in Kerala High Court also and the same are also pending before Division Bench of the Kerala High Court. 16. Mr.Karthick Ranganathan, learned Standing Counsel, also raised a contention with reference to Sections 60 and 62 of the Act in Chapter V of the Act, which provides for income of other persons to be included in Assessee's total income or popularly known as clubbing provisions and he submitted that Section 60 provides that all income arising to any person by virtue of a transfer whether revocable or not, where there is no transfer of the assets from which the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Missionaries who adopted a particular Religious Order and have taken vow of poverty in their complete surrender to the Religious Order cannot be said to have entered into any service to earn any income for themselves and therefore, the Grant-in-Aid paid to them under the caption Salary is nothing but a receipt by them as a conduit to be passed on to the Religious Order, for which they are bound by the Canon Law, which is a codified law of Christianity and therefore, no character of taxable income can be attributed to such receipts in the hands of Nuns and Missionaries and therefore, TDS provisions cannot be applied to them. 22. The learned senior counsel for the Assessees heavily relied upon the Circulars and Instructions of 1944 and 1977 quoted above and urged that the Government being fully conscious of the surrender of the Missionaries to the Religious Order, issued the aforesaid Circulars specifically exempting the tax in the hands of such Missionaries on the fees received by them on behalf of Society in their fiduciary capacity and the same principles would apply even to the 'Salaries' paid to these Teachers under the Grant-in-Aid Schemes of the State Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and have taken vows of poverty etc. and consequently the later so-called clarifications issued by the Department in 2016 are of no consequence and they deserve to be quashed. 26. Relying upon the case laws which will be discussed hereinafter, Mr.Arvind Datar, learned senior counsel, concluded that the learned single Judge has therefore rightly allowed the writ petitions of the Institutions and the writ appeals filed by the Union of India deserve to be dismissed by this Court. 27. We have heard the learned counsel at length and given our earnest consideration to the rival submissions and case laws cited at the bar. 28. With great respects, we are unable to persuade ourselves to agree with the contentions placed by learned senior counsel Mr.Arvind Datar and the reasons given by the learned Single Judge in the order under appeal and we are inclined to allow the present writ appeals of the Union of India and Income Tax Department for the following reasons. 29. In our opinion, the provisions relating to tax deduction at Source in Section 192 of the Act in Chapter XVII of the Act, providing for Collection and Recovery of tax in 7 Parts, wherein Part B provides for o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is always made much in advance before the return of income is filed and the assessment procedure is adopted under the relevant provisions of the Act. The words on the estimated income of the assessee in the later part of the said Provisions of Section 192 do not envisage the determination of the issue of taxability or otherwise at that point of time and that expression is only for deciding the rates in force which will depend upon the estimated income of the Assessee under the Head Salary . Obviously, the question of taxability or non-taxability can be decided only by the tax authorities or the Courts of law in quasi-judicial or judicial proceedings and not by the concerned persons making such payments or assessees recipients concerned. They can only make their claims, submissions or the contention with regard to this issue. Thus, the entire claim of the Teachers, like Nuns and Missionaries in the present case, whose cause is said to be espoused by the educational institutions before us with regard to their surrender to the Religion on Canon Law, has no connection or effect on the operatability or uniform application of the said provisions of Section 192 of the Act. 31. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 35. The same Chapter III provides for Special Provisions relating to Incomes of political parties also in Section 13A of the Act, while Section 13B of the Act provides for special provisions relating to voluntary contributions received by Electoral Trust. There is no issue raised with regard to these provisions before us in the present case and these provisions are referred just to indicate that except these special provisions with limited application, the Income Tax Law is otherwise a-political and a-religious in character. 36. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties, is their discretion and if the Assessee gets its share of total profits only to the extent of ₹ 45/- per Case in the name of bottling charges and DIAGEO takes the entire remaining balance as per Clauses 16 and 17 of the Agreement dated 30/10/2007 , that distribution of surplus between the two parties to the contract has no effect and overriding impact on the taxability part of the entire income arising or accruing firstly, in the hands of the Respondent Assessee CHAMUNDI for the period in question. 39. A long series of case laws on the said issue of Diversion of Income versus Application of Income was discussed by the Karnataka High Court in that decision supra, rendered on 25th September 2018 and since most of the judgments cited at bar before us in the present case have already been discussed therein, the following extract from that judgment is considered appropriate, though a lengthy one. 37. In Commissioner of Income Tax, Punjab, Himachal Pradesh and Bilaspur v. Thakar Das Bhargava [1960] 60 ITR 301 (SC) , the Hon'ble Supreme Court dealing with the case of a leading Advocate who reluctantly accepted to appear in a Criminal trial on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Appellate Assistant Commissioner was the correct view. The money when it was received by the assessee was his professional income, though the assessee had expressed a desire earlier to create a charitable trust out of the money when received by him. Once it is held that the amount was received as his professional income, the assessee is clearly liable to pay tax thereon. In our opinion, the correct answer to the question referred to the High Court is that the amount of ₹ 32,500 received by the assessee was professional income taxable in his hands. 39. In another judgment of 1960s only, the Three Judges' Bench of the Hon'ble Supreme Court in Provat Kumar Mitter v. Commissioner of Income Tax [1961] 41 ITR 624 ( SC ) dealing with the case of the Assessee, who by a written instrument assigned the Shares of a Company in favour of his wife, held that the Dividends received from such Shares would continue to be taxed in the hands of the Settlor-husband, since the Assessee merely applied his income , since he has entered into a legal obligation to apply it in that way, nonetheless the Dividends will remain his income . The Privy Council decision in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an ultimate purpose, even though he may have entered into a legal obligation to apply it in that way, it remains his income. This is exactly what has happened in the present case. We need only add that the principle laid down by the Privy Council in Bejoy Sigh Dudhuria v. Commissioner of Income Tax [1993] 1 ITR 135 does not apply to this case ; because this is not a case of an allocation of a sum out of revenue before it becomes income in the hands of the assessee. In other words, this is not a case of diversion of income before it accrues but of application of income after it accrues. 40. We feel this judgment applies on all fours to the case on hand, because here also, not only the Excise Licence and entire business is done in the name of the Assessee CHAMUNDI by itself, but only the income is sought to be assigned and transferred to DIAGEO which will distract the Income-Tax liability in the hands of the Assessee. 41. The Hon'ble Supreme Court in 2003 in the case of Commissioner of Income-Tax v. Sunil J. Kinariwala [2003] 259 ITR 10 ( SC ) again succinctly dealt with the earlier case laws on the issue of 'Diversion of Income by over riding title at s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor, in our view, is the nature and effect of the assessee's obligation in regard to the amount in question. When a third person becomes entitled to receive the amount under an obligation of an assessee even before he could lay a claim to receive it as his income, there would be a diversion of income by overriding title; but when after receipt of the income by the assessee, the same is passed on to a third person in dis-charge of the obligation of the assessee, it will be a case of application of income by the assessee and not of diversion of income by overriding title. The decisions of the Privy Council in Raja Bejoy Singh Dudhuria v. CIT [1993] 1 ITR 135 and P.C.Mullick v. CIT [1938] 6 ITR 206 together are illustrative of the principle of diversion of income by overriding title. In Raja Bejoy Singh Dudhuria's case [1933] 1 ITR 135 ( PC ) , under a com-promise decree of maintenance obtained by the step- mother of the assessee, a charge was created on the properties in his hand. The Law Lords of the Privy Council, reversing the judgment of the Calcutta High Court, held that the amount of maintenance recovered by the step-mother was not a case of application of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-Tax, Chennai v. T. Jayachandran [2018] 406 ITR 1 ( SC ) upholding the decision of the Madras High Court reported in [2013] 263 CTR 629 ( Mad ) dealt with an interesting case of a Share Broker who was working on behalf of the Indian Bank and got only his Commission Income but was sought to be taxed for the gross receipts for the sale of Shares and Securities dealt with by him on behalf of the Indian Bank, held in favour of the Assessee that he was not liable to be taxed, except for his Commission Income received from the Indian Bank. 45. This judgment relied upon before us by both the Revenue and the Assessee also reiterates the aforesaid principles about the 'Diversion of Income' by an over riding title at source in the following manner:- (a) The Respondent - an individual and the proprietor of M/s Chandrakala and Company, is a stock broker registered with the Madras Stock Exchange. He is stated to be an approved broker of the Indian Bank. The assessment years under consideration herein are 1991-92, 1992-93 and 1993-94 respectively. During all these relevant assessment years the Respondent acted as a broker to the Indian Bank in purchase of the securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there was no overriding title in favour of the PSU's with regard to the additional amount earned out of the securities transactions and it is a case of application of income after accrual and, hence, the said amount is liable to be assessed as the income of the Respondent. ... ... ... ... ... ... The relationship between the Indian Bank and the Respondent is very much clear by the evidence led during the criminal proceedings. The Executive Director of the Bank has specifically spoken about the role of the Respondent as a broker specifically engaged by the Bank for the purchase of securities and that the Bank has included the interest money too in the consideration paid, for the purpose of taking demand drafts in favour of PSUs. Further, the evidence led by other bank officials points out that the price of securities itself were fixed by the bank authorities and as per their directions the Respondent had purchased the securities at the market price and the differential amount was directed to be used for taking demand drafts from the bank itself for paying additional interest to the PSUs. Further, the letter dated 25.03.1994 by the Bank wherein the Bank had acknow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by both the parties independently. 48. The Division Bench of the Rajasthan High Court in the case of Commissioner of Income Tax v. Jodhpur Co-operative Marketing Society [2005] 275 ITR 372 [Raj] dealt with a case of Co-operative Society which under the statutory obligations was liable to transfer 25% of its net profits to the specified funds and the Assessee Society claimed that such diversion was not taxable in its hands. Even negativing this plea of the Assessee - Co-operative Society, the Court explained the concept of 'Diversion of Income by over riding title at source' after discussing several case laws, some of which were cited before us also, in the following manner:- The obligation to carry a part of net profit to a reserve fund does not envisage diversion of any part of profits in person other than society itself. There is no overriding title vesting in a third party other than the assessee to lay claim to the reserve fund independent of co-operative society. The reserve fund remains part of the assessee-society's corpus and is to be applied for assessee's business only, albeit its application is being regulated by the Registrar under the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention that it be a contribution to the charitable or benevolent fund. The race club itself is under no statutory compulsion to earmark or divert any part of its income for the benefit of the jockeys, apprentices, stable boys, etc. The race club was under no statutory obligation to create a trust fund for their benefit . The fact that the club has done so and had done so with the best of intentions, does not on that score result in what is actually the income of the club, a part of which has been applied for benevolent purposes by having those amounts credited to the benevolent fund, becoming the income of the benevolent fund even at the inception. The income which the benevolent fund receives is by way of the amounts which the race club has allowed to be credited to that fund, the amounts so allowed by the club to be so credited being the amounts which it has collected from the jockeys, trainers and others, who are required to take out licences and pay licence fees and the penalties and fines, which it has levied and collected from those who are participants in racing but who have not complied with the rules and had therefore become liable for a penalty or fine. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes cannot be regarded as an instance of diversion by overriding title when the amounts received by the club and allowed by it to be used by the fund were not amounts, which had been paid voluntarily with the object of making those payments for charitable purposes. Diversion of the income took place after, and not before the income had reached the assessee. - CIT vs. Bangalore Turf Club Benevolent Fund ( 1984 ) 38 CTR ( Kar ) 235: ( 1984 ) 145 ITR 323 ( Kar ) : TC 44R. 1060 distinguished .... 57. The other case law which requires a mention here from the side of the Respondent Assessee is one in the case of Poona Electric Supply Co.Ltd. v. Commissioner of Income-Tax [1965]56 ITR 521 ( SC ) in which case, the Assessee, an Electric Supply Company under the statutory Regulations made provisions for distributing or setting apart for distribution to the consumers, a part of excess over clear profits to be refunded to the consumers by way of rebate, the Court held that the amounts credited by the Electricity Supply Company to the Consumers' Benefit Reserve Account being a part of the excess amount paid to it and reserved to be returned to the consumers, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent take-over of the Undertaking by the Government, such amount due on account of the enhancement of rates had not really accrued to the Assessee Company and therefore, was not taxable in the hands of the Assessee Company. More so touching the concept of taxability of the real income rather than the diversion of income , the Court thus held in favour of the Assessee in the said case. 59. Both the aforesaid cases really have no application to the facts of the present case. There is no doubt that only real income can be brought to tax under the Act but as we have said above, what is real income itself is a mixed question of fact and law and therefore, it will depend upon the facts and circumstances of each case and the law of precedents cannot be blindly applied to all the facts alike. 60. On the issue of diversion of income at source , the learned counsel for the Assessee also relied upon a Division Bench decision of this Court in the case of Commissioner of Income-Tax v. Pompei Tile Works 175 ITR 1 ( Kar ) , wherein the Division Bench of this Court held that in case of a Partnership, where the Partnership Deed provided that an outgoing Partner had to give a thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a self agreed swipe of profits from CHAMUNDI to DIAGEO, retaining only the portion of the profits in the name of the bottling charges at the rate of ₹ 45/-per Case and therefore, the said judgment is of no help to the Assessee in the present case. 63. In another Division Bench decision of the Karnataka High Court relied upon by the Assessee in the case of Commissioner of Income-Tax v. Nagarbail Salt-Owners Co-operative Society Ltd. [2017] 291 CTR 287 ( Kar. ) , a Co-operative Society manufacturing and selling Salt on lands belonging to the land owners who were known as Maliks and who are the Members of the Society where the activity of manufacturing and sale of Salt was undertaken by the Society and a large portion of sale proceeds were transferred to an account called Distribution Pool Fund Account which was paid to its Members commensurate with their land holdings and the remaining income was offered to tax, the Court held that logically the amount transferred to the Distribution Pool Fund Account cannot be taxed in the hands of the Society as income in its hands as the land in question belonged to the different Members in their own rights. 64. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave a right to receive that salary even before it reaches the Teachers, who are Nuns or Missionaries. The facts, as pointed out, that some of the receipts of salary were credited to a common bank account of the Institution and at some places, instead of Teachers signing the receipt in the Registers maintained by the Institution only the word 'Religious' was printed there, does not alter the character of salary receipts in their hands as taxable income, much less it would prohibit the deduction of tax at source under Section 192 of the Act, by the Payer, i.e. State Government. As already stated above, it is the nature and character of receipt as salary at the time of payment which is important under the provisions of the Act. 42. Mr.Datar, learned senior counsel emphasised that the long standing practice of the Revenue Department 'not imposing any tax in the hands of the Nuns and Missionaries on such salary or Grant-in-Aid received from the State Government on the basis of the Circular issued in 1944 and 1977 does not deserve to be disturbed at this stage also', in our opinion, does not turn the tables in favour of the respondent Teachers or the educational Inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the Missionaries and referring to the old Circular of 24th January, 1944, again reiterates that the same would not be taxable in the hands of the Missionaries, as there is an overriding title to such fees which would entitle the Missionaries to exemption from payment of income tax. It does not, in so many words discuss the salary received by Nuns and Missionaries as Teachers to be exempt from payment of Income Tax under 1961 Act. Therefore, read in the context of medical fees or other earnings starting from 1940 Circular with 1944 Circular, this Court does not find it clear and categorical stand of the Department in the contemporary period about the exemption being available to the Missionaries with respect to salaries received by them under the Grant in Aid Schemes of the State Government, which came into force much after the independence of the country in 1947 and for the period in question before us, when such Grant-in-Aid were paid by the State Government to the Teachers directly under the direct transfer to the bank accounts under ECS Scheme. As noted above, the said old Circulars themselves have been overridden and clarified by the subsequent Circulars of 26th Februar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecepts 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 . 47. About the Circulars and Instructions, the learned Single Judge of the Kerala High Court proceeded to hold as under: ... 7. Circulars and instructions issued by the Board are no doubt binding in law on the authorities under the respective statutes, but when the Supreme Court or the High Court declares the law on the question arising for consideration, it would not be appropriate for the court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary 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 impugned instructions of the Income Tax Officers, that direct the persons responsible for paying Salary and Pension to members of religious congregations, to deduct tax at source in accordance with Section 192 of the IT Act, cannot be said to be illegal. The writ petitions , in their challenge against the said instructions, fail and are accordingly dismissed . 48. Though an intra-court appeal against the said judgment of the learned single Judge is said to be pending before the Division Bench of the Kerala High Court, we are of the opinion that the view taken by the learned Single Judge of the Kerala High Court is perfectly justified and is in accordance with law and we respectful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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. We accordingly allow the said appeals of the appellant Union of India and set aside the order passed by the learned Single Judge. No costs. 51. Being conscious of the fact that our reversal of the order passed by the learned Single Judge may result in practical complications for the past period for the Educational Institutions as well as Teachers belonging to said class and also the State Government and Income Tax Department on the other side, we direct that this judgment shall be applied prospectively and not for the past period. In the Judgment pronounced today, there are some Respondents/Assessees, who are not represented by the learned Counsels before us. Though, prima facie, we find that those Writ Appeals are also covered by the Judgement and therefore, we have disposed of those Writ Appeals also, we direct that a copy of the said Judgment along with a copy of the present order may be sent to the Respon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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