Fr. Sabu P.Thomas Vs Union of India (Kerala High Court)
The receipts in question, in the instant cases, are amounts by way of salary and pension. These payments accrue to the individuals concerned, who have rendered service in their individual capacity and based on the educational qualifications and skills possessed by them as individuals. The right to receive payments by way of salary or pension also, consequently, accrues or arises to them as individuals and not to the congregation of which they are members. No doubt, 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.
The concept of diversion of income by overriding title to apply, the diversion of income must be effective at the stage when the amount in question leaves the source, on its way to the intended recipient. At that stage, on account of a pre-existing legal obligation, the amount should be diverted to another, who can claim it as of right, based on the pre-existing legal arrangement. The person to whom the amount is diverted should have a legal right that entitles him to claim the amount directly from the source, and without the intervention of the person who would have received the amount but for the said legal arrangement. The nature of the receipt would also have a bearing on the issue of whether the amount in question reached the member of the congregation or was diverted to the congregation, without reaching the member, by way of overriding title.
Thus, 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 CBDT. They are simply instructions issued in situations not covered by the CBDT Circular/Instructions. Further, the CBDT 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 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.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
The short question that arises in all these writ petitions is whether, under the Income Tax Act, tax is required to be 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 members of 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 follow:
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 Treasury. The issue as to whether or not the amounts by way of fees or earnings, received by the members of the religious congregation, would be treated as income in their hands, had engaged the attention of the Central Board of Direct Taxes as early as in 1944, when it was clarified that fees and other earnings of missionaries, that they were obliged to make over to the congregation to which they belonged, would not be treated as income in their hands but viewed as diverted by overriding title to the congregation of which they were a part. While the said Circular of 1944, and the subsequent Instructions of 1977, are said to be in force even today, the respondent authorities began to issue instructions to the District Treasury Officers in the State, to deduct tax at source from payments, by way of salary and pension, made to members of religious congregations. The said instructions are impugned in the writ petitions inter alia on the grounds that (i) they run counter to the instructions of the Central Board of Direct Taxes, issued in terms of Section 119 of the IT Act, that are binding on all authorities under the IT Act and (ii) they run counter to the well accepted legal position that members of religious congregations cannot own property, and whatever amounts are received by them towards earnings is diverted by overriding title to the congregation and forms part of the latter’s income.
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3. A statement has been filed on behalf of the respondents, wherein the stand taken is that the instructions issued by the CBDT in 1977, dealt only with fees and not with salary income and hence, in respect of salary income, there was no binding instruction of the CBDT that held the field. It is also pointed out that, insofar as the members of the religious congregations were receiving the income in return for services rendered by them, the salary income had accrued to them, and the subsequent making over to the congregation was only an instance of application of income. The instructions issued to the District Treasury Offices are sought to be justified on the said basis.
4. I have heard learned Senior Counsel Sri.Kurien George Kannanthanam, as well as Sri.A.Kumar and Sri.K.T.Thomas on behalf of the petitioners and the learned Senior Counsel Sri. K.Ravindranath Menon for the Income Tax department.
5. The submissions of learned counsel for the petitioners can be summarised as follows:
