Union of India Vs The Society of Mary Immaculate (Madras High Court)
Conclusion: Payment of salaries made to nuns, sisters, priests or fathers for rendering their services as Teachers in schools which receive Grant-in-aid from the State Government under the Grant-in-Aid Schemes and bound by the Canon Law were liable for tax deduction under section 192 as neither Income Tax Department nor State Government had anything to do with the religious character of the Institution, might be Teachers or Nuns or Missionaries and therefore, they could not take a stand for not making the tax deduction at source in view of the Canon Law.
Held: The crux of controversy was that the Nuns, Sisters, Priests or Fathers, who also render their services as Teachers in schools which receive Grant-in-aid from the State Government under the Grant-in-Aid Schemes formulated by the State to the extent of their full salary, claim that they were bound by the Canon Law for their vows of poverty to the Christ and that they could not be taxed in respect of the Grant-in-Aid or salary received from the State Government by respective school or educational institutions and now directly transferred to the individual Bank Account of the Teachers under ECS Scheme, as the receipt of salary in their hands entirely belonged to the Institution, Church or the Religion and having taken such vows of poverty etc. in their Canon Law, they had suffered a civil death and renounced the world and therefore, they could not be subjected to the deduction of tax at source as stipulated in Section 192 of the Income Tax Act, 1961. In the recent past, the Income Tax Department instructed the concerned authorities of the State Government to deduct income tax at source on the payment of salaries made to these Teachers, nuns, etc. along with other Teachers also who were employed in such Schools and consequently, the relevant Instructions of the Income Tax Department in this regard deserved to be quashed. It was held the State Government could not be said to be bound to pay such salary in favour of the Church or Diocese in place of Teachers concerned who might be Nuns or Missionaries and who might even leave and come out of such Religious Order on their own volition. On the other hand, the State Authorities, if they did not deduct tax at source on such salary payments, might be held guilty of not following the provisions of Income Tax Act rendering them to pay penalty and even face prosecution. Therefore, neither Income Tax Department nor State Government had anything to do with the religious character of the Institution, might be Teachers or Nuns or Missionaries and therefore, they could not take a stand for not making the tax deduction at source in view of the Canon Law. Therefore, Single Judge had 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, the present writ appeals filed by Union of India deserved to be allowed and the order of Single Judge under the appeal deserved to be set aside.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
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 character of the receipt of income and whether the provisions for withholding of tax or deduction of tax at source are dependent upon the final taxability of the sum paid or not, are the background cords, in which, we called upon to decide a few important questions of law arising in the present Writ Appeals filed by the Union of India and Income Tax Department, arising from the judgment of the learned Single Judge, by which he allowed the writ petitions filed by the respondent/assessees, the Christian Religious Institutions, which run and control a large number of educational institutions, Convents or Schools in the State of Tamil Nadu and who represent the cause of the Teachers working in such Schools, mainly the Nuns, Sisters, Missionaries and Fathers, who are also Teachers in such Schools of the various subjects.
2. The crux of controversy is that the Nuns, Sisters, Priests or Fathers, who also render their services as Teachers in these schools which receive Grant-in-aid from the State Government under the Grant-in-Aid Schemes formulated by the State to the extentof their full salary, claim that they 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 and now directly transferred to the individual Bank Account of the Teachers under ECS Scheme, as the receipt of salary in their hands entirely belongs to the Institution, Church or the Religion and having taken such vows of poverty etc. in their Canon Law, they have suffered a civil death and renounced the world and therefore deduction of tax at source as stipulated in Section 192 of the Income Tax Act, 1961, and for which, in the recent past, the Income Tax Department instructed the concerned authorities of the State Government to deduct income tax at source on the payment of salaries made to these Teachers, nuns, etc. along with other Teachers also who are employed in such Schools and consequently, the relevant Instructions of the Income Tax Department in this regard deserve to be quashed.
3. The learned single Judge, in the judgment under appeal rendered on 22.12.2016 in W.P.Nos.37565 to 37567 of 2015, etc. (Institute of the Fransican Missionaries of Mary v. Union of India and Others), allowed the 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 which impinged upon the right to practice a religion as guaranteed under Articles 25 and 26 of the Constitution of India has to be held to be as not sustainable.
4. Aggrieved by the said judgment, the Union of India and Income Tax Department have come up in the present set of writ appeals, which we heard finally at the admission stage itself,by consent of the parties and Mr. Karthik Ranganathan appeared for the Revenue, whereas Arvind Datar, learned senior counsel and Fr. Xavier Arulraj, learned senior counsel himself a Father under Canon Law, appeared on behalf of the assessee Institutions.
5. Besides the aforesaid order of the learned Single Judge passed at Principal seat at Chennai, another learned single Judge of this Court allowed a batch of writ petitions filed at Madurai Bench of Madras High Court on etc. batch 03.3.2016 in WP (MD) Nos.21172 to 21181 of 2015 etc. batch (The Correspondent, Holy Cross Primary School, Golden Rock v. Central Board of Holy Cross Primary School, Golden Rock v. Central Board of Direct Taxes and Others). The learned single Judge at Madurai also allowed the writ petitions and held that upon individual Undertaking and Affidavit given by Priests or Nuns to the Income Tax Department, that his/her entire salary as Teacher/Non-Teaching Staff can be paid directly by the State Government to the Congregation or Diocese to which he/she belongs and filing of similar affidavit before the Government of Tamil Nadu, the Income Tax Department, on their satisfaction, to give a certificate or a letter to the Government of Tamil Nadu that they need not deduct tax at source insofar as such Priests and Nuns are concerned because they will not be paying salary to the individual, but only in the name of Congregation or Diocese only. The learned counsel for the Revenue Mr.Ravi Kumar submitted before us that writ appeal on similar lines have also been filed by the Department at Madurai Bench also, which are pending consideration there.
6. The present controversy in hand takes us back to a necessary reference of certain old Circulars and Instructions issued by the Central Board of Revenue as well as the Commissioner of Income Tax, which were heavily relied upon by the Respondent Assessees also and we think it appropriate to quote them in extension here.
I – Circular of the Central Board of Revenue, No.5 of January 1940
Circular No.5 of 1940
D.Dis. No.26(33)-I.T./39
CENTRAL BOARD OF REVENUE
New Delhi, the 2nd January 1940.
Circular
Liability to tax – Fees received by Missionaries and subsequently made over to their Society
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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
Circular No.1 of 1944
C.No.26(48)-I.T./43
CENTRAL BOARD OF REVENUE
Simla, the 24th January 1944.
CIRCULAR
Liability to tax – Fees received by Missionaries and subsequently made over to their Society
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Attention is invited to the instructions contained in Board’s circular No.5 of 1940/D.Dis.No.26(33)-I.T./39 dated the 2nd January, 1940 and D.O. D.Dis.No.26(33)-I.T./39, dated the 9th May 1940. It has been brought to the Board’s notice that considerable hardship is caused to Missionaries by the taxation of fees received by them for services rendered, which, by the conditions of their service and the Rules of their Society, they are required to make over to the Society. In view of the principle of diversion of income enunciated by the Privy Council in Dudhuria’s case (6 I.T.C. 449) it is arguable that fees received by Missionaries on behalf of a Missionary Society and which are payable to it according to their contract of service are not their income. As recognised in the Board’s D.O. letter referred to above, where a Missionary employee collects fees in payment of bills due to the institution the amount collected will be the income of the institution and not that of the employee. It makes little difference whether the bills are prepared by the Society and sent out for collection or whether the employee collects the fees in a fiduciary capacity and pays the amount over to the Society. In the circumstances, the Board have decided that no income-tax should be levied on fees received by Missionaries for services rendered by them, which by the conditions of their service and the Rules of their Society, they are required to make over to the Society. Such income would also be exempt in the hands of the Society concerned if the conditions laid down in Sec. 4(3)(ia) are satisfied.
2. Board’s circular No.5 of 1940(D.Dis.No.26(33)-I.T./39) dated the 2nd January 1940 is hereby cancelled.
Sd/-
for First Secretary, Central Board of Revenue.
All Commissioners of Income-tax.
All Appellate Assistant Commissioners.
III – Proceedings of the Director of Public Instruction, Madras, dated 18th July, 1946.
Copy of Proceedings of the Director of Public Instruction, Madras.
Rc. No.387/D/46, dated 18th July 1946
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
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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:-
