TMI Blog2015 (8) TMI 431X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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. For reasons that as already stated, 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 the members of religious congregations, to deduct tax at source in accordance with section 192 of the Income-tax Act cannot be said to be illegal. The writ petitions, in their challenge against the said instructions, fail and are accordingly dismissed. The petitioners had, taking note of the instructions issued by the Income-tax Officers to deduct tax at source from salary payments, approached the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sury 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 upon to substantiate the contention that Instructions and Circulars of the Central Board of Direct Taxes are binding upon the authorities under the Income-tax Act. As regards the contents of the Circular/Instructions issued by the Central Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 their individual capacities, the said payments accrued to the recipients as their income and the subsequent diversion to the religious congregation was only an instance of application of that income. Referring to the decisions in Mother ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very 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 the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 congregation could be validly nominated as a member of the family of a deceased nun, for the purposes of receiving the gratuity that was payable to the nun. As per the provisions of the Kerala Service Rules, as they then stood, the defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to the house of which he is an inmate ; nothing descends to him for he is already dead. In the eye of ecclesiastical law the monk who became a proprietaries, the monk, that is, who arrogated to himself any proprietary rights o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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 becomes, so to say, a spiritual son of the latter. The other disciples of his guru are regarded as his brothers, while the co- disciples of his guru are looked upon as uncles and in this way a spiritual family is establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 taxed on such income. The test, though stated in simple terms, is often difficult in its application. It would be profitable, therefore, to refer to the following decisions to understand where the line of separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives 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, title and interest (excluding capital), as a partner in the firm, and a sum of rupee five thousand out of his capital in the firm, in favour of a trust that he had created and of which the assessee's b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 in that way. The decision of the Full Bench of this court was affirmed by the Supreme Court in V. Venugopala Varma Rajah v. Commr. of Agrl. I. T. [1972] 84 ITR 466 (SC). The Supreme Court, while dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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. No. 200/88/75-II)AI Government of India Central Board of Direct Taxes New Delhi : Dated 5th December, 1977 To All Commissioners of Income-tax. Sir, Subject : Exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the authorities cannot act contrary to the circular. Once the circular is brought to the notice of the court, the challenge by the Revenue should be turned out and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 impugned instructions of the Income-tax Officers that direct the persons responsible for paying salary and pension to the members of religious congregations, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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