16 Jan 2024 2:09 PM GMT
The Supreme Court on Tuesday listed for final hearing a batch of appeals filed by Catholic congregations challenging the judgments of Madras and Kerala High Court which held that Tax Deduction at Source (TDS) must be applied with respect to the the salaries given to nuns and missionaries.
A bench comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala and Manoj Misra decided to list the batch containing 93 appeals after three weeks.
Senior Advocate Arvind P Datar, appearing for the appellants, submitted that the nuns and missionaries take a vow of poverty on joining the congregation and hence, they cannot own any worldly possessions. Whatever salaries they earn are diverted to their congregations or dioceses. Since no income is accrued to them in personal capacity, their salaries cannot be subjected to TDS deduction, the senior counsel argued.
In 2019, the Supreme Court had stayed the operation of the Madras High Court judgment.
Madras High Court Judgment
The Division Bench of Madras was hearing the appeals filed by the Income Tax Department against the judgment of a single bench, which had allowed the writ petitions filed by catholic religious institutions challenging steps taken for recovering TDS amount on salaries paid to priests/nuns employed in aided educational institutions.
The single bench had accepted the case of religious institutions that since priests/nuns have taken a vow of poverty as per which they have to surrender their personal income to the Church/Diocese, no income is effectively accrued to them so as to make it liable for taxation. It further held that priests/nuns have suffered civil death as per Canon Law and renounced the world and therefore cannot be subjected to TDS.
The Division Bench of Justices Dr. Vineet Kothari and C V Karthikeyan set aside the judgment of single bench, holding that the salaries were received by them in their individual capacity and that the subsequent surrender of their salaries to the religious institutions can only be treated as an application of income. The Court further held that religious institutions cannot claim to have an overriding title with respect to the salaries at the source itself.
The Madras High Court relied on the judgment passed by the Kerala High Court in Fr Sabu P Thomas v Union of India, which explained the concept of 'diversion of income by overriding title' was not applicable in the case. This concept refers to a pre-existing legal obligation to divert the income to another.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 diversion of income must be effective at the stage when the amount in question leaves the source.
The High Court noted that income accrued to the nuns/missionaries in their individual capacity, and was credited to their individual accounts. The organization had no claim over the salaries at the source itself, and they were not privy to the contract of employment with the nuns/missionaries..
"we find that the salary in question was not directly received by the Congregation or Religion by overriding diversion of title, but were paid by the State to the Teachers who are Nuns or Missionaries and thereafter, it might have been applied or made over to the Church or Diocese or the Institution run by them"
"The salary is paid under the contract of employment with which Educational Institution or the Church or Diocese is not even a privy to such contract of employment qua the State Government", observed the Court.
From a reading of Section 192 of the Income Tax Act, the Court held that the religious character of assessee does not impact the TDS liability.
Case : Institute of the Fransican Missionaries of Mary and others v. Union of India SLP(C) No. 10456/2019 and connected cases.