Fr. Sabu P. Thomas v. Union of India
[Citation -2015-LL-0204-6]

Citation 2015-LL-0204-6
Appellant Name Fr. Sabu P. Thomas
Respondent Name Union of India
Court HIGH COURT OF KERALA AT ERNAKULAM
Relevant Act Income-tax
Date of Order 04/02/2015
Judgment View Judgment
Keyword Tags non-deduction of tax • diversion of income • individual capacity • overriding charge • state government • legal obligation • married daughter • overriding title • sub-partnership • personal law
Bot Summary: 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. On the issue of whether or not there is a diversion of income by overriding title, it is contended that, on account of the pre-existing obligation of the member of the religious congregation, based on the precepts of canon law, the member was incapable of receiving any amount from the Government by way of salary or pension and such receipts had to be deemed as having accrued to the religious congregation concerned by applying the principle of diversion of income by overriding title. If 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. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable. In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The members of the family received that income on behalf of the family, and applied the same in discharge of an income on behalf of the family, and applied the same in discharge of an obligation of the family. In the light of the principles that can be culled out from the decisions referred to above, I am of the view that for 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.


JUDGMENT A. K. Jayasankaran Nambiar J.-The short question that arises in all these writ petitions is whether, under Income-tax Act, tax is required to be deducted at source, from payments by way of salary/pension made by Government, to persons who are members of religious congregations. writ petitions were filed in wake of instructions, issued by income-tax authorities to District Treasury Officers in State, calling upon them to deduct tax at source from such payments made to members of religious congregations. While in most of writ petitions, religious congregation concerned is petitioner, in W. P. (C). No. 10/ 2015, individual member of religious congregation is petitioner. brief facts necessary for disposal of these writ petitions is as follows: members of religious congregations concerned are employed as teachers in various aided educational institutions in State. remuneration that they draw, for teaching services rendered by them, is in nature of salary that is paid to them by State Government. In one case, payment made is of pension, subsequent to retirement of member from service. payments are made to them through educational institution in question pursuant to disbursal of amounts through Government treasury. issue as to whether or not amounts by way of fees or earnings, received by members of religious congregation, would be treated as income in their hands, had engaged attention of 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 congregation to which they belonged, would not be treated as income in their hands but viewed as diverted by overriding title to congregation of which they were part. While said Circular of 1944, and subsequent Instructions of 1977, are said to be in force even today, respondent authorities began to issue instructions to District Treasury Officers in State to deduct tax at source from payments, by way of salary and pension, made to members of religious congregations. said instructions are impugned in writ petitions, inter alia, on grounds that (i) they run counter to instructions of Central Board of Direct Taxes issued in terms of section 119 of Income-tax Act that are binding on all authorities under Incometax Act, and (ii) they run counter to 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 congregation and forms part of latter's income. statement has been filed on behalf of respondents, wherein stand taken is that instructions issued by Central Board of Direct Taxes in 1977, dealt only with fees and not with salary income and, hence, in respect of salary income, there was no binding instruction of Central Board of Direct Taxes that held field. It is also pointed out that in so far as members of religious congregations were receiving income in return for services rendered by them, salary income had accrued to them, and subsequent making over to congregation was only instance of application of income. instructions issued to District Treasury Offices are sought to be justified on said basis. I have heard learned senior counsel Sri Kurien George Kannanthanam, as well as Sri. A. Kumar and Sri K. T. Thomas on behalf of petitioners and learned senior counsel Sri P. K. Ravindranath Menon for Income-tax Department. submissions of learned counsel for petitioners can be summarised as follows: - Central Board of Direct Taxes had, by its Circular dated January 24, 1944, followed by its Instructions dated December 5, 1977, clearly indicated that, in so far as fees and other earnings received by missionaries are to be made over to congregation concerned, there is overriding title to fees which would entitle missionaries to exemption from payment of tax and, consequently, such fees or earnings would not be taxable in their hands. said Circular and instructions of Central Board of Direct Taxes were binding on income-tax authorities under Income-tax Act by virtue of section 119 of Income-tax Act. It followed, therefore, that Income-tax Officer could not have issued instructions to deduct tax at source from salary payments that were effected from Government to members of religious congregations. decisions of Supreme Court in R and B Falcon (A) Pty. Ltd. v. CIT [2008] 301 ITR 309 (SC); [2008] 12 SCC 466, State of Tamil Nadu v. India Cements Ltd. [2011] 40 VST 225 (SC); [2011] 13 SCC 247 and CCE v. Ratan Melting and Wire Industries [2008] 13 SCC 1 are relied upon to substantiate contention that Instructions and Circulars of Central Board of Direct Taxes are binding upon authorities under Income-tax Act. - As regards contents of Circular/Instructions issued by Central Board of Direct Taxes, it is pointed out that it applies to all receipts by way of fees and earnings, that is received by member of religious congregation who is obliged, under precepts of canon law, to make over said receipts to religious congregation. It is pointed out that as per canon law, member of religious congregation cannot own any property and whatever he/she receives is receipt on behalf of religious congregation of which he/she is member. In support of this contention, reliance is placed on decisions of this court in Mother Superior, Adoration Convent v. DEO [1977] KLT 303, Oriental Insurance Co. v. Mother Superior S. H. Convent [1994] 1 KLT 868 and Varghese v. Krishnan Nair [2004] 2 KLT 783. - On issue of whether or not there is diversion of income by overriding title, it is contended that, on account of pre-existing obligation of member of religious congregation, based on precepts of canon law, member was incapable of receiving any amount from Government by way of salary or pension and, consequently, such receipts had to be deemed as having accrued to religious congregation concerned by applying principle of diversion of income by overriding title. It is contended that these are not instances of application of income by member of religious congregation since income never reached member of religious congregation at all. Reliance is placed on following decisions in support of said contention; CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC); AIR 1964 SC 1653, CIT v. Ashokbhai Chimanbhai [1965] 56 ITR 42 (SC); AIR 1965 SC 1343, E. D. Sassoon and Co. Ltd. v. CIT [1954] 26 ITR 27 (SC), Moti Lal Chhadami Lal Jain v. CIT [1991] 190 ITR 1 (SC), P. C. Mullick v. CIT [1938] 6 ITR 206 (PC), CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC), CIT v. Surat Jilla Kamdar Sahakari Sangh Ltd. [1993] 200 ITR 157 (Guj), Addl. CIT v. Rani Pritam Kunwar [1980] 125 ITR 102 (All), CIT v. Subramaniam Brothers [1999] 236 ITR 148 (Mad), Surajratan Damani v. CIT [1977] 106 ITR 576 (Bom) and CIT v. Sunil J. Kinariwala [2003] 259 ITR 10 (SC); [2003] 1 SCC 660. Per contra, submissions of learned senior counsel appearing on behalf of Revenue in these cases, briefly put, is as follows: - Circular dated January 24, 1944 of Central Board of Direct Taxes, as well as 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 term "missionaries" would apply only to those engaged in dissemination of religious knowledge, and not to members of religious congregation engaged in general vocations, including teaching profession. 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 nature of receipts, in instant cases, would have to be looked into to determine whether they constituted income of member of religious congregation who received it. It is contended that, in so far as receipts were by way of salary and pension, and were payments made to recipients for services rendered by them in their individual capacities, said payments accrued to recipients as their income and subsequent diversion to religious congregation was only instance of application of that income. - Referring to decisions in Mother Superior, Adoration Convent v. DEO [1977] KLT 303, Oriental Insurance Co. v. Mother Superior S. H. Convent [1994] 1 KLT 868 and Varghese v. Krishnan Nair [2004] 2 KLT 783, it is contended that said decisions only decided inter se relationship between religious congregation and its members and manner in which amounts becoming due to member, would be applied in event of death of member. said decisions could not, therefore, have bearing on issue to be decided in instant cases. It is further contended that said decisions only interpreted rights of member of religious congregation under personal law and could not be relied upon for determining his/her obligations under Income-tax Act. - Lastly, it is contended that receipts, in instant cases, constituted income of member of religious congregation who received it and, consequently, there was nothing illegal or irregular in instructions issued by Income-tax Officer to Treasury Officers to deduct tax at source under section 192, from payments by way of salary and pension to members of religious congregations. It is contended that payments by members to religious congregation, of amounts received by them by way of salary or pension, could be viewed only as application of income by member concerned, for purposes of Income-tax Act. On consideration of facts and circumstances of case and submissions made across Bar, I find that primary issue to be decided in instant cases is whether there is diversion of income by overriding title to religious congregation, in every case where one of its members receives amounts by way of salary/pension for services rendered by him/her. significance of issue, in context of Income-tax Act, becomes apparent when one considers two fundamental concepts in income-tax law, namely, (i) diversion of income by overriding title, and (ii) application of income. In former, income that is diverted at source is not liable to tax in hands of assessee, and in latter, transaction is ignored and assessee in whose hands income accrues becomes liable to tax. test to be applied is to see whether amount in question ever reached assessee as his/her income. Under Income-tax Act, every income that accrues or arises is liable to be taxed, irrespective of what happened to it afterwards. If, however, income does not reach assessee but, on account of legal obligation, is diverted before it reaches him/her, then he/she cannot be taxed on such income. classic statement of law is to be found in judgment of Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367 (SC), where principle was succinctly stated as follows (page 374): "These are cases which have considered problem from various angles. Some of them appear to have applied principle correctly and some, not. But we do not propose to examine correctness of decisions in light of facts in them. In our opinion, true test is whether amount sought to be deducted, in truth, never reached assessee as his income. Obligations, no doubt, there are in every case, but it is nature of Obligations, no doubt, there are in every case, but it is nature of obligation which is decisive fact. There is difference between amount which person is obliged to apply out of his income and amount which by nature of obligation cannot be said to be part of income of assessee. Where by obligation income is diverted before it reaches assessee, it is deductible; but where income is required to be applied to discharge obligation after such income reaches assessee, same consequence, in law, does not follow. It is first kind of payment which can truly be excused and not second. second payment is merely obligation to pay another portion of one's own income, which has been received and is since applied. first is case in which income never reaches assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of person to whom it is payable. In our opinion, present case is one in which wife and children of assessee who continued to be members of family received portion of income of assessee, after assessee had received income as his own. case is one of application of portion of income to discharge obligation and not case in which by overriding charge assessee became only collector of another's income." In case of members of religious orders in these writ petitions, they are bound by precepts of canon law that oblige them to observe vows of chastity, obedience and poverty prior to their ordainment as members of congregation. Canon 668 in Code of Canon Laws reads as follows: "Can. 668. 1 Before their first profession, members are to cede administration of their goods to whomsoever they wish and, unless constitutions provide otherwise, they are freely to make dispositions concerning use and enjoyment of their goods. At least before perpetual profession they are to make will which is valid also in civil law. 2 To change these dispositions for just reason, and to take any action concerning temporal goods, there is required permission of superior who is competent in accordance with institute's own law. 3 Whatever religious acquires by personal labour, or on behalf of institute, belongs to institute. Whatever comes to religious in any way through pension, grant or insurance also passes to institute, unless institute's own law decrees otherwise. 4 When nature of institute requires members to renounce their goods totally, this renunciation is to be made before perpetual profession and, as far as possible, in form that is valid also in civil law; it shall come into effect from day of profession. same procedure is to be followed by perpetually professed religious who, in accordance with norms of institute's own law and with permission of supreme moderator, wishes to renounce goods in whole or in part. 5 Professed religious who, because of nature of their institute, totally renounce their goods, lose capacity to acquire and possess goods; actions of theirs contrary to vow of poverty are, therefore, invalid. Whatever they acquire after renunciation belongs to institute in accordance with institute's own law. legal consequences that ensue from adoption of religious way of life have been discussed in Division Bench decision of this court in Mother Superior, Adoration Convent v. DEO [1977] KLT 303. said case considered issue of whether head of religious congregation could be validly nominated as member of family of deceased nun, for purposes of receiving gratuity that was payable to nun. As per provisions of Kerala Service Rules, as they then stood, definition of term "family" for purposes of nomination, included only certain natural relatives and not head of religious congregation, of which nun was member. This court considered formalities that are undergone by person who takes to religious profession among Catholics and found as follows: "4. As preliminary to question arising for consideration it is necessary to describe formalities that are gone through by person who takes to religious profession among Catholics. Catholic Encyclopedia, volume 12, page 287, describes what is meant by religious life. It is described as particular expression of love of God through following of Christ. It is approved by church as public state of life by profession of poverty, chastity and obedience through public vows and by some form of separation from world, practised for sake and service of world. Religious profession is act by which person embraces religious state by taking three public vows of poverty, chastity and obedience. This is really agreement made with religious order which, when accepted by competent superior, creates whole series of reciprocal rights and obligations between religious order and religious. Before person is admitted into this order he or she is put on probation.'Postulantship' is intended to give superiors opportunity to observe candidate and candidate opportunity of becoming acquainted with general obligations of religious life. After period of this probation candidate is admitted to novitiate. Thereafter, she is put to canonical examination to make certain that she is acting with full knowledge of case and with full liberty. If she gets through examination she is required to take temporary vow which is generally for period of three years. During this period superior will judge fitness of person to take perpetual vow. After expiry of period of three years religious shall either make his or her perpetual profession or he or she can return to world. Before perpetual vow is taken professed must renounce in favour of person whom he or she likes, all property which he or she actually possesses on condition however of his solemn profession subsequently taking place. After solemn profession is taken all property which may come to religious in any manner whatsoever accrues to Order according to constitution and if order cannot acquire or own any property it becomes property of Holy See. effect of taking perpetual vow and becoming 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 man becomes "professed in religion", his heir at once inherits from him any land that he has, and, if he has made will, it takes effect at once as though he were naturally dead. If after this kinsman of his dies leaving land which according to ordinary rules of inheritance would descend to him, he is overlooked as though he were no longer in land of living; inheritance misses him and passes to some more distant relative. rule is not that what descends to him belongs to house of which he is inmate; nothing descends to him for he is already dead. In eye of ecclesiastical law monk who became proprietaries, monk, that is, who arrogated to himself any proprietary rights or separate enjoyment of any wealth, committed about as bad offence as he could commit.' This fiction, however, has its own limits. If monk or nun does wrong or suffers wrong he or she is dealt with as though he were only ordained clerk and tried by ordinary courts. In respect of civil wrongs rule is that monk or nun could neither sue nor be sued without his or her sovereign. monk or nun could make no contract. But he or she is capable of acting as agent of his or her sovereign and even in litigation he or she could appear as superior's attorney. In History of French Private Law included in Continental Legal History Series, volume III, paragraph 583, it is stated thus: 'Entering religious orders resulted in eyes of church in death to world. From this it should have been concluded that from time of his entrance into monastery monk could not acquire anything, and that possessions which he had at that time should pass to his heirs.' Thereafter personality of monk was absorbed by that of monastery. He acted as means of receiving for benefit of monastery. Once he had entered monastery, monk, stripping off his own personality, could only receive for benefit of his community. But monastery did not take those possessions which he had at time of his entering it; he was regarded as being dead at that time and from this fiction there arose two consequences: 1st, his inheritance vested for benefit of his relatives; second, he was thence forward incapable of inheriting upon intestacy or by virtue of will, either in his own interest or in interest of monastery. In this sense civil death with which he was affected was equivalent of real death. Similarly, in History of Italian Law included in Continental Legal History Series, volume VIII, at page 512, paragraph 299, it is stated thus: 'A sort of civil death overtook one who took solemn religious vows, though limited in its effect to property and inheritance.' Again, in Catholic Encyclopedia, page 320 legal effects on taking to religious profession as set forth in Canon Law are stated with reference to those who take temporary vows and who take perpetual vow. It is stated at page 330 that any'religious' in simple minor vows, must before joining profession make will disposing of all his or her property and cannot retain any property which later comes to them. It automatically becomes property of 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 status of sanyasi under Hindu law also. In case of sanyasi entrance to religious order generally operates as civil death man who becomes ascetic severs his connection with members of his natural family and being adopted by his preceptor becomes, so to say, spiritual son of latter In Sital Das v. Sant Ram, AIR 1954 SC 606 Justice Mukherjea stated law thus at page 613, paragraph 20: 'It is well known that entrance into religious order generally operates as civil death. man who becomes ascetic severs his connection with members of his natural family and being adopted by his preceptor becomes, so to say, spiritual son of latter. other disciples of his guru are regarded as his brothers, while codisciples of his guru are looked upon as uncles and in this way spiritual family is established on analogy of natural family.'" It was, accordingly held that notwithstanding that rules did not expressly provide for nomination of head of religious congregation, there was no impediment to deceased nun having made such nomination. above decision was followed in later decision of this court in Oriental Insurance Co. v. Mother Superior S. H. Convent [1994] 1 KLT 868, where it was held that Mother Superior of holy order of Catholic nuns is legal representative of deceased nun of that congregation and was entitled to claim compensation on account of death of nun. relevant portion of judgment of Division Bench is at paragraph 9 and reads as follows: "9. Therefore, even though deceased continued to be Indian Christian as defined under section 2(d) of Indian Succession Act, because of her civil death by becoming member of holy order natural heirs mentioned in sections 41 to 48 of Succession Act will not be her legal heirs. If she had made will it was to take effect at once as though she were naturally dead. So also if one of her kinsman dies leaving properties which according to ordinary rules of inheritance would descend to her, she will be overlooked as though she were no longer alive. Entering religious orders resulted in eyes of church in death to world. From time of her entrance into holy order she could not acquire anything and she acted only as means of receiving for benefit of holy order. By becoming member of Holy Order she becomes member of family consisting of Mother Superior and other members of that holy order. Therefore, contention of learned counsel for appellant that in view of section 29(2) of Indian Succession Act, sections 41 to 48 of said Act should apply in this case also, cannot be accepted." upshot of discussion in aforementioned cases, which dealt with receipt of amounts due to deceased members of religious congregations, is that payment received by member of religious congregation of Catholics, is to be seen as payment received for benefit of holy order. In other words, said cases dealt with issue of what had to be done with amounts that accrued to member of religious congregation, after her death. In was in that context, that obligation of member vis-a-vis congregation, based on precepts of canon law, were analysed and applied. said cases did not have to consider issue of whether, at first instance, amounts ever reached member or accrued to him/her. In instant cases, question to be considered is precisely that: whether, notwithstanding obligation of member of religious congregation to make over any amount, received by him/her by way of remuneration or other earnings, to congregation concerned, amount could be treated as having accrued to him/her for purposes of Income-tax Act? As already noted, under Income-tax Act, every income that accrues or arises is liable to be taxed, irrespective of what happened to it afterwards. If, however, income does not reach assessee or accrue to him/her but, on account of pre-existing legal obligation, is diverted before it reaches him/her, then assessee cannot be taxed on such income. test, though stated in simple terms, is often difficult in its application. It would be profitable, therefore, to refer to following decisions to understand where line of separation lies, between cases of diversion of income by overriding title and cases of application of income. In K. A. Ramachar v. CIT [1961] 42 ITR 25 (SC) assessee who was partner of firm settled share of his profits in firm on his wife, married daughter and minor daughter. They were entitled to receive and collect their share from firm under settlement. Rejecting contention of assessee that amounts covered by settlement could not be included in his total income, Supreme Court applied principle laid down in Sitaldas Tirathdas (supra) and held that, under law of partnership, it was partner and partner alone who was entitled to profits and that stranger, even if he were assignee, did not have and could not have any direct claim to profits. claim of assessee was negatived on ground that what was paid was in law portion of his income and, hence, amounts had to be included in his total income. In Murlidhar Himatsingka v. CIT [1966] 62 ITR 323 (SC), one of partners of firm constituted sub-partnership firm with his two sons and grandson. deed of sub-partnership provided that profits and losses of partner in main firm shall belong to sub-partnership and shall be borne and divided in accordance with shares specified therein. question in that case was: whether share of partner in main firm, who had become partner in sub-partnership, could be assessed in his individual assessment. It was held that there was overriding obligation which converted income of partner in main firm in to income of sub-partnership and, therefore, income attributable to share of partner had to be included in assessment of sub-partnership. That was on principle that partner in sub-partnership had definite enforceable right to claim share in profits accrued to or received by other partner in main partnership, as on entering into sub-partnership, such partner changes his character vis- a-vis sub-partners and income-tax authorities. Further, subpartnership creates superior title and results in diversion of income from main firm to sub-partnership before same becomes income of partner concerned. In such case, even if partner receives income from main partnership, he does so not on his behalf but on behalf of sub- partnership. Distinguishing K. A. Ramachar it was observed (page 332 of 62 ITR): "In that case, it was neither urged nor found that sub-partnership came "In that case, it was neither urged nor found that sub-partnership came into existence between assessee who was partner in firm and his wife, married daughter and minor daughter. It was pure case of assignment of profits (and not losses) by partner during period of eight years. Further, fact that sub-partner can have no direct claim to profits vis-a-vis other partners of firm and that it is partner alone who is entitled to profits vis-a-vis other partners does not show that changed character of partner should not be taken into consideration for income-tax purposes." In CIT v. Sunil J. Kinariwala [2003] 259 ITR 10 (SC); [2003] 1 SCC 660, assessee, who was partner of firm holding ten per cent. share therein, settled fifty per cent. of his ten per cent. right, title and interest (excluding capital), as partner in firm, and sum of rupee five thousand out of his capital in firm, in favour of trust that he had created and of which assessee's brother's wife, niece, and mother were beneficiaries. While rejecting contention of assessee that amounts transferred to trust could not be included in his total income, court found that determinative factor is nature and effect of assessee's obligation in regard to amount in question. When third person becomes entitled to receive amount under obligation of assessee even before he could lay claim to receive it as his income, there would be diversion of income by overriding title; but when after receipt of income by assessee, same is passed on to third person in discharge of obligation of assessee, it will be case of application of income by assessee and not of diversion of income by overriding title. Commenting on distinction between factual situation that arose in K. A. Ramachar (supra) and Murlidhar Himatsingka (supra), it was observed as follows (page 17 of 259 ITR): "It is apt to notice that there is clear distinction between case where partner of firm assigns his share in favour of third person and case where partner constitutes sub-partnership with his share in main partnership. Whereas in former case, in view of section 29(1) of Indian Partnership Act, assignee gets no right or interest in main partnership, except, of course, to receive that part of profits of firm referable to assignment and to assets in event of dissolution of firm, but in latter case, sub-partnership acquires special interest in main partnership. case on hand cannot be treated as one of sub-partnership, though in view of section 29(1) of Indian Partnership Act, Trust, as assignee, becomes entitled to receive assigned share in profits from firm not as sub-partner because no sub-partnership came into existence but as assignee of share of income of assigner-partner." In S. Venugopala Varma Rajah v. Commr. of Agrl. I. T. [1968] 68 ITR 83 (Ker) [FB], Full Bench of this court considered issue of whether income derived by tarwad, from properties that were in possession of junior members of tarwad, based on agreement (karar) that was entered into among members of tarwad, could be treated as having been diverted by overriding title to junior members for whose benefit income was to be applied. It was held that case was one where tarwad received income from properties allotted to junior members and applied same for purposes of tarwad and not case of diversion of income. There was no transfer of properties from tarwad to allottees. junior members of tarwad had right to be maintained out of income from properties of tarwad, and arrangement in karar was only method for discharging obligation of tarwad in matter of payment of maintenance to junior members. members received income from properties allotted, in their capacity as members of tarwad and in discharge of obligation of tarwad to maintain them. Even assuming that karar was settlement or disposition of income, it was case of application of income of tarwad, even though assessee had entered into legal obligation to apply it in that way. decision of Full Bench of this court was affirmed by Supreme Court in V. Venugopala Varma Rajah v. Commr. of Agrl. I. T. [1972] 84 ITR 466 (SC). Supreme Court, while dealing with contention of assessee that income in dispute never reached his hands, observed (page 475): "the income of family. It reached hands of family as soon as it reached hands of any of members of family who were entitled to receive it on behalf of family. members of family received that income on behalf of family, and applied same in discharge of income on behalf of family, and applied same in discharge of obligation of family. When this court spoke of income reaching hands of assessee, it did not refer to any physical act. It was dealing with legal concept-a receipt in law. Viewed that way, it is quite clear that income with which we are concerned in this case was received by family." In light of principles that can be culled out from decisions referred to above, I am of view that for concept of diversion of income by overriding title to apply, diversion of income must be effective at stage when amount in question leaves source, on its way to intended recipient. At that stage, on account of pre-existing legal obligation, amount should be diverted to another, who can claim it as of right, based on pre- existing legal arrangement. person to whom amount is diverted should have legal right that entitles him to claim amount directly from source, and without intervention of person who would have received amount but for said legal arrangement. Viewed from that angle, nature of receipt would also have bearing on issue of whether amount in question reached member of congregation or was diverted to congregation, without reaching member, by way of overriding title. receipts in question, in instant cases, are amounts by way of salary and pension. These payments accrue to individuals concerned, who have rendered service in their individual capacity and based on educational qualifications and skills possessed by them as individuals. right to receive payments by way of salary or pension also, consequently, accrues or arises to them as individuals and not to congregation of which they are members. No doubt, precepts of canon law might require them to entrust amounts so received to religious congregation of which they form part, but, in my view, said obligation of member, which is only obligation based on personal law, would not clothe religious congregation with legal right to receive salary/pension payments directly from Government/employer, and without involving member. Consequently, entrustment of amounts received by member to congregation would tantamount only to application of income by member in favour of congregation. It will not be case of diversion of income by way of overriding title. I must now deal with contention of petitioners with regard to Circular issued by Central Board of Direct Taxes, that allegedly obliges authorities under Income-tax Act to treat all receipts by way of earnings of members of religious congregations as income of religious congregation and not as income of individual member. Instruction dated December 5, 1977, which is based on earlier Circular dated January 24, 1944 of 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 from payment of income-tax on salaries of members of religious congregations. Attention is invited to Circular No. 1 of 1944 O. No. 26(43)-II/45, dated January 24, 1944, in which liability to tax on fees received by missionaries and subsequently made over to society had been considered. 2. Representations have been received from members of religious congregations situated all over country regarding taxability of fees received by them. question for consideration, is whether fees of other earnings of missionaries be assessed as their income, although same is to be made over to congregation to which they belong under rules thereof. 3. Board have examined this issue and have decided that since fees received by missionaries are to be made ever to congregation concerned there is over-riding title to fees which would entitle missionaries to exemption from payments of tax. Hence such fees or earnings are not taxable in their hands. 4. Those instructions may be brought to notice of all officers working in your charge. Yours faithfully, (Sd.)........... J. P. Sharma, Secretary, Central Board of Direct Taxes." It is no doubt true, that by virtue of section 119 of Income-tax Act, Circulars and Instructions issued by Central Board of Direct Taxes are binding on authorities under Income-tax Act. said provision under Income-tax Act is intended to ensure uniformity in application of law, by those who are entrusted with its administration across country. officer under Income-tax Act is thus expected to conform to Circulars and Instructions issued by Central Board of Direct Taxes when he issues directions to assessees or other persons such as Treasury officers. When direction issued by officer under Act is called in question in writ petition, however, this court has to ascertain, not only whether authority concerned acted contrary to instructions of Board but also whether instructions of Board are in conformity with law laid down by Supreme Court. latter exercise would have to be undertaken to ensure that, while issuing directions to officer concerned, to act in accordance with instructions of Board, this court does not inadvertently direct him to act contrary to provisions of statute. To that effect is caveat that was issued by Constitutional Bench of Supreme Court in CCE v. Ratan Melting and Wire Industries [2008] 13 SCC 1 where it was observed as follows: "5. Learned counsel for Union of India submitted that law declared by this court is supreme law of land under article 141 of Constitution of India. circulars cannot be given primacy over decisions. 6. Learned counsel for assessee on other hand submitted that once circular has been issued it is binding on Revenue authorities and even if it runs counter to decision of this court, Revenue Authorities cannot say that they are not bound by it. circulars issued by Board are not binding on assessee but are binding on Revenue authorities. It was submitted that once Board issues circular, Revenue authorities cannot take advantage of decision of Supreme Court. consequences of issuing circular are that authorities cannot act contrary to circular. Once circular is brought to notice of court, challenge by Revenue should be turned out and Revenue cannot lodge appeal taking ground which is contrary to circular. 7. Circulars and instructions issued by Board are no doubt binding in law on authorities under respective statutes, but when Supreme Court or High Court declares law on question arising for consideration, it would not be appropriate for court to direct that circular should be given effect to and not view expressed in decision of this court or High Court. So far as clarifications/circulars issued by Central Government and of State Government are concerned they represent merely their understanding of statutory provisions. They are not binding upon court. It is for court to declare what particular provision of statute says and it is not for executive. Looked at from another angle, circular which is contrary to statutory provisions has really no existence in law." As has already been noticed above, analysis of decisions of Supreme Court on subject indicates that, for concept of diversion of income by overriding title to apply, diversion of income must be effective at stage when amount in question leaves source, on its way to intended recipient. At that stage, on account of pre-existing legal obligation, amount should be diverted to another, who can claim it as of right, based on pre-existing legal arrangement. person to whom amount is diverted should have legal right that entitles him to claim amount directly from source, and without intervention of person who would have received amount but for said legal arrangement. nature of receipt would also have bearing on issue of whether amount in question reached member of congregation or was diverted to congregation, without reaching member, by way of overriding title. Thus, while there may be instances where receipt of fees or other earnings by members of religious congregations do get diverted by overriding title to congregation, proposition is by no means absolute one that is applicable in all cases of earnings by member of religious congregation. applicability of concept would have to be tested on facts of each case, by examining nature of receipt by assessee. Viewed in that light, impugned instructions of Income-tax Officers, in these cases, to deduct tax at source from payments by way of salary and pension to members of religious congregations, cannot be said to be contrary to Circulars and Instructions issued by Central Board of Direct Taxes. They are simply instructions issued in situations not covered by Central Board of Direct Taxes Circular/Instructions. Further, Central Board of Direct Taxes Circulars/Instructions cannot be treated as encompassing receipts by way of salary and pension, as that would render said Circulars and Instructions contrary to law declared by courts on concept of diversion of income by way of overriding title. For reasons that I have already stated, I am of view that payments involved in instant cases accrued to members of religious congregations as their income and subsequent diversion of that income to religious congregation concerned was only case of application of that income. impugned instructions of Income-tax Officers that direct persons responsible for paying salary and pension to members of religious congregations, to deduct tax at source in accordance with section 192 of Income-tax Act cannot be said to be illegal. writ petitions, in their challenge against said instructions, fail and are accordingly dismissed. In W. P. (C). Nos. 22299 of 2014 and 22357 of 2014, petitioners had, taking note of instructions issued by Income-tax Officers to deduct tax at source from salary payments, approached Income-tax Officers under section 197 of Income-tax Act for certificate for non-deduction of tax at source. When said application was rejected, petitioners approached Commissioner of Income-tax through revision petition filed under section 264 of Income-tax Act. said revision applications were, however, rejected by holding that salary of teachers was received by them and formed part of their income for purposes of Income-tax Act. It was found that voluntary foregoing of income in favour of religious congregation of which they were members, was instance of application of income and not diversion of income by overriding title. In aforementioned writ petitions, diversion of income by overriding title. In aforementioned writ petitions, petitioners impugn said orders passed by authorities under Income- tax Act. In light of my findings on issue, these writ petitions also fail, and are accordingly dismissed. Resultantly, all writ petitions are dismissed and stand of income-tax authorities that tax is required to be deducted at source from payments by way of salary/pension effected to persons who are members of religious congregations, is upheld. *** Fr. Sabu P. Thomas v. Union of India
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