Kerala High Court: Dealing as to whether the payments by way of salary/ pension made by the Government to the members of the religious congregations is liable for tax deduction at source (TDS), a bench of A.K. Nambiar J upheld the impugned instructions of the Income Tax officers, which direct the person 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 as legal.

In the instant case, income tax authorities issued instructions to the District Treasury officers in the State to deduct tax at source from payments made to the members of religious congregations for teaching services rendered by them in various aided educational institutions, against the circular/ instruction of the CBDT in 1944 and 1977 respectively. The learned Senior Counsel for the petitioner K.G. Kannanthanam contended that the circulars/ instructions of CBDT which exempt the fees and earnings of missionaries from payment of taxation are binding on the Income Tax authorities under S. 119 of the IT Act. The learned Senior Counsel P.K. Ravindranath Menon for the Income Tax department contended that payments made to the recipients for services rendered by them in their individual capacities are their ‘income’ which is liable to be taxed.

The Court clarified the two fundamental concepts in the Income Tax Law i.e. “Diversion of income by overriding title”, and “Application of income” and noted that “under the IT Act, every income that accrues or arises is liable to be taxed, however, if the income does not reach the assessee or accrue to him/her and is diverted before it reaches him/her on account of pre-existing legal obligation, then the assessee cannot be taxed on such income. The line of separation lies between cases of diversion of income by overriding title and cases of application of income”.

The Court found that the receipts in question are amounts by way of salary and pension which accrued or arose to the members on account of service rendered in their individual capacity based on the educational qualifications and skills possessed by them, and therefore are ‘income’ and the subsequent diversion of that ‘income’ to the religious congregation concerned was only a case of application of that income, and not a case of diversion of income by way of overriding title. Accordingly, the Court upheld the legality of the impugned instructions of the Income Tax officers to deduct tax at source from payments by way of salary and pension to members of the religious congregations and held that the said instruction is not contrary to the Circulars and Instructions issued by the CBDT. FR. Sabu P. Thomas v. Union of India, 2015 SCC OnLine Ker 766decided on 04.02.2015


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