Daijiworld Media Network

New Delhi, May 11: The Supreme Court on Thursday stayed the Madras HC judgment which had ruled that salaries received by missionaries and nuns of Catholic Church are liable to be subjected to Tax Deduction at Source(TDS) under Section 192 of the Income Tax Act.

The bench of Justice Ashok Bhushan and K M Joseph ordered to maintain "status quo as on today" while issuing notice in the petition filed by Institute of Franciscan Missionaries of Mary against the March 20 judgment of the High Court.

Senior Advocate Arvind P Datar, appearing for the petitioner, submitted that salaries earned by the missionaries are diverted to their congregations or dioceses, as they cannot hold worldly possessions on account of their vow of poverty. Since no income is accrued to them in personal capacity, their salaries cannot be subjected to TDS deduction, submitted the petitioner. Recognizing this, they have not been subjected to income tax since 1944 and the High Court judgment will directly impact about 2300 priests and nuns, submitted the petitioner.

It was also contended that the judgment interfered with the vow of poverty observed by the missionaries and thereby infringed the right to religious freedom under Article 25 of the Constitution of India.

The Central Government sought four weeks time to respond to the petition. The Court listed the matter for final disposal on August 7.

Madras High Court Judgment

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. 

Quoting with approval the judgment of the single bench of High Court of Kerala in Fr Sabu P Thomas v Union of India, the Division Bench 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. when the amount in question leaves the source, on its way. The diversion of income must be effective at the stage when the amount in question leaves the source. 

The Court noted that income accrued to the nuns and 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 and missionaries.

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. 

The Court held that their obligations by virtue of vows which they have taken, namely vows of poverty, etc and their surrender to the Church or Diocese does not affect the taxability of the income. At best, it can only amount to application of their income by way of salary under that obligation towards that religion, after they discharge their tax obligation under the Income Tax Law, out of such receipt of salary by them. 

(With agency inputs)