TDS on salary to religious teachers applies because Canon Law remittance is only application of income, not diversion by overriding title.
Salary paid by the State Government to teachers serving as nuns, sisters, missionaries or priests in grant-in-aid institutions remained income chargeable under the head of salaries, so the payer was required to deduct tax at source under section 192. A Canon Law obligation to remit the salary to a religious congregation was only an application of income after receipt, not a diversion by overriding title, because the congregation had no prior legal right to receive the salary from the State. Articles 25 and 26 did not override the statutory TDS mandate, and earlier departmental circulars on fiduciary receipts did not extend to salary.
Issues: (i) Whether salary paid by the State Government to teachers who were nuns, sisters, missionaries or priests in grant-in-aid institutions was subject to deduction of tax at source under section 192 of the Income-tax Act, 1961. (ii) Whether the obligation under Canon Law to remit such salary to the religious congregation amounted to diversion of income by overriding title so as to exclude taxability in the hands of the recipients and defeat TDS.
Issue (i): Whether salary paid by the State Government to teachers who were nuns, sisters, missionaries or priests in grant-in-aid institutions was subject to deduction of tax at source under section 192 of the Income-tax Act, 1961.
Analysis: Section 192 obligates the person responsible for payment of income chargeable under the head 'Salaries' to deduct tax at source at the time of payment. The provision operates irrespective of the caste, creed, religion or religious order of the recipient. The character of the payer's obligation is determined by the nature of the payment as salary at the point of disbursement, not by the recipient's later treatment of the amount or by any subsequent assessment issues. The Court held that the salary retained its character as taxable salary in the hands of the teachers.
Conclusion: The payment was liable to tax deduction at source under section 192 and the contention against TDS failed.
Issue (ii): Whether the obligation under Canon Law to remit such salary to the religious congregation amounted to diversion of income by overriding title so as to exclude taxability in the hands of the recipients and defeat TDS.
Analysis: The obligation to pass on the money to the religious institution was held to be only an application of income after receipt and not a diversion at source. The teachers earned the salary in their individual capacity for services rendered under the employment arrangement, and the religious congregation had no direct legal right to receive the salary from the State Government before it reached the teachers. The older departmental circulars were confined to fees received in a fiduciary capacity and did not extend to salary; the later departmental clarifications of 2016 supported that understanding. Articles 25 and 26 did not curtail the statutory TDS mandate under the Income-tax Act.
Conclusion: There was no diversion of income by overriding title, and the salary remained taxable in the hands of the recipients.
Final Conclusion: The writ appeals succeeded, the order of the Single Judge was set aside, and the challenge to deduction of tax at source from such salary payments was rejected, with the ruling directed to operate prospectively.
Ratio Decidendi: Salary earned by an individual under an employment relationship is taxable and subject to section 192 deduction at source notwithstanding any personal or religious obligation to remit it onward, because such remittance is only an application of income after accrual and not a diversion of income before it reaches the recipient.
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