Allowing the appeal of the revenue the Court held 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 were nuns or missionaries. Hence there was no diversion of income by overriding title. That an old circular issued on January 24, 1944, much prior to independence of the country in the year 1947 and much prior to the coming into force of the 1961 Act, and that too vaguely worded and too narrowly worded to cover only the “fees” received by missionaries and subsequently made over to the society, did not have any effect on the controversy. The 1977 circular, though in the subject caption referring to “taxes on salaries”, in the body of the circular, only talks of “fees or earnings” in the hands of the missionaries and referring to the old circular of January 24, 1944, again reiterated that the same would not be taxable in the hands of the missionaries, as there was an overriding title to such fees which would entitle the missionaries to exemption from payment of Income-tax. It did not, in so many words discuss the salary received by nuns and missionaries as teachers to be exempt from payment of Income-tax under the 1961 Act. The old circulars themselves had been overridden and clarified by the subsequent circulars of February 26, 2016 and April 7, 2016, in which the Board had clearly stated that these old circulars would not cover the case of salary and pension payable to such nuns or missionaries working as teachers. That tax had to be deducted at source on the salaries.

By the court : The State Government as a payer of salary under the Income-tax Act is not bound by any religious tenets or provisions of canon law. It has nothing to do with the religious freedom as guaranteed under articles 25 and 26 of the Constitution of India. The State Government could not be said to be bound to pay such salary in favour of the church or diocese in place of teachers concerned who may be nuns or missionaries and who may even leave and come out of such religious order on their own volition. On the other hand, the State authorities, if they did not deduct tax at source on such salary payments, might be held guilty of not following the provisions of the Income-tax Act rendering them liable to pay penalty and even face prosecution. Therefore, neither the Income-tax Department nor the State Government had anything to do with the religious character of the institution, may be teachers or nuns or missionaries and therefore, they could not take a stand for not making the tax deduction at source in view of the canon law.