SC: The Law is Common for Everyone; Income Tax Must Be Deducted on Salaries Paid to Christian Nuns

The Apex court dismissed 93 appeals contesting the application of the Tax Deduction at Source (TDS) on the salaries furnished to the nuns and priests of the Catholic Church who are working as teachers in aided institutions.

The bench, which included Chief Justice of India DY Chandrachud and Justices JB Pardiwala and Manoj Misra, was hearing the challenge to the Madras High Court ruling, which stated that Tax Deduction at Source (TDS) is required to be applied to the salaries furnished to nuns and missionaries.

The applicant’s counsel, the nuns, and the priests have taken an oath of poverty and therefore the salaries made via them by working as teachers in administered institutions are handed over to the diocese/convents. Hence the salaries are not accrued to them personally.

CJI after that cited that the salaries are obtained to them in their accounts.

“Salary is received, but because of the vow of poverty, they say I will not retain the salary because, in the diocese/parish, they cannot have personal income…But how does it affect the taxability of the salary? TDS has to be deducted.”

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It was cited by the CJI that the requirement to have the constant application of the law for any person employed and obtaining a salary shall be within taxation.

“If there is a Hindu priest who says I will not retain this salary, and give the money for doing puja to an organisation. But if the person is employed, he gets the salary, and tax has to be deducted. The law is common for everyone. How can you say that it is not subject to TDS?”

“When the organization pays a salary, and it is treated as salary in the books of accounts of the organization, but that is not retained by the person and paid somewhere else, the application of money, either to the diocese or someone else, has nothing to do with taxability,” CJI cited.

Justice JB Pardiwala said, “This is salary in its true sense.” The Counsel cited that they were safeguarded via the issued circulars from the 1940s and the department started the proceedings after a letter was written by someone to them in 2015.

Thereafter the counsel furnished that the Kerala High Court in its decision ruled that the family of a priest or nun, on his/her death cannot avail compensation under the Motor Vehicles Act. As per the explanation of the CJI a reason for the same is that via their oath, the nuns and priests break the mortal bond with their family and become ascetics.

Hence the families could not claim the compensation on their behalf. But the taxation is for a distinct footing, as mentioned by CJI Chandrachud.

Senior Advocate Arvind Datar said that the appellants shall work in government-supported schools and obtain the said salaries for teaching. By the finish of the month, the salaries in their names shall proceed to the Diocese and the same shall be the Diocese which files the tax as a charitable trust and not the nuns/priests. He said that the priests/nuns do not file income tax returns (ITR).

They have again announced to the world… The priest gets nothing. They do not provide the provident funds. For the last 85 years, priests have never been levied tax.

CJI suggested, “If you are not liable for TDS, you can make a claim for a refund.” Datar stated they are not taxpayers.

“Without a statutory exemption, taxation cannot be avoided,” CJI said. “As per the definition of the Income Tax Act, an individual is a person who is capable of receiving money. They are not. They are virtually people who suffered civil death. I am not capable of earning a taxable income,” Datar said.

Also, he cited that not every receipt should pay tax, and for the receipt levied to tax, it must be in the form of an income, but at present the nuns/priests do not retain the salaries for their use. Datar cited the circular of the Central Board of Direct Taxes (CBDT) citing that priests/nuns shall get waived from TDS still in the field. He mentioned that over 4000 priests shall be affected.

The bench dismissed the plea after seeing them disinclined to entertain the case.

CJI said that we would not entertain, thank you, Mr. Datar.

Ruling of Madras High Court

The Division Bench of Madras was hearing the appeals furnished via the income tax department against the ruling of a single bench which has permitted the writ petitions furnished via catholic religious institutions contesting the steps opted to recover the TDS amount towards the salaries filed before the priests/nuns employed in aided educational institutions.

The single bench of Madras was hearing the Income tax department’s appeals against the ruling of a single bench, which has permitted the writ petitions furnished via catholic religious institutions contesting the steps opted to recover the TDS amount on salaries filed to priests/nuns employed in aided educational institutions.

The single bench has considered the matter of religious institutions that as the priests/nuns have opted for an oath of poverty as per which they would required to surrender their income to the Church/Diocese, no income is accrued to them perfectly to make it obligated for taxation, it carried that priests/nuns have faced civil death under the Canon Law and renounced the world and consequently cannot be imposed to TDS.

The ruling of a single bench has been set aside by the Division Bench of Justices Dr. Vineet Kothari and C V Karthikeyan carrying that the salaries were obtained to them as per their capacity and that the following surrender of their salaries to the religious institutions can merely be regarded as an income application. Additionally, the court carried that the religious institutions cannot avail to have an overriding title concerning their salaries at the source itself.

On the Kerala High Court’s ruling, the Madras High Court relied on Fr Sabu P Thomas v Union of India, which explained the concept of ‘diversion of income by overriding title’ was not applicable in the case. The concept directed to a pre-existing legal liability to divert the income to the other.

The individual to whom the amount is been diverted must be required for a legal right that qualifies him to claim the amount from the source, and without the interruption of the person who shall have obtained but for the said legal arrangement. The allocation of income must take place at the point the specified amount departs from the source.

The High Court observed that the income earned by the nuns/missionaries was in their personal capacity and was deposited into their individual bank accounts. The organization held no rights to the salaries at the source and had no access to the employment agreement with the nuns/missionaries.

“we find that the salary in question was not directly received by the Congregation or Religion by overriding diversion of title, but was paid by the State to the Teachers who are Nuns or Missionaries and thereafter, it might have been applied or made over to the Church or Diocese or the Institution run by them”

“The salary is paid under the contract of employment with which Educational Institution or the Church or Diocese is not even a privy to such contract of employment qua the State Government”, the Court observed.

Based on an examination of Section 192 of the Income Tax Act, the Court determined that the religious status of the assessee does not influence TDS obligations.