'Law Common For Everyone' : Supreme Court Rejects Plea Of Christian Nuns & Priests Against TDS Application To Their Salaries

The Supreme Court today (November 7) dismissed a batch of 93 appeals challenging the application of the Tax Deduction at Source (TDS) on the salaries given to nuns and priests of the Catholic Church who are working as teachers in aided institutions.

The bench comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala and Manoj Misra was hearing the challenge to the judgment of Madras High Court which held that Tax Deduction at Source (TDS) must be applied with respect to the the salaries given to nuns and missionaries.

The Counsel for the petitioners explained that the nuns and priests have taken a vow of poverty and hence, the salaries earned by them by working as teachers in aided institutions are handed over to the diocese/convents. Therefore, the salaries are not accrued to them personally.

CJI then pointed out that the salaries are received by them in their personal 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." 

The CJI further stressed the need to have a uniform application of law - that any person employed and receiving a salary would be subject to 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, 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 said.

"This is salary in its true sense," Justice JB Pardiwala said. The Counsel said that they were protected by circulars issued from 1940s and the department initiated proceedings after someone wrote a letter to them in 2015.  

The Counsel then submitted that the Kerala High Court in a few of its decisions has held that the family of a priest or nun, on his/her death cannot claim compensation under the Motor Vehicles Act. The CJI explained that the reason for this is that through their vows, the nuns and priests break the mortal bond with their family and become 'ascetics'. Therefore, the families cannot claim compensation on their behalf. However, taxation stands on a different footing, CJI Chandrachud explained.

Senior Advocate Arvind Datar, who then joined the proceedings virtually, submitted that the appellants would work in government-aided schools and receive the said salaries for teaching. However, by the end of the month, the salaries in their names would go to the Diocese and it would be the Diocese which pays the tax as a charitable trust instead and not the nuns/priests. He added that the priests/nuns do not file income tax returns.

"They have renounced the world... The priest gets nothing. They don't get provident funds. For the last 85 years, the priests were never taxed." 

"If you are not liable for TDS, you can make a claim for a refund," CJI suggested. Datar then said they are not assessees.

"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.

He further added that not every receipt is taxable, and for a receipt to be taxable, it should be in the form of an income, but presently, the nuns/priests were not retaining the salaries for their own use.  Datar said that the circular of the CBDT saying that priests/nuns are exempted from TDS still holds the field. He said that over four thousand priests would be affected.

Seemingly disinclined to entertain the matter further, the bench dismissed the appeals. 

"We will not entertain, thank you Mr.Datar," CJI said.

Madras High Court Judgment

The Division Bench of Madras was hearing the appeals filed by the Income Tax Department against the judgment of a single bench, which had allowed the writ petitions filed by catholic religious institutions challenging steps taken for recovering TDS amount on salaries paid to priests/nuns employed in aided educational institutions.

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.

The Madras High Court relied on the judgment passed by the Kerala High Court in 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. 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. The diversion of income must be effective at the stage when the amount in question leaves the source.

The High Court noted that income accrued to the nuns/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/missionaries..

"we find 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 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", observed the Court.

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.

Case : Institute of the Fransican Missionaries of Mary and others v. Union of India SLP(C) No. 10456/2019 and connected cases.