The
Kerala High Court in a judgment rendered last week has held that income tax can
be deducted at source from salary or pension paid to priests. Justice A K
Jayasankaran Nambiar said that if the salary of priests and nuns working in
government-aided institutions is submitted to the common pool of their
congregation, such congregations have to pay the income tax on account of the
individual income of inmates drawn from the government.
As
many as 49 priests and nuns, working as teachers in government-aided
educational institutions, had moved to the High Court challenging the directive
of the Income Tax Department to the State Treasury that tax has to be deducted
at source from salary and pension payments.
Relying
on a 1944 circular and a 1977 instruction issued by the Central Board of Direct
Taxes, the nuns and priests had contended that fees and other earnings of
missionaries, which they were obliged to turn over to the congregation, cannot
be treated as income in their hands.
Senior
counsel P K Ravindranath Menon, who represented Income Tax Department, argued
that the circular and instruction refer only to income earned by missionaries
and not all members of the congregation. The exemption would only apply to
those engaged in dissemination of religious knowledge and not to those who are
engaged in general vocations, including teaching profession, the senior counsel
submitted.
Upholding
the Income Tax Department directive, the Court observed that it was the
government which pays salary for the petitioners as employees of the
government-aided institutions. The Court said if the priests and the nuns hand
over their income to their religious congregation with the support of a
legal agreement, the clergy need not pay tax individually. However, their
congregations have the liability to pay the income tax of members drawing
government salary. However, to consider the clergy as income tax assessee, the
court said it should be ascertained whether there is a legal pact between the
clergy and their congregations regarding the transfer of individual income to
the account of the institution.
The High Court of Kerala in its opinion further said that an analysis of the Supreme Court's decisions on the subject indicated that tax exemption can be claimed only if the income is diverted, through a pre-existing legal arrangement, at the stage when the amount leaves the source. Through such pre-existing legal obligation, the congregation should have a legal right to claim the amount directly from the source and without the intervention of the member of the congregation, the court said.
