Tax on salary and pension drawn by nuns and priests working as teachers in government-aided institutions can be deducted at source: High Court of Kerala

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.