Chennai: The Madras High Court has ordered status quo on the tax exemption given to nuns and priests working as teachers.
Justice R Mahadevan on November 20 gave the direction on two separate petitions moved by Nirmala Education Society, Coimbatore, and Stella Maris College, Chennai.
The petitioners challenged a recent circular of the Income Tax Department ordering TDS (Tax Deduction at Source) from the incomes earned by nuns and priests working as teachers.
The petitioners pointed out that the Income Tax authorities had in January 1944 given TDS exemption to their income taking into account the religious status of its members and charitable nature of the society.
The circular from the federal government said nuns and priests teaching in colleges cannot avail the TDS exemption.
The principal chief commissioner of income tax in Tamil Nadu issued the circular on November 12 asking the tax authorities to deduct TDS from the salaries of nuns and priests working as teachers.
According to the petitioners, the canon law of the Church prohibited them from owning any property, including salary. Contending that this position had been upheld by the Supreme Court and High Courts in various judgments, the petitioners sought quashing of the circular.
The Madras court stand differed with a Kerala High Court decision nine months ago.
On February 5, the Kerala court held that priests and nuns drawing government salary were liable to pay income tax.
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 congregations, the congregations have to pay 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 order of the Income Tax Department to the State Treasury Department that tax has to be deducted at source from salary and pension payments.
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 petitioners had contended that they were members of religious institutions and hence were exempted from income tax. They said their government payments, both salary and pension, have been credited into their institutions and they were not liable to pay income tax.
They cited a circular issued by the Central Board of Direct Taxes in 1944 and another directive in 1977, which allowed income tax exemption for those who handed over their payments to religious institutions. However, the Income Tax Department, in an affidavit, pointed out that the stated circulars did not insulate salary payments from the liability of income tax.