Salaries payable to Nuns, Priests working as teachers in Govt, Aided institutions liable for TDS; does not violate Article 25: Kerala High Court

The Kerala High Court has held that salaries paid to nuns and priests of religious congregations, working as teachers in government or government aided educations institutions are liable for tax deduction at source (TDS) (Provincial Superior, Nirmal Rani Provincial House v. Union of India)..A Bench of Justices SV Bhatti and Bechu Kurian Thomas upheld the judgment rendered by a single-judge and ruled that such deduction of tax does not violate freedom of religion under Article 25 of the Constitution. "If a valid law permits deduction of tax at source, we find ourselves at a loss to assimilate the scope of the contention that deduction of tax at source violates the fundamental right to freedom of religion," the Court held.The Court also turned down the contention that nuns and priests do not utilise their salary they get but rather give it to their congregation.The Bench ruled that if the income payable will fall under the head 'Salaries' under Income Tax Act, the statute attaches an obligation to the person paying the salary to deduct TDS."While deducting the TDS under section 192 of the Act, the person deducting it, is not obliged to or required to ascertain the nature of calling or vocation of the assessee or utilization or application of the income by the assessee," the Court underscored..Factual BackgroundEven though nuns and priests take the vow of poverty, many of them work as teachers and and are paid salaries. However, the income received by them is handed over to their religious congregation.From 1944 until the filing of the petitions in 2014, the salary paid to the nuns or priests by the government or aided institutions was not subjected to TDS..However, in 2014 Income Tax Officers directed District Treasury Officers that proper deduction of TDS must be effected even in the case of employees who are members of religious congregations receiving salary from the government exchequer. .The appellants approached the court challenging the decision. A single-judge of the High Court dismissed the plea leading to the present appeal before the Division Bench. .The rival contentions of the Bar gave rise to the following questions which were considered by the Division Bench to arrive at their conclusions. .(i) Whether the writ petitions are maintainable?As 45 out 49 appeals were filed by religious congregations that do not receive any salary directly, the Court held that those appeals are not maintainable. The 4 appeals preferred by individual nuns and priests were held to be maintainable..(ii) Whether salaries paid to nuns and priests, who are employees of educational institutions, are liable for tax deduction at source?The Court Examined Section 192 of the Income Tax Act in detail to hold that provision does not contemplate any exemption from the liability to deduct tax at source on the basis of the nature of calling, profession, or vocation of the person who receives the salary."The statute makes it an obligation upon the person who pays the salary to deduct tax, at the time when payment of salary is made. As per the statutory scheme, the sole focus under section 192 of the Act, upon the person paying the salary, is whether the income is chargeable under the head 'Salaries'," the Court opined.The petitioners had claimed that they were not utilising their salaries but were giving it to their congregations. But the Court ruled that it is not a relevant consideration to determine TDS."The manner of utilisation of the income which at the most may be a window for claiming a deduction or a refund, but, it is irrefutably not a ground to claim an exclusion from deduction of tax at source," the Court held..(iii) Whether the principle of diversion of income by overriding title apply to the salary received by nuns and priests?The Court adverted to the judgments of the Supreme Court in various cases which established that tax is attracted at the point when income is earned or accrued and is not dependent on the manner in which income is utilised. It, therefore, considered whether the salary paid to nuns or priests gets diverted even before they can lay a claim to receive it as their income.The appellants contended that as per the canon law, once a perpetual vow of poverty is taken, the nun or priest, undergoes a civil death, and thereafter, they are not 'persons' under the Act.THowever the Court held that "the concept of civil death is alien to the Income Tax Act and the same cannot be incorporated into the statute book through any mode of interpretation. The civil death contemplated under our rule of law is only the civil death provided for in section 108 of the Indian Evidence Act, 1872. Thus, the reliance upon the concept of civil death of nuns and priests under canon law, to avoid deduction of tax at source, cannot be of avail to the appellants.".(iv) Whether CBDT circulars of 1944 and 1977 are valid? If yes, do they exclude TDS from the salaries of nuns or priests?The petitioners had relied upon circulars issued by the Central Board of Direct Taxes (CBDT) in the year 1944 as well as in 1977, to claim exemption from TDS. According to the appellants, based upon the circulars so issued, salary received by the nuns and priests, and made over to the religious congregations were not chargeable to income tax, and tax was never deducted at source from the salary paid to the nuns and priests.The Court opined that the circular of 1977 cannot apply to the salaries received by nuns or priests from the government or aided institutions. Further the CBDT does not have the power to issue any circular excluding or exempting a person or a category of persons from the taxing provisions. The power to exclude any person or category of persons from the purview of tax can be done only through the mandate of the statute..(v) Whether deduction of tax at source violates Article 25 of the Constitution of India?The right to profess, practice and propagate religion under Article 25 of the Constitution of India is not an absolute or an unfettered right and is subject to the law of the land, the Court held.It further said that Article 25 does not provide any immunity from taxation on the basis of religion. "The right is subject to public order, which term has a wide connotation. One of the facets of public order is the law of the land. A valid piece of legislation and its compliance is part of public order under Article 25 of the Constitution," the Bench opined.Payment of taxes imposed under a validly enacted legislation is an essential attribute of public order, the Court ruled."If a valid law permits deduction of tax at source, we find ourselves at a loss to assimilate the scope of the contention that deduction of tax at source violates the fundamental right to freedom of religion," the judgment made it clear..(vi) Whether the non-deduction of tax at source from the salaries of nuns or priests for more than 76 years confers a right against such deduction?The appellants had contended that the non collection of TDS all these years have vested a legitimate expectation and a right upon them.The Court, however, turned down the argument stating that there cannot be any estoppel against law. Noting that the Income Tax Department admitted that they had, by mistake, failed to properly instruct the collection at source prior to 2014, the Court held that this judgment shall apply only prospectively and not for any earlier periods. It clarified that this direction is issued not on the basis of any proclaimed right of the nuns or priests. .The Court, therefore, dismissed the appeal and held that nuns and priests who accrue salaries from the Government exchequer are liable to pay TDS..The appellants were represented by Senior Advocate Joseph Kodianthara, advocate Abraham Joseph Markose, Senior Advocate Kurian George Kannanthanam, advocate Tony George Kannanthanam and advocate A Kumar. Advocate Christopher Abraham represented the Income Tax Department. .[Read Judgement]