2016 (6) TMI 430 - HC - Income Tax

Deduction of TDS from the salaries of the Religious Nuns in the service of the petitioners school - petitioners are in Catholic Institutions, religious Priests and Nuns who have been employed in the respective Schools/Colleges owned and administered by Dioceses, Congregation or institutions - whenever salaries are directly paid by the Government to the concerned religious Priests or Nuns, who are working in the schools owned by Catholic Dioceses and Congregation? - Held that - When the Government directly pays to the concerned Congregation or Diocese which has already been exempted from payment of tax, naturally there cannot be any evasion of tax and as have rightly pointed, in this connection, already the department has taken a stand way back in the year 1944 to the circular in 1977 whenever ultimately the beneficiary is the Congregation which has been exempted then they need not pay tax. It is made clear because the Government is paying authority, the Income Tax Department on receipt of such affidavit and on their satisfaction would give a certificate or a letter to the Government of Tamil Nadu that they need not deduct TDS insofar as the Priests and Nuns are concerned because they are not paying salary to the individual which are now being paid only in the name of the Congregation or Diocese only. - Decided in favor of petitioners / assessee.

Summary

Issues Involved:
1. Deduction of Income Tax (TDS) from salaries of Religious Nuns and Priests.
2. Exemption status of Congregations or Dioceses from Income Tax.
3. Compliance and procedural requirements for TDS exemption.

Issue-wise Detailed Analysis:

1. Deduction of Income Tax (TDS) from salaries of Religious Nuns and Priests:
The petitioners, representing Catholic Institutions, argued that the salaries paid to religious Priests and Nuns by the Government should not be subject to TDS because these individuals do not retain the salaries for personal use but instead remit them to their respective Congregation or Diocese. The petitioners contended that since the ultimate beneficiary of these salaries is the Congregation or Diocese, which is often exempt from income tax, the deduction of TDS is unwarranted. The court acknowledged that the Priests and Nuns do not personally benefit from the salaries and that the salaries are ultimately added to the income of tax-exempt religious institutions.

2. Exemption status of Congregations or Dioceses from Income Tax:
The court reviewed historical precedents and communications from the Income Tax Department dating back to 1944, which consistently indicated that salaries received by religious personnel and subsequently passed to tax-exempt religious institutions should not be taxed. Notable references included a 1944 circular, a 1963 communication from the Commissioner of Income Tax, and a 1977 instruction from the Central Board of Direct Taxes, all supporting the exemption of such salaries from income tax when they are transferred to exempt institutions.

3. Compliance and procedural requirements for TDS exemption:
The court directed that individual Priests and Nuns must file affidavits with the Income Tax Department and relevant government authorities, affirming that their entire salary should be paid directly to their respective Congregation or Diocese. The Congregation or Diocese must also file similar affidavits. The court specified that these affidavits must be submitted within two weeks from the receipt of the order. Additionally, the Income Tax Department, upon receipt and verification of these affidavits, must issue a certificate or letter to the Government of Tamil Nadu, confirming that TDS need not be deducted from the salaries of Priests and Nuns, as the payments are made directly to tax-exempt religious institutions.

Conclusion:
The court allowed the writ petitions, concluding that salaries paid to Priests and Nuns should not be subject to TDS if they are directly transferred to tax-exempt Congregations or Dioceses. The court emphasized the need for compliance with procedural requirements, including the submission of affidavits by the concerned individuals and institutions. The order ensures that the ultimate beneficiaries, the tax-exempt religious institutions, receive the full amount of the salaries without TDS deductions.