The Nun Tax: A Case Study in Tax Law and Religious Exemptions
[By Tanmay Doneria & Varsha Tanwar] The authors are students of Rajiv Gandhi National University of Law, Punjab. Introduction The intersection of taxation and religion is a multifarious and contentious matter. It is vital to navigate this delicate landscape having far-reaching implications. The Hon’ble Supreme Court of India is set to adjudicate a significant legal question in the Institute of Franciscan Missionary of Mary v. UOI (SLP No. 10456 of 2019). The current SLP inter-alia has been filed to review the judgement rendered by the Hon’ble Madras High Court in Union of India v. The Society of Mary Immaculate. The case hinges on the issue of whether State governments are obligated to deduct Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act, 1961 (“Act”) while making grant-in-aid payments captioned as salary directly to the individual members of religious congregations, such as nuns, who render their services in educational institutions. The present case presents a unique situation as the nuns and missionaries live in a state of civil death, they take a vow of poverty due to which they do not have any proprietary rights and their income is surrendered in entirety to the congregation. This has been argued before the Madras High Court stating that in accordance with the same, they should not be subject to TDS. However, rejecting this argument the Court held that Section 192 of the Act is a-religious and apolitical thus, the payments made to the nuns will be subject to TDS. This article analyses the fundamental question, which was overlooked by the Hon’ble Madras High Court, of whether the payments made by the State government to nuns will qualify as “salary” under the Act thereby triggering the requirement of TDS under Section 192 of the Act. Furthermore, it will delve into the nuanced concept of ‘diversion of income,’ positing that the congregation’s overriding title to the nuns’ income, as dictated by their religious tenets, renders the payments made to them as diverted income. The Payments made by the State Government does not fall within the ambit of ‘Salary’ under the Act No payment can be considered within the ambit of salary as defined under Section 15 of the Act unless there exists an employer-employee relationship between the payer and the payee. Furthermore, as Section 192 of the Act only applies to payments made under the head of salary, it can be stated that in order to attract the provisions of Section 192 of the Act, it is imperative that the payments must arise out of an employer-employee relationship. Therefore, in specific circumstances of the case at hand, there must be an employer-employee relationship between the State Government and the missionaries/nuns. It is important to note that the Madras High Court did not adequately discuss the preliminary issue of whether these payments arise out of an employer-employee relationship. The Court had remarked that “Section 15, read with Section 192, obligates the State Government or the employer, be it educational institution or the State to deduct income tax at source.” This blanket statement is erroneous as it merely creates an assumption that the State Government can be considered as an employer of individual missionaries. To shed light on this matter, we should examine the recent ruling of the Hon’ble Tripura High Court in Aparna Chowdhury Reang v. State of Tripura. Wherein, the court unequivocally established that an employee of a grant-in-aid school cannot be considered to be a government employee. On applying this precedent to the case under consideration, it can be argued that even though the nuns (payee) were receiving payments directly from the State Government (payer) as grant-in-aid through the Electronic Clearing Scheme (ECS), there exists no employer-employee relationship between the State Government and the individual missionaries. Consequently, in the absence of any employer-employee relationship, the TDS provisions under Section 192 of the Act would not be applicable in this scenario. Therefore, failing to qualify the preliminary requirement of an employer-employee relationship, the provisions under Section 192 of the Act cannot be attracted at all. Surrender of Remuneration to the Congregation Constitutes Diversion of Income The concept of diversion of income, as outlined in Section 4 of the Income Tax Act, 1961, involves the diversion of income at its source before it reaches the assessee. This refers to instances where the income is re-directed to another entity having an overriding title, thereby preventing it from being subjected to tax under the Act. The test to determine the diversion of income was recently laid down in the case of National Co-operative Development Corporation v. Commissioner of Income Tax, wherein the Apex Court held that if a “portion of income arising out of a corpus held by the assessee consumed for the purposes of meeting some recurring expenditure arising out of an obligation imposed on the assessee by a contract or by statute or by own volition or by the law of the land and if the income before it reaches the hands of the assessee is already diverted away by a superior title the portion passed or liable to be passed on is not the income of the assessee.” Essentially, to apply the doctrine of diversion of income, there must be, firstly, an obligation on the Assessee by a contract, statute, law of the land or by own violation resulting in a recurring expenditure and secondly, income must be passed on or liable to be passed on by a superior or overriding title. In the present case, the nuns are under an obligation to surrender their entire income to the congregation, this obligation is imposed on them by their own violation i.e., by taking their vow of poverty in accordance with the canonical law. Furthermore, their vow of poverty creates an overriding title of the congregation over any income earned by the Nuns/missionaries and thus, any income credited to the individual account of the nuns is liable to be passed to the congregation by virtue of this overriding title. It is evident that all the
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