Salaries of Nuns and Priests in Aided Schools Subject to Income Tax: Supreme Court Ruling
The Supreme Court has affirmed a decision by the Madras High Court that salaries paid to nuns and priests serving as teachers in church-run aided schools are subject to income tax. The court dismissed over 90 petitions from various missionary organizations seeking exemption from income tax for salaried nuns and priests.
During a session led by Chief Justice of India D Y Chandrachud, the court stated that the funds provided to the school as salary grants cannot be exempt from Tax Deducted at Source (TDS). The Chief Justice noted, “It’s a salary which is paid to one of the nuns or a father. They don’t take it in their own coffers. That’s all.” Senior advocate Arvind Datar, representing some of the appellants, argued that the money goes directly to the diocese rather than the schools.
The bench, dissatisfied with the counsel’s argument, questioned, “How will the government pay the diocese?… The government will never pay the diocese…” and emphasized that the government cannot fund a religious institution; thus, it pays the school directly.
The bench—comprising Justices J B Pardiwala and Manoj Misra—addressed the claim of a vow of poverty, stating, “So, they would not retain the salary.” The Chief Justice explained that while the salary is technically billed to the priest or nun, it is directed to other charitable organizations. He emphasized that TDS must be applied to these salaries. The bench clarified that the government’s funding for aided schools involves a budget allocation, for example, Rs 5,000 crore, with specific grants for individual schools.
Further clarifying the process, the Chief Justice described how funds intended for teachers could be redirected to the diocese, asserting that once the salary reaches the school, it becomes designated for teacher compensation. Datar countered by stating, “I can bring the account and show you… it never comes to the account of the school.” He argued that due to a CBDT circular, priests do not pay into a provident fund and that the funds typically go directly to the diocese.
The bench was informed that the diocese operates as a charitable trust under Section 11 of the Income Tax Act. Datar emphasized that they must allocate 75 percent of all collected funds for charitable purposes, with priests receiving nothing. He added that, historically, priests have not been taxed for the last 85 years.
The bench pointed out that if a Hindu priest chooses not to keep their salary but donates it for puja, the salary still requires tax deduction because employment status obligates tax compliance. They remarked, “The law is common for everybody. How can you say that it’s not subject to TDS?”
The appellants’ counsel cited previous judgments from the Madras and Kerala High Courts, noting that if a priest dies in an accident, compensation would go to the diocese, not their family. The Chief Justice explained that this occurs because, upon entering an ascetic order, individuals sever ties with their families. “When that person dies, that family will have no claim for compensation because that person at the point of renouncing the family has cut off all bonds with the family,” he stated.
A single judge from the Madras High Court had ruled in favor of the priests and nuns, asserting their salaries should not be subject to income tax as they do not accrue to them personally. This ruling was challenged by the Income Tax Department, which led to a reversal by a division bench in 2019, culminating in the appeal to the Supreme Court.