What does ending tax exemptions for Christian clergy mean for Hindu Undivided Family benefits?

A decision by the Supreme Court last month endorsed a 2019 Madras High Court judgement striking down income tax exemptions granted to Catholic clergy. The court emphasised the secular nature of tax laws and clarified that tax provisions operate independently of religious vows, theocratic laws or obligations to religious orders. This ruling could have implications for the Hindu Undivided Family, the only other group that receives preferential tax treatment based on religion.

Among the advantages that benefit the Hindu Undivided Family, a legal entity under Hindu personal law, are separate tax filings, exemptions and deductions that allow Hindu, Jain. Sikh and Buddhist families to reduce their collective tax liabilities.

The judgment could intensify scrutiny of these provisions, especially as debates on a Uniform Civil Code gather momentum.

Equal before the law

The case before the Madras High Court in 2019 involved income tax exemptions for Catholic priests and nuns by the income tax department through circulars issued between 1944 and 1977. In April 2016, the Central Board of Direct Taxes withdrew the income tax exemption, stating that its earlier circulars granting the exemption were based on an incorrect interpretation of the 1944 circular.

This withdrawal was challenged before the High Court by a Chennai-based Christian religious institution – the Society of Mary Immaculate – that runs several educational institutions in Tamil Nadu.

The Society of Mary Immaculate sought to represent the interests of Christian religious personnel working as teachers in its educational institutions.

The Madras High Court eventually held that salaries paid to nuns and missionaries working as teachers in government-aided schools are subject to tax deduction at source under Section 192 of the Income Tax Act. Even though many Christian clergy take vows of poverty and surrender of their income to the Church, these were deemed irrelevant in determining tax liability.

The court emphasised that Section 192 operates on the principle of uniform applicability. Salaries are taxable at the time of payment. The payer, which in the case of the schools run by the Society of Mary Immaculate is the state government, is mandated to deduct tax.

The subsequent use of the salary by an individual, whether surrendered to religious orders or credited to institutional accounts, does not alter its taxable nature.

The court rejected the argument that the teachers’ salaries were not taxable because they were meant for their religious institutions and not for personal use. It noted that the salary arises directly from an employment contract between the state and the teachers, with no legal role for the religious institutions. The payment to teachers, even if subsequently deposited in common institutional accounts, is a taxable salary in the hands of the individual recipients.

The court also rejected reliance on outdated circulars from the Central Board of Direct Taxes that previously suggested exemptions for Christian religious personnel. It ruled that such administrative orders could not override statutory provisions or grant blanket exemptions without explicit legislative authority.

The judgement highlighted the secular and neutral character of Indian tax laws, stating that they are “a-religious” and must be applied uniformly to all individuals, regardless of caste, creed or religious affiliation.

This judgement was appealed against at the Supreme Court. The apex court dismissed those appeals on November 7.

Providing context for the courts’ decision-making, Senior Advocate Mohan Katarki told Scroll, “There is no fundamental right to tax exemption…Such exemptions are entirely up to the Parliament.”

However, he questioned the Supreme Court’s dismissal. “The aggrieved missionary institutions questioned the levy of income tax on the grounds that the expansion of the scope of the provisions of Income Tax Act by the tax authorities violates their fundamental right to religion under Articles 25 and 26 of the Constitution," he said. “Instead of dismissing at the very outset, the Supreme Court should have considered the matter since it apparently raises a substantial question of law touching fundamental rights.”

Katarki described this as a “fit case for review”.

While the immediate impact of this judgment is minor, affecting a small number of people, its implications might be major. The principle that all Indians are equal before the law on matters of taxation could challenge preferential tax benefits offered to Hindus under the rubric of the Hindu Undivided Family.

Benefits for HUF

The Hindu Undivided Family has long been a controversial entity in Indian tax law. It allows Hindu families to divide income between the family unit and its members, reducing their overall tax burden.

For example, a Hindu Undivided Family can claim the same basic income tax exemption as an individual taxpayer. This allows income from ancestral property or businesses to be taxed separately, reducing the overall tax burden on family members.

Under Section 10(2) of the Income Tax Act, income received by individual members from the Hindu Undivided Family is tax-exempt. This effectively lowers the taxable income for the family as a collective unit.

Tax consultants often advise Hindu married persons to avail of the instrument of Hindu Undivided Family to save tax.

These benefits have been criticised for creating loopholes for tax avoidance while favouring wealthier families with substantial ancestral assets.

Historical context

The preferential treatment of the Hindu Undivided Family in taxation dates back to colonial India. The Income Tax Act, 1922, recognised it as a separate taxpayer, a status retained in the post-Independence Income tax Act, 1961.

“Traditionally, Hindu joint families carried out business jointly too,” tax and investment expert Balwant Jain told Scroll. “This custom has been followed for almost a century, which is why it was recognised by the pre-Independence Income Tax Act as well.”

Over the years, several expert committees have questioned the tax advantages granted to Hindu Undivided Families. The Direct Taxes Enquiry Committee report in 1971 and a Law Commission of India report in 2018 highlighted the revenue losses caused by these benefits.

However, political and social sensitivities around Hindu personal law have prevented substantial reforms. Last year, the Union Finance Ministy had informed the Parliament that it had made no assessment of a proposed uniform civil code on the tax benefits to Hindu Undivided Families.

Kerala abolished the joint family system in 1975 through legislation, effectively ending the legal existence of the Hindu Undivided Family in the state. The Supreme Court later ruled that this abolition extended to taxation, preventing families from claiming benefits under the Hindu Undivided Family framework.

Implications for Hindu Undivided Family

The Hindu Undivided Family is a unique example of a customary law finding recognition in the tax law. Usually, customary laws are features only of personal law, which relates to such matters as marriage, divorce, adoption and inheritance.

No such tax exemptions exist for other religious groups, experts said.

The Madras High Court’s focus on equality and non-discrimination should, in theory, prompt a reassessment of Hindu Undivided Family tax provisions. If the principles from the judgment, endorsed by the Supreme Court, are extended, preferential treatment of Hindu Undivided Families may no longer hold under constitutional scrutiny.

“Obviously, the tax benefits extended to the Hindu Undivided Family go against an equitable tax system since all religions are not treated equally,” said Jain.

As India moves closer to implementing a uniform civil code, a key poll promise of the Bharatiya Janata Party-led Union government, the tax treatment of Hindu Undivided Families is likely to come under closer examination.

“If the uniform civil code is implemented, it will have to deal with the question of the Hindu Undivided Family,” said Jain. He said that the government may draw from what has been done in Kerala.

Supreme Court advocate and legal scholar Saif Mahmood, who has experience working on family law and property law matters, agreed. “If the uniform civil code is brought in, either everyone should be entitled to form an undivided family for tax benefits or no one should get that benefit,” he said.