No tax deductible at source from salary paid to priest/nun

Under section 192 of the Income-tax Act, every employer is required to deduct tax at source if the taxable portion of the salary.

Q: My son who has just graduated from America wants to go to India and get involved in a skill development project in the field of packaging and warehousing. It appears that this may turn out to be quite profitable from the early years of setting it up. Are there any tax incentives for the same?
- S.K. Biswas, Dubai

A: An eligible company is entitled to claim one and one-half times expenditure on any skill development project which is notified by the Central Board of Direct Taxes. However, the cost of any land or building will not be so eligible. Your son will, therefore, have to set up a company in India and make an application for the project to be notified under section 35-CCD. The application has to be made to the National Skill Development Agency.

The application will have to be accompanied by a detailed note on the skill development project, details of expenditure which is projected to be incurred, the expected date of project completion and a letter from the training institute agreeing to undertake the project. Under this section, the fields of packaging and warehousing, including cold storage facilities, container freight stations and container depots are covered.

Q: My father received compensation from the government when his agricultural land was acquired. Since substantial capital gains have been made, I want to know whether these gains are taxable and, if so, at what rate?
- G. Garg, Sharjah

A: If your father's land is not situated in a specified urban area, it is not treated as a capital asset. Therefore, if the land is outside the municipal or cantonment limits or is more than eight kilometres from the limits of a municipality which has a population of more than 1 million, the land will not be treated as a capital asset and capital gains would be exempt under section 10(37) of the Income-tax Act. However, it is necessary that such land should have been used for agricultural purposes during the period of two years immediately preceding the date of transfer by your father.

Land would be deemed to be used for agricultural purposes when some activities of tilling the soil, sowing seeds, etc., are undertaken. If no such activities were undertaken during the two years prior to the date of sale of the land, the benefit of exemption will not be available even if the land is classified as agricultural in the land records of the government.

Q: My brother is a priest who works for a school. The school pays him a salary as a teacher. The school has not been deducting tax at source from the salary paid to my brother as is required to hand over the entire amount of the salary to his diocese to which he is attached. The school is now being questioned by the tax department for not deducting tax at source. Is the school correct in not withholding the tax?
- F. Colaco, Abu Dhabi

A: Under section 192 of the Income-tax Act, every employer is required to deduct tax at source if the taxable portion of the salary, after claiming relevant deductions, exceeds Rs250,000. There is a circular of the Central Board of Direct Taxes which stipulates that no tax would be deductible at source from the salary payable to the priest or nun if the amount is required to be handed over to the diocese or congregation which is eligible for exemption under section 11 of the Act.

Recently, the Madras High Court held that the school need not deduct tax at source from the salary payable to the priest or nun if an affidavit is given to the tax department by such person that his or her entire salary has to be paid to the diocese or congregation which is eligible for income-tax exemption. The High Court held that in such cases, the salary will be deemed to be diverted at source and, therefore, it would not accrue to the priest or nun. Hence, the question of withholding tax will not arise where the diocese or congregation is itself exempt from tax.

The writer is a practicing lawyer, specializing in tax and exchange management laws of India. Views expressed are his own and do not necessarily reflect the newspaper's policies.

• India