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Taxability of Stipend or Scholarship Income

taxability-of-stipend-or-scholarship-income

Section 10(16) of the Income-tax Act, 1961 (“Act”) provides that any scholarship granted to a person to meet the cost of education is exempt from tax. Thus scholarships or stipends received for pursuing higher education is always exempt from tax. In this article, we will be discussing various aspects of scholarship or stipend the receipt of which will be exempt from tax and the circumstances when the stipend will be taxable under the Act. 


    Meaning of ‘Scholarship’


    The term ‘scholarship’ is not defined in the Act. According to Webster's International Dictionary, ‘scholarship’ means a sum of money or its equivalent offered (as by an educational institution, a public agency or a private organization or foundation) to enable a student to pursue his studies at a school, college or university.


    Funk & Wagnalls Standard Dictionary International Edition, defines ‘Scholarship’ as maintenance or a stipend for a student awarded by an educational institution.


    The Encarta World English Dictionary gives the following meaning to the word ‘scholarship’:-


    Scholarship- Financial help for a student,


    1. a sum of money awarded to a student on the basis of academic merit, to help with living expenses, study or travel,


    2. formal study, academic learning or achievement,


    3. academic works, a body of learning or an academic subject.


    The term ‘scholarship’ has been interpreted liberally to also include within its scope and ambit, amounts of fellowships, stipends, grants for travel and incidental expenses, etc. awarded for acquiring education.


    A stipend received to meet the cost of education may be treated as a scholarship being exempt under Section 10(16) of the Income-Tax Act, 1961. A scholarship would necessarily mean some payment to meet the cost of education to the person pursuing the education and incurring costs on it.


    The view of the income-tax statute of a scholarship differs from the popular, or dictionary, view of a "scholarship". 


    Whereas under the popular view, scholarship is education made available gratis, the sense in which the same expression is used in the Act is positive payment made to a scholar for pursuit of his education. If scholarship is made free, it would not naturally come within the ambit of s. 10(16). In the sense of payment made for studies, scholarship necessarily means some payment to meet the cost of education, the payment being made to the person pursuing the education and incurring the cost thereof.


    There are, therefore, two considerations which, together, make up the concept of a "scholarship for meeting the cost of education" within the meaning of s. 10(16). 


    Read Also: What Income Tax Benefits are Available for Education


    One is that the scholarship is a payment intended to be an income receipt in the hands of the scholar. The other one is that whatever is paid is intended to meet the cost of education of the recipient. Since the purpose is to meet the cost of education, the question whether the quantum of payment is adequate or inadequate, or is or is not in excess of requirements are all beside the point. A scholarship may only meet the partial cost of education. Still it would be a scholarship within the meaning of s. 10(16). Again, a scholarship might, in a given case, prove to be more than enough for meeting the cost of education, and the scholar may make a saving out of it, or even spend the surplus otherwise. It is not the appropriation of the scholarship that matters. If the whole object of the payment is to meet the cost of education of a person, then that is enough. No further inquiry is called for in order to exclude the amount from the taxable total income under s. 10(16).


    A scholarship under section 10(16) cannot be equated with merit scholarship. It would only mean a payment to a party for the continuation of study or for the advancement of learning.


    Scholarship includes Stipend


    Words 'stipend' and 'scholarship' have not been defined in the Act. According to Webster Dictionary word 'stipend' means Settled pay or compensation for services, whether paid daily, monthly, or annually,


    The Income Tax Act nowhere mentions 'stipend', it says 'scholarship granted to meet the cost of education' is exempt from tax under Section 10(16).


    ‘Stipend' and 'Scholarship' have two different connotations and can not be used as synonyms. Stipend is a compensation paid for service rendered for the benefit of other, whereas scholarship is paid for the maintenance of a scholar or student


    However, it has been held in various judicial decisions that stipend, if given to meet the cost of education while pursuing an educational course, comes under the purview of section 10(16) and is exempt from tax.


    Hence, for the purpose of section 10(16), if the stipend is granted to meet the cost of education then it comes within the meaning of scholarship. Hence, it is not the nomenclature but the purpose which is decisive to determine the exemption u/s 10(16).


    It is a judicial view that stipends given to trainees, especially student trainees, are effectively to meet their cost of education like cost of books, coaching fees, examination fees, etc and hence are no different from scholarships exempt under section 10 (16).


    Analysis of the provisions of Section 10(16)


    Clause 16 to section 10 of the Act in simply worded provision provides for an exemption to the scholarship income. It simply states “scholarships granted to meet the cost of education” is not to be included in the total income of the person. Thus, the essential ingredients to claim exemption u/s 10(16) are-

    (i) grant or receipt of a scholarship

    (ii) and such scholarship is granted or received to meet the cost of education


    On receipt of the scholarship, it partakes the character of income. Such income of scholarship will be exempt from tax only if it is received to meet the cost of education.


    It is immaterial from which source the scholarship is granted. It may be received from the university or institute from which the education or course is pursued or may be received from the employer or any other person. The only condition for exemption is that the scholarship must be received for pursuing the education.


    It is also immaterial whether the course of education is leading to a degree or not. Even if an educational course is not leading to a degree but it qualifies to be an education course then grant of any scholarship or stipend under such an course is eligible for exemption under this clause.


    Meaning of ‘cost of education’


    Scholarships may be granted for purposes other than to meet the cost of education also. However, the exemption u/s 10(16) is limited to that part of the scholarships which meets the condition and is not available for other grants though they are provided under the nomenclature of scholarships. 


    Even if the scholarship is more than enough for meeting the cost of education and a scholar may make a saving out of it, it is immaterial. The main purpose of granting the scholarship is ‘education’. Courts have held that it is enough if the whole object of granting the scholarship is to meet the cost of education of a person and no further inquiry should be made as regards the actual education costs incurred for the purpose of determining tax exemption. The quantum of the scholarship is not the determinative factor for allowing exemption under clause (16). If the purpose is the pursuit of higher education, then it will be exempt irrespective of the value of the scholarship. It is also not required that the recipient should prove that the amount of scholarship is utilised for the purpose for which it was given. It is also not necessary to spend the entire amount of scholarship receipt. Section 10(16) does not speak of spending.


    The expression ‘cost of education’ is very wide and is not restricted to the tuition fees only. It includes all other incidental expenses, viz., travelling grant, hostel grant, cost of living/accomodation grant, etc. which are incurred for the purpose of acquiring education. Hence, the term ‘cost of education’ takes within its ambit not only tuition fee but all other incidental expenses incurred for acquiring education. The requirement of Section 10(16) is that the scholarship must be granted to meet the cost of education. Cost of education comprise within its ambit, not only tuition fee, which the student is required to pay to the Institution. It includes all other incidental expenses which are incurred for acquiring the education.


    The term “cost of education” takes within its ambit not only tuition fee but all other incidental expenses incurred for acquiring education – [Dr. J. C.N Joshipura v. ACIT (1996) 56 ITD 424 (Mum. Trib.)]


    The word 'education' may be used to describe any form of training, any manner by which physical or mental aptitude, which a man may desire to have for the purpose of his work, may be acquired.


    The meaning of the word 'education' has given in Black's Law Dictionary as under:


    Comprehends not merely the instruction received at school or college, but the whole course of training, moral, intellectual and physical. Education may be particularly directed to either the mental, moral or physical power and faculties, but in its broadest and best sense it relates to them all.


    The word 'education' includes within its ken, knowledge, understanding and reflection. One cannot get an education just by paying tuition fee. One acquires knowledge by going to the school. But knowledge gathered at the school is not the complete education. The scope of education is vast. If one is required to travel to a place for the sake of education, the expenditure on travelling will also come within the ambit of the expression 'cost of education'. Therefore, travel grants given for the purpose of education shall form an integral part of the cost of education.


    Residential status and eligibility to claim exemption u/s 10(16)


    The statute does not distinguish between classes of persons eligible for availing the exemption. The tax exemption is available irrespective of the nationality or residential status of the recipient or grantor of the scholarship.


    In the case of CIT vs. V.K. Balachandran (1984) 147 ITR 4 (Mad) their Lordships of Madras High Court observed that there cannot be one rule for foreign students receiving scholarships in India and the tax treatment of such scholarships under the Income Tax Act, and quit a different rule or a contrary application of the same rule, so far as the Indian scholars in foreign parts are concerned. The nature of the scholar or a foreigner, whether he be white, brown, or black, whether he receives the scholarship from an Indian institution or from a Western institution. The essence of scholarship is that it should pay for the educational enterprises of a man's pursuit after knowledge. If scholarships are given for such a purpose, it cannot matter whether the recipient is of Indian origin or is of a foreign origin.


    Indian students going abroad and earning scholarships or stipend


    Earning scholarships or stipends from foreign institutions or universities etc., assumes great significance because in many cases the amount of such scholarships or stipend ranges in lakhs which exceeds the basic exemption limit.


    When Indian Students remain resident: In case an Indian student goes abroad and before leaving the country he/she stays in India for 182 days or more then he will be considered as resident in India and in this case, his global income will be taxable in India. Therefore, any scholarship or stipend received abroad from any foreign university or institution or any stipend received from any foreign company, etc. will be subject to tax in India as well.


    In this context one should note that the taxability of stipend or scholarship shall be charged to tax in the country of residence. However, the same may attract tax in the foreign  country too. In such a case, the student is eligible to claim tax credit in India against the tax liability on Indian Income tax.


    However, if the scholarship or stipend is received in the foreign country in the course of pursuing education or to meet the cost of education the same will be exempt in India u/s 10(16).


    When Indian Students become non-resident: In this case, the stipend or scholarship received in a foreign country from a foreign university/institution/company etc. will not be liable to tax in India. Since in case of non-resident only income from Indian sources is taxed in India.


    Foreign students coming to India and earning scholarships or stipend


    If foreign student comes on a study tour in India and earns scholarships or stipend in India will be taxed in India. It is immaterial whether he is receiving the stipend from indian educational institutions etc. or foreign institutions.


    Since scholarship or stipend to meet the cost of education is exempt in India u/s 10(16), the same exemption shall be available to non-residents also.


    Provisions of DTAA explained:  The taxability of scholarship or stipend is further dependent on the provisions of Double Taxation Avoidance Agreement (DTAA0 entered between India and the foreign country. For example, in case of DTAA with the USA, it is specifically provided that students who earn scholarships or stipends in the USA shall be exempt from tax in the USA. This is as per Article 21 titled "Payments Received by Students and Apprentices" of the Indo-US tax treaty.


    Case laws on Exemption from Taxability of Stipend


    The big question whether stipend or scholarship income is taxable under various circumstances is studied from the decisions of various courts in this context.


    The decisions of various courts are presented based on the nature of stipend income so granted to the assessee.


    Is CA Articleship Training Stipend Taxable


    For obtaining the degree of Chartered Accountancy Course, one needs to go through practical training from practicing CA firms for certain duration. In lieu of such training, the Institute of Chartered Accountants of India (ICAI) prescribes payment of stipend. Such practical training is required to be completed even if the student clears the CA examination during the training period. Thus the practical training is an integral part of the CA Course.


    In this context, the decision of ITAT Jaipur in the case of Sudhir Kumar Sharma vs. ITO (1983 15 Taxman 100 Jaipur Mag): 17 TTJ 226 is worthy to mention. In this case, it was held that stipend received by an articled clerk from a chartered accountant is exempt under Section 10(16). The reason given by the Tribunal was that the stipend is paid to meet the cost of books, coaching fees, examination fees, and so on and hence stipend is not taxable is taken in the light of section 10(16).


    Is Stipend to Doctors Taxable


    One may refer to the ITAT decision in the case of ITO vs. Dr. G.N. Ramachandran (1 ITD 902 Bangalore) : ITA No. 763 & 521/Bang./1981 wherein it was held that stipend received to meet the cost of education would be exempt under Section 10(16).


    In this case the assessee received stipends from National Institute of Health (NIH), Bethesda, Maryland, USA. These incomes were shown as salary in the return of income. In appeals, it was held that the amount received by the assessee was not in the nature of salary but in the nature of scholarship. The appellate authority held that such income received by the assessee from the USA is exempt under Section 10(16).


    On appeal before the Tribunal, the Bench held that the primary purpose of payment of stipend was to further the education and training of the fellow rather than to benefit the grantor. It was certified by NIH that stipend payments do not represent compensation for past, present or future employment services nor do they represent remuneration for services subject to the direction or supervision of the grantor. Thus, the amount received by the assessee is not in the nature of salary but in the nature of scholarship. It clearly falls under Section 10(16) and is exempt.


    Stipend is not held as Salary and thus exempt u/s 10(16)


    Also covers receipt of scholarship where the course of education is not leading to a degree


    The Karnataka High Court in the case of A. Ratnakar Rao vs. ACIT (1981) 128 ITR 527 (Kar.) has held that the amount paid to the taxpayer was for the benefit of securing training and pursuing study and research in medicine and the entire amount received from the hospital was in the nature of scholarship and not for services rendered and services, if any, rendered by the taxpayer were only incidental to the course of practical training.


    In this case, the assessee received some amount from Jewish Hospital, Brooklyn, U.S.A which he declared as exempt income under section 10(16) of the Act.


    The department, however, proposed to bring the income to tax on the ground that the amount received by the assessee was not in the nature of scholarship but it was salary for the services that he had rendered.


    It was further stated that the assessee had not produced any evidence to show that the scholarship was wholly exempted or partly exempted under the United States' law and that the employer's certificate indicated that there was relationship of employee between the hospital and the assessee and, therefore, the amount received by the assessee was salary and, therefore, liable to tax under the Act. 


    On appeal, the Tribunal noticed that under the American law, the amounts received for pursuing a course of education leading to a degree was fully exempt from taxation but amounts received for pursuing education, which did not lead to a degree, was exemption only to the extent of $ 300 per month and that such a deduction had been allowed in favour of the assessee in the United States. Despite this, the Tribunal held that the amount received by the assessee was in the nature of salary income and not scholarship and dismissed the appeal of the assessee.


    The Certificate of the Hospital states that the primary purpose of the programme was to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose do not represent compensation for services to patients nor does it serve the interest of the grantor. In other words, services were of only incidental benefit to the hospital.


    From the above certificate, the High Court observed that it is evident that the amount paid to the assessee by the hospital was for the benefit of securing training and to pursue study and research in pediatrics. Therefore, there cannot be any doubt that the entire amount paid by the hospital and received by the assessee was in the nature of scholarship to pursue study and research in pediatrics and also for the purpose of securing training in that filed and it was not for the services rendered as such and the services, if any, rendered by the assessee was only incidental to the course of practical training.  Further, the deduction at the rate of $ 300 per month also supports that the amount received by him from the Jewish hospital was in the nature of scholarship.


    Once it is established that the amount received was in the nature of a scholarship though the exemption given under the United States' law was limited to $ 300 per month on the ground that the course of education was not one leading to a degree, there being no such restriction under section 10(16) of Act, the whole of the amount received by the assessee stands exempted.


    Amount received by a medical PG Student is stipend or salary


    Also covers savings from scholarship amount


    The ITAT, Chandigarh SME Bench, in the case of Rahul Tugnait (Dr.) vs. ITO (2010) 124 ITD 480 : [2009] 315 ITR 139 (Chd) : ITA No. 197/CHD/2008 had occasion to consider whether stipend received by a student pursuing his post graduation at a medical college be termed as salary so as to deny exemption under section 10(16).


    In this case, the assessee was a student of post-graduation in Rajindra Medical College and received stipend/scholarship which he claimed as exempt u/s 10(16). The department was, on the other hand, reluctant to consider the same as stipend but assessed the amount so received by the assessee as salary.


    The Tribunal after analysis of the terms and conditions, mutually agreed upon in the bond executed between the assessee and the college, found that the bond itself talks about scholarship holders. The assessee was selected for a Government scholarship of Rs. 8,700 for pursuing/studying post graduation course in Government Medical College. In the terms and conditions, words used are qualifying examination and withholding the payment of the scholarship for pursuing further studies. All these conditions and terminology used therein clearly suggest, firstly, the impugned amount is a scholarship/stipend for further studies and not a salary. Even the sureties in their respective affidavits have clearly sworn that the assessee was selected for pursuing post-graduation course in surgery for the period from 2003 to 2006. 


    The assessee also moved application under s. 6(1) of RTI Act, on Form A [r. 3(1)], wherein, in reply, the Principal of Government Medical College, Patiala vide its letter dt. 31st Jan., 2008 has clearly termed the impugned amount as ‘stipend’ to the post-graduate student. 


    All the aforesaid documents clearly point that the assessee got the scholarship/ stipend as provided exempted under s. 10(16) of the Act, for pursuing higher studies, therefore, it cannot be termed as a ‘salary’ as provided under s. 15 r/w s. 17(1) of the Act. 


    If the wording used in s. 10(16) of the Act is analyzed, it clearly speaks about scholarship granted to meet the cost of education, therefore, it can be said that even if it is an income in the hands of scholar recipient, it would not be included in the taxable total income because it is a scholarship to meet the cost of education. 


    Presumably, there is a situation that the recipient does not spend the whole amount of scholarship towards education and is able to save something out of it, would not detract the same from the character of payment for scholarship.


    Finally, the Tribunal held that scholarship/ stipend received by a student from College for pursuing higher studies cannot be termed as salary and therefore, same would be exempt under section 10(16).


    Grant-in-aid is not Salary but scholarship u/s 10(16)


    Also covers the what if the entire scholarship is not spent, in other words, the quantum of scholarship and savings from scholarship amount


    Similarly, in V.K. Balachandran’s case (supra) the Madras High Court has held that scholarship   granted  to  the  assessee  for  doing  research  work  in  foreign university is not salary but constitutes scholarship within the meaning of section 10(16) and thus exempt from tax.


    In this case, the issue before the Madras High Court was whether the grant-in-aid given to the assessee was scholarship exempt under section 10(16) of the Act.


    The facts of the case is that the assessee is a Professor of Mathematics in the Ramanujam Institute of the Madras University. In the FY 1970-71, he received a grant-in-aid of $10,000 and other fringe payments from the Princeton Institute of Advanced Study as consideration for his doing research work at the Institute in New Jersey. 


    He claimed that the grant-in-aid received by him from the Princeton Institute was to be excluded from his taxable income under s. 10(16) of the Act. 


    The ITO turned down the assessee's claim on the score that the grant-in-aid was nothing but salary paid by a foreign institute to the assessee as a professor of mathematics. 


    On appeal, the AAC held that there was no employer-employee relationship between the institute and the assessee and the grant was not a salary, but a scholarship paid to the assessee for doing research work as a student of mathematics. 


    In the departmental appeal against this order, the Tribunal held that the grant received by the assessee was undoubtedly of an income-character, but nevertheless it must be considered to be a scholarship and on that account, was to be excluded from the total income under s. 10(16) of the Act.


    The High Court analyzed a few circulars where the Board has issued instruction to the subordinate officers as to how they have got to deal with the scholarship, remuneration, maintenance grants, and other receipts which are received by foreign scholars in Indian institutions of higher learning like the Council of Industrial and Scientific Research. 


    The Court observed that the Board has proceeded on a liberal understanding of the provisions of s. 10(16) and have accordingly given instructions to the departmental officials at the assessment level to grant exemption from tax to scholarships apparently without making much fuss about the precise nature of the receipts so long as the receipts of the scholars can be broadly brought under the heading "Scholarship" and so long as the terms of the scholarship do not contain any purpose extraneous to education.


    Finally, the Court has taken a view that grant-in-aid received for doing advance research work in a foreign university is exempt from tax, if the whole object is to meet the cost of education, irrespective of the appropriation of scholarship. It is further held that where the purpose of payment of scholarship is to meet the cost of education, the question whether the quantum of payment is adequate or inadequate, or, is or is not in excess of the requirement is beside the point.


    The Court also held that the fact that the recipient does not spend the whole of the amount or saves something out of it or utilizes for other purposes would not detract from the character of the payment being one for scholarship and accordingly exempt from tax.


    A similar decision was rendered by the Ahmedabad Bench of ITAT in the case of  ACIT vs. Girish Saran Agarwal (ITA 293/Ahd/2003) by following the case of V.K. Balachandran’s (supra). In this case, the assessee received amount being Humboldt Research Award from Alexander Von Humboldt Foundation, Germany. The amount received by the assessee was not fully utilized to meet the cost of education but also for his financial investment i.e. purchase of shares, RBI Relief Bond, purchase of NSC and mutual fund, etc.. The assessee claimed the receipt of the amount as exempt u/s 10(16) treating the same as scholarship for pursuing education.


    However, as per the Assessing Officer, the amount received by the taxpayer was not a scholarship but an award which did not fall within the ambit of section 10(16). The Assessing Officer further observed that the amount so received by the taxpayer have been partly utilized for the purchase of shares, RBI Relief Bond, NSC and Mutual Fund, the same could not be said to have been given as scholarship and disallowed the taxpayer’s claim. 


    The ITAT rejected the contention of the AO and allowed the assessee’s claim for exemption u/s 10(16), holding that the facts and circumstances of this case are similar to the Madras High Court case of V.K. Balachandran (supra) and accordingly the ratio of the same could be applied in the instant case as well.


    Scholarship includes Stipend under section 10(16)


    Also Covers no TDS from Scholarship or Stipend Income exempt u/s 10(16)


    In the case of Junior Doctors Association vs. CIT (W.P. No. 1309/2007), the Madhya Pradesh High Court observed that there is no relationship of employer and employee between the State Government and a student doing PG Course. A PG student may be required to examine or attend to a patient but that part of course and stipend is not being paid for any kind of service rendered by a PG Student. Thus, it is obvious that a stipend paid to a PG student is to meet the cost of education and thus would be in the nature of a 'scholarship' and thus exclude the amount from the taxable total income under section 10(16) of the Act.


    The Court while deciding the Writ petition, further ordered that no TDS would be attracted in respect of stipend/scholarship paid to PG Students. The Court further directed that if any sum is/ was deducted as TDS from the Stipend, it shall be refunded forthwith to such PG Student.


    Is scholarship paid to employee or employee’s son is exempt u/s 10(16)


    Taxability of Scholarship received by son from Employer: Hon’ble Allahabad High Court in the case of CIT vs. B.L.Garg [2007] 289 ITR 218 (All) held that the amount of scholarship was received by the assessee’s son and not by the assessee, the amounts were exempted u/s 10(16) and not taxable in the hands of the assessee u/s 17(2)(iii)(c) of the Act.


    In this case, the assessee is an employee of a company. The company had paid certain amounts to the assessee's son as scholarship which the assessee did not include in his total income and claimed as exempt u/s 10(16).


    The Assessing Officer after rejecting the assessee's plea that the said amount is exempt under Section 10(16) of the Act added them in the income of the assessee on the ground that the said sum is liable to be added in the income of the assessee as perquisite.


    The Tribunal found that the payment was made by the employer to the children of the assessees as scholarship and as such the said amount is liable to be exempt under Section 10(16) of the Act. Against the order of the Tribunal, the department went into an appeal before the High Court.


    Before the High Court, the DR submitted that the amount is taxable as perquisite u/s 17(2)(iii)(c). It was submitted that by giving a scholarship to the son of the assessee the company in a way reimbursed the amount of expenses which would have been incurred by the assessee. The assessee has, thus, been the ultimate beneficiary and has been benefited by the employer company. However, the Court rejected the contention of the ld. Dr and affirmed the order of the Tribunal.


    Similarly, in the case of CIT vs. M.N.Nadkarni [1986] 161 ITR 544 (Bom) the Bombay High Court has held that when the scholarship was paid entirely gratuitously by the company and in its sole discretion and payment of scholarship amount was never received by the employee but the children concerned, the scholarship amount cannot be treated as a perquisite received by the assessee as contemplated under Section 17(2)(iii)(c) of the Act. Thus, the amount of scholarship received by the assessee's son as scholarship is exempt u/s 10(16).


    A similar decision is given in the case of ICICI Ltd. vs. Fourth ITO (1993) 47 TTJ (Bom.) 401 and held that the payment by way of scholarship to the employees or employee’s children would be exempt under section 10(16) of the Act. In this case, an employee under the terms of his service cannot demand as a matter of right any payment from the company for meeting the cost of the education of his or her children. Though the payment is made to the children uniformly there is no vested right if the employee to claim the payment. There were instances, though very few, where such a claim has been rejected by the company.


    Scholarship received from  foreign Institution 


    In the case of ITO vs. Dr. V. Ramalinghaswami (1983) 6 ITD 491 (ITAT Delhi) it was held that Scholarship received from a foreign institution to meet the cost of education is fully exempt under section 10(16). The certificate of the concerned foreign institute which gave the scholarship to the assessee, the certificate given by the concerned institute showed that the scholarship was meant to meet the cost of education, etc. It squarely fell within section 10(16) so fully exempt.


    A similar decision is given by the ITAT Chennai in the case of Dr.K.G. Murugavel vs. DCIT (ITA No. 177/CHNY/2014) to hold that stipend received from a foreign university is exempt u/s 10(16).


    Stipend is held as Salary and thus not exempt u/s 10(16)


    In Dr. G.N. Ramachandran’s case (supra) it was held that the amount received for giving lectures and royalty are not stipend and thus not exempt under section 10(16). In this case, the assessee received stipend as well as an amount for giving lectures and royalty from the National Institute of Health (NIH), Bethesda, Maryland, USA. The Tribunal held that receipt of such amount for giving lectures and royalty are not exempt under Section 10(16) as they are not scholarship granted. Hence, they are taxable. 


    Similarly, in the case of Dr. V. Mahadev vs. CIT (1990) 82 CTR (Mad) 236 : (1990) 184 ITR 533 (Mad) : Tax Case No. 1261 of 1979 decided on 20-03-1990 the Madras High Court affirmed the findings of the Tribunal that the payment was received by the assessee as wages and held that the payment received by the assessee was towards his pay or salary and was not scholarship. In this case the assessee joined a medical school at the University of Massachusetts. Internship in a hospital for the specified period was compulsory and the assessee was paid wages representing overtime charges and that Federal and State Taxes were deducted from it. It was in this context, the High Court on a reference held that the amount paid to the assessee was not scholarship within the meaning of Section 10(16) of the Act.


    It was further observed that every payment which is received by a person in the nomenclature of Stipend or Fellowship or even Scholarship may or may not truly be scholarship in the sense of meeting the cost of education.


    Stipend and scholarship vs Salary and Perquisite


    In certain cases, an employer may reimburse expenses incurred by his employee for undertaking an educational course in his own field of expertise. A question may arise on the taxability of reimbursement of such expenses in the hands of the employee. Will it be taxed as perquisite or it be exempt from tax u/s 10(16).


    The above issue is discussed on the following three provisions of the Income Tax Act-


    1. Section 17(2) which deals with ‘perquisites’

    2. Exemption under section 10(16)

    3.Section 10(14)(i) read with Rule 2BB of the Income Tax Rules, 1962


    Perquisites: Section 17(2) of the Act lists out perquisites which are taxable in the hands of the employees as salary income. The term ‘perquisite’ is not defined in the Income Tax Act. It merely states that perquisite will include certain items specified in clauses (i) to (viii) of section 17(2). The definition is an inclusive one.


    However, from the reading of section 17(2)(iii) or section 17(2)(iv), it appears that payment or reimbursement of the cost of education by an employer to his employee shall be taxed as ‘perquisites’.


    Section 17(2)(iii) provides for taxation of perquisites to include the value of any benefit or amenity granted or provided free of cost or at a concessional rate by any employer to an employee. Clause (iv) of Section 17(2) provides to include any sum paid by the employer in respect of any obligation which would have been payable by the employee as a perquisite.


    Hence, on reading the above provisions, it appears that meeting the cost of education of the employee is a free benefit or an obligation of the employee which the employer has undertaken.


    In the judicial decisions discussed above, [see M.N.Nadkarni's case (supra) and ICICI Ltd.'s case (supra)] it is already held that payment for cost of education does not come within the purview of perquisites either section 17(2)(iii) or section 17(2)(iv).


    Also, on analyzing section 10(14)(i) and the rules, Rule 2BB, framed thereunder makes it clear that such reimbursement is tax-free and exempt from tax and shall not be included as income in computing the total income of the employee.


    Section 10(14)(i) provides for exemption of any special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose.


    For this purpose, Rule 2BB is notified. As per Rule 2BB(e), allowances for the purpose of section 10(14)(i) includes any allowance granted for encouraging the academic, research and training pursuits in educational and research institutions.


    Thus any allowance granted to meet the cost of education is exempt under section 10(14)(i). The exemption provided in section 10(14)(i) read with Rule 2BB is more specific exemption for meeting the cost of education than taxing the same as perquisite which is general in nature.


    Further, in the judicial decisions discussed above the payment by the employer to the employee for meeting or reimbursing the cost of education is held to be a scholarship which qualifies for exemption u/s 10(16) provided such payment is independent of employment terms.


    Thus, the expenditure incurred by an employer on the training of an employee for gaining experience and additional qualifications in his field of expertise is exempt from tax u/s 10(16) and is not included as ‘perquisite’ under section 17(2) of the Act.


    TDS on Scholarship or Stipend


    The issue of deduction of tax or TDS from the payment of stipend is discussed forthwith.


    In case any payment is made towards scholarship and such scholarship is paid towards meeting the cost of education or pursuing any education then such scholarship is exempt under section 10(16) and therefore there is no liability to deduct tax or TDS from such scholarships payments. Even if the payment amount exceeds the threshold limit of the basic exemption limit of Rs. 2,50,000 it does not make any difference and such scholarship will remain exempt from income-tax and thus there is no requirement to deduct TDS on such scholarship payments. This holds good only when the income is exempt u/s 10(16). In case the scholarship is not granted to meet the cost of education then the same is not exempt from income tax u/s 10(16) and tax may be required to be deducted therefrom based on the facts and circumstances of the case.


    The same holds good for the stipend. As stated earlier, a stipend is paid for the rendering of services. However, these services shall not constitute an employer-employee relationship or any principal-agent relationship rather, must be rendered in the course of acquiring education or knowledge so as to qualify for a scholarship and consequent exemption u/s 10(16).


    There may be situations where interns are appointed and a stipend is paid to them. If the engagement of such trainees is under any educational course, then the same may be exempt u/s 10(16) and then there is no requirement of deduction of tax or TDS from such stipend payment. Otherwise, if the payment of stipend is made under the employer-employee relationship then such stipend income may be treated as Salary income and tax shall be deducted accordingly.


    In order to determine the taxability of the stipend, one needs to review the terms and conditions of the engagement of the interns pursuant to which stipend is paid. When such an engagement reveals an employer-employee relationship, then payment of such stipend is taxable as Salary even though the nomenclature of the payment may be a stipend. However, when the Stipend is paid to a person for the advancement of his or his children's education and no employer-employee relationship as such persists, then payment of such stipend qualifies as "Scholarship" which will be eligible for exemption u/s 10(16).


    Thus, one must review the terms under which the stipend is paid. When a stipend is paid to further a person’s education and if it qualifies as a scholarship, then such a stipend is in the nature of a scholarship it shall be exempt. 


    In some cases, the deduction of tax may be required under section 194C or under section 194J from the payment of stipend to interns or trainees based on the facts and circumstances of each case.


    Gist of CBDT Circulars on Stipend and Scholarships exempt u/s 10(16)


    The following are the instances of scholarships exempt under clause (16) as recognized by the department/CBDT.

     

    (1) Annual allowance granted to retiring research scientists by CSIR, New Delhi

     

    (2) Stipend of research fellowships for working under the National Commission for the compilation of History of Scientists in India under the auspices of the National Institute of Scientists of India

     

    (3) Fulbright grants described as ‘maintenance allowance’ given to Fulbright students.

     

    (4) Fulbright grant described as “maintenance allowance” given to American tutors prosecuting studies in India.

     

    (5) Junior/Senior fellowships awarded by the Department of Atomic Energy.

     

    (6) Financial assistance to teachers in the universities for undertaking research of learned work in science subjects and humanities.

     

    (7) Maintenance allowance granted to foreign trainees under the scheme of the International Association for the exchange of students for Technical Experience.

     

    (8) Research fellowship in engineering, technology, humanities and science subject

     

    (9) Junior and Senior research fellowships awarded by CSIR.

     

    (10) National research fellowship and fellowships to German nationals awarded by the Ministry of Education.

     

    (11) Where a professor of mathematics is granted a grant-in-aid by a foreign university for doing advanced research in the field of mathematics, the amount of grant-in aid would be scholarship exempt under Section 10(16).

     

    (12)  Discretionary scholarship granted by the employer to the children of employees cannot be treated as a perquisite in the hands of children of employees because no right is created in their favour. Even if such scholarship is regarded as a perquisite, it would be exempt under section 10(16) in the hands of the recipient.

     

    (13) Where the assesses receives a trainee stipend from a U. S. Hospital to aim him in his pursuit of study and research and not for Hospital to aid him in his pursuit of study and research and not for services rendered and the services, if any are only incidental to the course of practical training, such a stipend would be a scholarship and would be exempt under section 10(16).


    We are also reproducing herewith certain notifications/letters etc. issued by the CBDT in respect of scholarship and other allowances paid to scientists, retired scientists, teachers and other research fellows etc. which speaks about exemption and denial in respect to section 10(16) of the Act. 


    Allowance to retired scientists - Annual allowance payable to retired scientists under the scheme for 'utilization of the services of retired scientists in the field of agriculture, animal husbandry and allied sciences' is not a payment to meet the cost of education and will be taxable in the hands of the recipients - Letter : [F. No. 24/35/66-IT(A-I)] dated 4-10-1966.


    Allowance of Rs. 6,000 per annum to the retiring research scientists granted by the Council of Scientific & Industrial Research New Delhi should be treated as exempt from tax in the hands of the recipients under section 10(16) - Letter [F. No. 24/2/69-IT(A-I)], dated 14-1- 1968.


    Stipend paid by NCCHSI - Stipend of research fellowships working under the National Commission for the Compilation of History of sciences in India under the auspices of the National Institute of Sciences of India should be treated as exempt from tax in the hands of recipients under section 10(16) - Letter: F. No. 24/25/68-IT(A-I), dated 18-9-1966.


    Fulbright grant to American Tutors - Fulbright grant described as 'maintenance allowance' of Rs. 1,000 p.m. given to American Tutors may be treated as exempt from tax under section 10(16) - Letter : F. No. 24/22/67-IT(A-I), dated 7-7-1967


    Research Fellowships paid by Atomic Energy Department - Junior and Senior Research fellowships (of Rs. 300 - Rs. 500 p.m.) instituted by the Department of Atomic Energy for study and research in the field of Nuclear Physics, Cosmic Rays Agriculture, Biochemistry, Bio-physics, Botany, Zoology, Organic Chemistry, Electronics and Micrology are to be treated as exempt from tax in the hands of the recipients under section 10(16) - Letter F. No. 25/37/6-IT(A-I), dated 2-12-1966.


    Non-recurring grants to teachers - Non-recurring grant (maximum of Rs. 5,000) payable to teachers for purchase of special apparatus, special chemicals, stores, books, consumables etc. and for field-work in connection with research in science subject and humanities will be exempt from tax under section 10(16) - Letter : F. No. 24/7/64-IT(A-I), dated 24-3-1964.


    Maintenance allowance under exchange scheme of IAESTE - Maintenance allowance of Rs. 400 p.m. paid to foreign trainees, coming under the exchange scheme of IAESTE should be exempted from payment of income-tax under section 10(16) - Letter . F. No 24/4/64-IT(AI), dated 12-2-1994.


    Research fellowship of UGC - Research fellowships in engineering technology, humanities and science subject given by University Grants Commission will be exempt under section 10(16). Contingent grant of Rs. 1,000 for petty expenses will also be exempt - Letter: F. No 24/34/62-IT(A-I), dated 25-1-1983.


    Research fellow in CSIR - Junior and senior research fellowships (Rs. 300 - Rs. 500 p.m.) granted by the Council of Scientific and Industrial Research, New Delhi should be treated as exempt from tax in the hands of recipients - Circular No. 3 (XXIII - 23), dated 12-1-1961. Fellowships to German Nationals - National research fellowships in science and technology and fellowships to German nationals study- ing in India under German Industrial Cooperative Scheme should be treated as scholarships granted to meet the cost of education and exempted from tax - Circular No. 49(XXIII-12), dated 13-12-1956.


    Living allowance/stipend under Colombo Plan and Special Commonwealth African Assistance Plan - Living allowance/stipend (Rs. 200 - Rs. 600 p.m.) paid to foreign trainees coming to India under the technical cooperation scheme of the Colombo Plan and the Special CommonWealth African Assistance Plan would be exempt from tax under section 10(16) - Source, Income-tax Circular published by the Directorate of Inspection (Research, Statistics and Publication), 1968 edition p. 89.


    Fellowships granted by Scientific Research and Cultural Affairs Ministry - Out of the fellowships awarded under technical teachers training programme by the Ministry of Scientific Research and Cultural Affairs an amount of Rs. 250 per month (representing the cost of education) may be treated as exempt from Income-tax - Circular No. 11(XXIII-24) [F. No. 27/67/60-IT(A-I)], dated 4-4-1961.


    Conclusion


    Section 10 of the Act enumerates several items of income that are outside the scope and purview of taxable total income. The opening words of section 10 clearly indicate that the items mentioned thereunder undoubtedly bear the stamp of income character, but are, nevertheless, excluded from the computation of taxable income.


    Under section 10(16) of the Act, scholarship to meet the cost of education has been included in section 10 of the Act not because it does not bear income character, but precisely for the very reason that it bears such a character as, if it did not bear the character of income, there was no need whatever for a specific exclusion. The proper view to take on section 10(16) of the Act would be that a scholarship, even though income in the hands of the scholar-recipient, would not be included in the taxable total income, if it was a scholarship granted to meet the cost of education.


    There are, therefore, two considerations, which, altogether, make up the concept of a scholarship for meeting the cost of education within the meaning of Section 10(16). One is that the scholarship is a payment intended to be an income receipt in the hands of the scholar. The other one is that whatever is paid is intended to make the cost of education of the recipient. Since the purpose is to meet the cost of education. The question whether the quantum of the payment is adequate or inadequate or is or is not, in excess of requirements are beside the point. The scholarship may only meet the partial cost of education. Still it would be a scholarship within the meaning of Section 10(16) and exempt from tax. Once an income is unconditionally exempt from tax, there is no need to deduct any tax or TDS from such stipend or scholarship.


    If the amount of stipend is towards support and furtherance of education and not as an employee then the stipend would be exempt u/s 10(16).


    The summary of the taxability of stipend is outlined below-

     

    1. All Educational scholarships are exempt from tax or are tax free, whether sponsored  by the Government or not; whether received from Indian Institutions or foreign Institutions.

     

    2. The tax exemption on scholarship would continue even if the scholarship is received for pursuing an educational course not leading to a degree.

     

    3. The quantum of scholarship is irrelevant. Even if the scholar saves money from scholarship, its eligibility from tax-exemption does not get changed so far as the objective for granting the scholarship is for the purpose of education. 

     

    4. Research fellowships, grants received from universities are exempt since it supports further education.

     

    5. If the scholarship is paid to the employee's son by the employer for pursuing education, it is exempt from tax u/s 10(16) and not chargeable to tax as perquisite under the head salary.



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