STIPENDS ARE TAX EXEMPT! Posted by Rajratan Mendhe

Stipends, awards, fellowships & grants for education have been held as scholarships exempt from tax!

Under Section 10(16) of the Income-tax Act, any scholarship granted to a person to meet the cost of education is exempt from tax. 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.

STIPEND IS NOT SALARY

In the case of ‘A. Ratnakar Rao vs. Addl. CIT’ 128 ITR 527, the Karnataka High Court had occasion to consider whether the trainee’s stipend granted to a physician to further his education and training was exempt under Section 10(16). The Income-tax Department took the view that the amount received by the taxpayer was not in the nature of scholarship, but it was salary for the services rendered.

The High Court 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.

The Income-tax Appellate Tribunal, Chandigarh Bench, in the case of Dr. Rahul Tugnait vs. Income-tax Officer 124 ITD 480, has held that the stipend received, by a student pursuing his post graduation at a medical college, cannot be termed as salary and the same would qualify for exemption under Section 10(16).

Similarly, the Income-tax Appellate Tribunal, Jaipur Bench has in the case of ‘Sudhirkumar Sharma vs. ITO’ 17 TTJ 226, also held that the stipend received by an Article Clerk from a Chartered Accountant is exempt, since it is not paid for rendering services by the Article Clerk, but is paid to him to meet the cost of books, coaching fee, examination fee, etc.

SCHOLARSHIP IF NOT FULLY SPENT?

An interesting question that could arise for consideration is in regard to taxability of a scholarship, where the recipient has not spent the whole amount. The Madras High Court, in the case of ‘CIT vs. V.K. Balachandran’ 147 ITR 4, had occasion to consider this very issue. The High Court 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. It is enough if the whole object is to meet the cost of education of a person and no further enquiry is called for in order to exclude the amount from the taxable income under Section 10(16).

In this case, the taxpayer, a professor of mathematics was awarded grant-in-aid by a foreign university for doing advance research in the field of mathematics. The Court 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.

The Income-tax Appellate Tribunal, Ahmedabad, in the case of ‘ACIT vs. Girish Saran Agarwal, had occasion to consider the taxability of DM 30,000 received by a PRL Scientist as Humboldt Research Award from Alexander Von Humboldt Foundation, Germany. The taxpayer’s name was approved by the Council of Scientific and Industrial Research as a beneficiary of the said award. According to 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 having 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 Tribunal allowed the taxpayer’s claim for exemption u/s. 10(16), holding that the facts and circumstances of his case were similar to the Madras High Court case of V.K. Balachandran and accordingly the ratio of the same could be applied in the instant case as well.