In Sudhir Kumar verma Vs ITO, the assesse claimed that stripend was exempt u/s 10(16) on various grounds like- learning, no contribution expected, to meet cost of books, coaching fee, examination fees etc...The decision was finally given in assessee's favor.There are many other case laws which have very lucidly explained the present issue and provision u/s 10(16) of the I T Act. Some of these are
1. If scholarship is paid only for meeting the cost of education, the fact that the recipient does not spend the whole amount towards education or that he is able to save something out of it would not detract from the character of the payment being one for scholarship. CIT v. V.K. Balachandran  147 ITR 4 (Mad.).
2. The proper view to take on section 10(16) of the Act would be that scholarship, even though income in the hands of the scholar-recipient, would not be ncluded in the taxable total income, if it was a scholarship granted to meet the cost of education - Dr. V. Mahadev v. CIT  51 Taxman 411/184 ITR 533 (Mad.).
3. Assessee received a scholarship from a US hospital to aid his study and research and not for the services rendered, Karnataka High Court held that the scholarship would be exempt under section 10(16), even though it was partly taxable under the American law - Addl. CIT  128 ITR 527 (Kar.).
4. Where the company of which the assessee was an employee granted scholarships to the children of its employees solely at its discretion without any reference to the terms of employment of the employees, and the assessee’s children had also received certain sum as scholarships from the company, even if the amounts were taken as having been paid to the assessee, they were amounts of scholarship and hence not liable to be included in the computation of the total income of the assessee within the meaning of section 10(16) - CIT v. M.N. Nadkarni  161 ITR 544 (Bom.).
There are also ITAT's order on the same subject , favourable to assessee. For example ,Income-Tax Officer.vs Dr. V. Ramalinghaswami. (6 ITD 491) [Delhi] Tribunal held that scholarship is not taxable as per section 10(16) of the I T Act.
5. In Dr JCN Joshipura Vs ACIT [56 ITD 424]1995 , Tribunal held as follows
Dealing with the basic postulates of a scholarships in clause (16), the Hon'ble High Court in V. K. Balachandran's case has held that it is an ' income receipt '. Nevertheless, it is excluded from the total income by being brought under section 10. The view of the income-tax statute of a scholarship, therefore, 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 Income-tax Act, is positive payment made to a scholar for pursuit of his education. The scholarship is made free, it would not naturally come within the ambit of section 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, 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 of 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)."
From the aforesaidcase laws, we can see that the courts and Tribunals have gone beyond the meaning of scholarship given in dictionary and stated that the word scholarship given under I T Act has to be seen from the angle of purpose for which payments have been made. If the basic purpose of payment to meet the cost of enhancing the knowledge of a person, such payments can come within the meaning of scholarship which incidentally not defined under the I T Act.
Therefore, I feel that earning of internship/stripend/scholarship is totally free from tax if there are no other facts which lead to show that internship/stripend/scholarship was not a session for gaining experience or furtherance of education.