09 April 2013
if an article is receiving the stipend from CA firm more than the amount specified in CA regulation e.g. more than Rs 30000/- p.m. Whether he is eligible for exemption u/s 10(16) of I.T. Act, 1961 and whether, the firm should deduct TDS u/s 194J? Article has experience of work in accounting for more than 3 years.
16 April 2013
I gone through the decision cited 15 Taxman 100, in which it is stated that the stipend is exempt u/s 10(16) and TDS is not deducted by the CA firm.
30 May 2013
Yes stipend is eligible for deduction u/s 10(16) but the size of the stipend should not be so big. Anyhow kindly refer to the decesion of Karnataka High Court in the case of A. Ratnakar Vs. Add. CIT - 128 ITR 527 and another case at 1 ITD 902
The case law is as below:- A. RATNAKAR RAO vs. ADDITIONAL COMMISSIONER OF INCOME TAX HIGH COURT OF KARNATAKA M.K. Srinivasa Iyengar & M. Rama Jois, JJ. IT Refd. Case No. 65 of 1977 Decided on 13th January, 1981 TC32R.642 SOURCE : (1981) 22 CTR (KAR) 83 : (1981) 128 ITR 527 (KAR) : (1981) 6 TAXMAN 144 Section 10(16), Asst. Year 1971-72 Decision in favour of Assessee Counsel appeared K.R. Prasad, for the Assessee : S.R. Rajasekhara Murthy & S. Rajendra Babu, for the Revenue RAMA JOIS, J.: The Tribunal, Bangalore Bench, has referred the following three questions for the opinion of this Court : "(1) Whether the Tribunal was justified in law in holding that the CIT was competent to consider before initiation of proceedings under s. 263, material which was brought on record subsequent to the passing of the order which is the subject- matter of revision ? (2) Whether the Tribunal was justified in law in coming to the conclusion that where the ITO has exempted a particular sum from tax and the CIT acts under s. 263 to withdraw such exemption it is for the assessee to lead evidence to show that the sum in question was exempt from tax ? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the order of the Addl. CIT that the amount of $ 7,725 equivalent to Rs. 57,938, received by the assessee from the Asstt. Director of Jewish Hospital, Brooklyn, U.S.A., was not exempt from taxation as scholarship under s. 10(6) of the IT Act, 1961 ?" 2. The relevant facts which are set out in the statement of the case are as follows : The asst. yr. 1971-72. The assessee filed the return of income for the period ending 31st March, 1971. He declared his total income at Rs. 61,117. He also indicated in returns that he had received $ 7,725 from the Jewish Hospital, Brooklyn, U.S.A. during the period from 1st July, 1970 to 31st March, 1971, by way of scholarship. Before the ITO he pleaded that the said amount was not taxable in view of s. 10(16) of the IT Act. The ITO accepted the plea of the assessee and exempted the said income from tax. Subsequently, there appears to have been some audit objection in respect of the exemption allowed by the ITO. Therefore, the CIT initiated action under s. 263 of the Act on 10th Jan., 1975. He proposed to bring the income to tax on th 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. Before the issue of notice, it appears that the IT Department had received a reply dt. 4th March, 1974, from the Department of Treasury, U.S., to their quarry. The information furnished reads as follows : "Our audit division determined that Mr. Rao received taxable earnings for services rendered at Jewish Hospital during 1971. Mr. Rao's assessed tax was $ 1,782.41 paid by withholding credits of $1,664.48 and a payment of $123.78." The assessee contended before the CIT that the entire amount received from the Jewish Hospital by him was scholarship given to him for undergoing training in pediatrics. The CIT rejected the objection of the assessee and held 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 employer and 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. He directed the ITO to modify the assessment treating the said amount as income. Against the order of the CIT the petitioner preferred an appeal to the Tribunal. The Tribunal even after having 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 exempted only to the extent of $ 300 per months and that such a deduction had been allowed in favour of the assessee in the United States, still proceeded to hold that the amount received by the assessee was in the nature of salary income and not scholarship and dismissed the appeal of the assessee. Thereafter, at the instance of the assessee, the three questions have been referred. We shall take up the third question for consideration first. In support of the plea that the amount received by the assessee from the Jewish Hospital was a scholarship amount, he had produced a letter given by the Jewish Hospital, which is marked an Annexure-A, which reads: "The Jewish Hospital and Medical Centre of Brooklyn has a large physician graduate training programme. A trainee stipend of $ 10,300 was paid to each physician during the academic year 1st July, 1970 to 30th June, 1971. The primary purpose of the programme is to further the education and training of the recipient in his individual capacity and the amount provided by the grantor for such purpose does not represent compensation for services to patients nor does it serve the interest of the grantor. In other words, services are of only incidental benefit to the hospital. The trainee stipend is defined as an amount paid or allowed, or for the benefit of, an individual trainee to aid him in the pursuit of study and research in pediatrics." From the above certificate 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 field 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. Attention of the Tribunal was invited to the position in law in the United States according to which the scholarship amount received was exempted in full if the study or course of education in respect of which it was granted was leading to a degree and in other cases the exemption would be limited to the extent of $ 300 per month. There was also evidence to the effect that the assessee had obtained deduction at the rate of $ 300 per month on the ground that though the amount received by him from the Jewish hospital was in nature of scholarship it was not for pursuing a course of education leading to a degree. 5. Learned counsel relied on the provision of law in the United States which is set out at page 375 of the World Tax Series (Taxation in the United States—Harvard Law School). "3. Prizes and awards; scholarships and fellowships : Specific Code provisions are applicable to prizes and awards and to scholarships and fellowships........ Amounts received as scholarship and fellowships grants are also excluded from gross income under specified conditions and in limited amounts. In general, if the individual receiving the scholarship or fellowship is a candidate for a degree, the entire amount received is excluded from income, except amounts received as compensation for teaching, research, or other part-time employment. If the individual is not a candidate for a degree, the exclusion is limited to $ 300 monthly." Therefore, the very fact that the assessee had secured deduction to the extent of $ 300 per month out of the amount received was in the nature of a 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 s. 10(16) of the IT Act, the whole of the amount received by the assessee stands exempted. In our view, the Tribunal after having noticed the position in law in the United States was in error in stating that it was immaterial that such deduction had been given to the assessee in the United States and that the amount received by the assessee was an income and was not scholarship and was not exempted under s. 10(16) of the IT Act, on the view that the amount was not meant to cover only expenses for education, but obviously represented the salary for the services rendered. There was no basis for this assumption, particularly in view of the second paragraph of the certificate issued by the Jewish hospital.
Accordingly, our answer to question No. 3 is in the negative, that is, the Tribunal was in error in upholding the order of the Addl. CIT that the amount of $ 7,725 was not liable for exemption under s. 10(16) of the IT Act. In view of our answer to question No. 3, question Nos. 1 and 2 have become academic and need not be answered.
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