The stipend or fellowship or scholarship are money or benefit one receives for certain specific reasons. That the income in the nomenclature “Stipend”,”Scholarship” or “Fellowship” is taxable is undisputed. However , section 10 of the I T Act expressly provides that certain income , even though taxable in character , shall be free of tax . Subsection 16 of section 10 provides as under
10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included
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(16) scholarships granted to meet the cost of education;
Therefore , if a person gets scholarship for the purpose of education , the same ,though taxable income , has to be granted exemption u/s 10(16) of the I T Act.
What is scholarship?
To quote from Allahbad High Court which gave favourable decision to assessee in a combined order in cases of
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Commissioner of Income-tax v. B.L. Garg [2007] 289 ITR 218 (All)
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Commissioner of Income-tax v. Y.K. Seth [2007] 289 ITR 218 (All)
The meaning of the word Scholarship as per Webster’s Third New International Dictionary, 1966 Edition is as follows :
“Scholarship: 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, which is reproduced as under :
“Scholarship 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.”
When Is Stipend /Fellowship or Scholarship tax free?
This is a question of fact. As is stated above , in case a person gets money or facility of money worth purely for enhancing his scholarship or education, section 10(16) makes such taxable receipt as “non taxable” . There are many decisions of the high Court and Tribunal which have given the favourable decision to assessee by looking into facts and finding that the receipt by respective assessee were in nature of scholarship. Some of the decisions are discussed with facts in background.
1. A. Ratnakar Rao vs Add CIT 128 ITR 527
The facts of the case was that he assessment year is 1971-72. The assessee filed the return of income for the period ending March 31, 1971. He declared his total income at Rs. 61,117. He, also indicated in the returns that he had received $ 7,725 from the Jewish Hospital, Brooklyn, U.S.A. during the period from July 1, 1970, to March 31, 1971, by way of scholarship. The A.O initially accepted , but later on audit objection, the amounts were considered as taxable.
The court’s decision
“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 July 1, 1970, to June 30, 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 guarantor for such purpose does not represent compensation for services to patients nor does it serve the interest of the guarantor. 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 the nature of scholarship it was not for pursuing a course of education leading to a degree.
2. CIT vs Balachandran 147 ITR 4
The facts of the case was that the assessee, a Professor of Mathematics in the Ramanujam Institute of the Madras University, was given a grant in aid of $10,000 and other fringe pay ments during the academic year 1970-71 by the Princeton Institute of Advanced Study as consideration for his doing research work at the Institute in New Jersey for a few months. The assessee was being assessed to income tax under our I.T. Act, 1961, in the status of a resident of India. 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 I.T. 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 went into the question whether the grant made by the Princeton Institute can be regarded as salary. He 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.
On appeal being filed by Department against Tribunal decision, the Madras High court dismissed departmental appeal by noting :
In s. 10(16), however, scholarship is not used in that sense of some thing in educational opportunity which is given free. The basic postulate of a scholarship in cl. (16) as earlier mentioned is that it is an income receipt. Nevertheless it is excluded from the total income by being brought under s. 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 ratis, the sense in which the same expression is used in the I.T. 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). 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).
3.Dr. J.C.N. Joshipura. vs Assistant Commissioner Of Income-Tax. 56 ITD 424 , (Mum)
The appellant is an Orthopaedic Surgeon mainly attached to Jaslok Hospital. During the relevant assessment year, the appellant received a grant of Rs. 15,000 from the said hospital. This grant said to have been paid to the senior and deserving doctors attached to Jaslok Hospital once in three years for attending conferences or for study tour for advancement of knowledge and experience. A certificate dated 16-10-1986 bearing Ref. No. DRC/TG/86-87, was issued by the Jaslok Hospital & Research Centre. The A.O considered the same as professional income.
The tribunal held
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 word ‘ education ‘ includes within its ken, knowledge, understanding and reflection. One cannot get 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 grant given for the purpose of education shall form integral part of the cost of education.
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we examine the purpose for which travel grant was given to the appellant. It was explained that it was given to provide an opportunity to get first hand experience and become practically acquainted at close quarters with the rapid scientific developments, taking place all over the world, in the medical field particularly in the line of orthopaedics.
18. Considering the profession of the appellant, his specialised knowledge in the field of orthopaedics and his educational qualifications, the appellant can very well be placed in the category of scholars. The travel grant was provided to the appellant so that he could sharpen his erudite in the field of orthopaedics. Therefore, in our opinion, the amount of Rs. 15,000 given to the assessee clearly comes within the ken of section 10(16) of the Income-tax Act, 1961. We, therefore, direct the Assessing Officer to grant exemption as contemplated in the said section.
19. In the result, the appeal of the assessee stands allowed
4. Income-Tax Officer. vs Dr. V. Ramalinghaswami. 6 ITD 491 [Delhi]
Facts of the case was that The assessee is an individual at present working as Director General, Indian Council of Medical Research. During the account year period relating to the assessment year before us, he received a scholarship of the value of 18,500 US dollars from the Department of Health, Education and Welfare, National Institute of Health, Maryland. In terms of Indian money the value came to Rs. 1,55,400. At the time of filing of the return he claimed 50 per cent of the money so received as exempt under section 80R of the Income-tax Act, 1961 (‘the Act’). The ITO, however, without giving any relief added the full amount of Rs. 1,55,400 as the assessee’s income.
2. The assessee went in appeal and contended that in view of the nature of scholarship and the purpose for which the same had been granted as per the certificate dated 17-12-1976 from the Institute in the USA, nothing was taxable in view of the judgments of their Lordships of the Karnataka High Court in S. Ranganatha Rao v. Accountant-General [1981] 129 ITR 130 and A. Ratnakar Rao v. Addl. CIT [1981] 128 ITR 527 (Kar.). He had also filed a copy of the tax return, filed and assessed in USA. The Commissioner (Appeals) allowed his appeal
Decision against assessee
However Every payment which is received by a person in the nomenclature of Stipend or Fellowship or even Scholarship may or may not be truly be scholarship in the sense of meeting the cost of education. For example , an employee can be given benefit in the nomenclature of “stipend’ which may actually be a wage or salary.That was the reason ,Madras High Court ,in case of Dr V Mahadev vs CIT 1990] 184 ITR 533 (MAD.) held on the basis of fact that the stipend received by Dr Mahadev was not exempt from tax. The facts and the decision of the High Court is described briefly for better understanding
The facts of the case
Dr Mahadev ,was employed as doctor in the State of Tamil Nadu. He resigned the job and joined University of Massachussets for securing a qualification in Internal Medicine .One of the requirements for obtaining certification in Internal Medicine, was that a candidate had to do internship in a hospital for a prescribed period. Accordingly, the assessee worked in and completed internship at the Worcester City Hospital from June, 1973, to June, 1974. During the accounting period ending March 31, 1974, relevant for the assessment year 1974-75, the assessee had admittedly received 7,086.82, and, in the course of the assessment proceedings, the assessee claimed that the amount received from the hospital was in the nature of a stipend paid to meet the expenses in connection with the post-graduate studies and hence exempt under section 10(16) of the Income-tax Act, 1961.The A.O , CIT(A)and the Tribunal disagreed with the contention of the assessee. The assessee approached High Court of Madras which concurred with A.O and Tribunal finding and dismissed appeal stating
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. Bearing this in mind, when we examine the precise nature of the payments received by the assessee, it is seen from annexure E styled as statement of earnings that the assessee has been shown to have been paid pay or salary. It has also been differently described as wages. The Federal and State taxes had been deducted from the payments so made. It may be that in order to fulfill one of the requirements of the Board of Internal Medicine to obtain certification in Internal Medicine, the assessee did internship in the hospital. But then the amounts received by the assessee cannot, by any means, be regarded as scholarship. Merely from the circumstances that the amounts have been paid to the assessee by the hospital authorities during the period the assessee was doing his internship, the payments do not cease to be either pay or salary and become metamorphosed into scholarship. The Tribunal had noticed not only the absence of evidence to show that the amounts paid to the assessee were not remuneration for services rendered, but something else, but also a concession by the assessee that part of the amounts paid by the hospital authorities represented overtime charges. It is difficult to accept that any overtime charges, pay or wages had been granted to meet the cost of education, so as to make it a scholarship within the meaning of section 10(16) of the Act.
Circulars of CBDT
CBDT vide different circulars had made the following fellowship and grants tax free u/s 10(16)
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Fellowship by Department by Atomic Energy
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Financial assistance to research workers in universities.
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Fellowship awarded under technical teachers training programmee
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Fellowship by UGC.
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Junior and senior research fellowship awarded by CSIR .
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Fellowship awarded under technical teachers training programme
All these The circulars can be read from here.
Following circulars gives express exemption to foreigners u/s 10(16)
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Stipend under Colombo Plan and SCAAP
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National research fellowships to German national awarded by Ministry of Education
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Fullbright Grants to American Students
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Maintenance Allowance to Foreign students under IAESTE scheme.
The aforesaid circulars can be read from here.
Interesting note taken by High Court
In CIT v. V.K. Balachandran [1984] 147 ITR 4 (Mad.), it was observed as under :
“Before closing the judgment, it is necessary to point out that the interpretation we have placed on section 10(16) is the way in which it has been understood and is being applied in several cases by the highest revenue authority under the Act, namely, the CBDT. Our attention has been drawn to a few circulars where the Board have issued instructions to the subordinate officers as to how they have got to deal with the scholarships, 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 Board, we may observe, has proceeded on a liberal understanding of the provisions of section 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. In the face of these circulars, we are at a loss to understand why the present reference is being pressed to a decision by the Department in the Madras charge. There cannot be one rule for foreign students receiving scholarships in India and the tax treatment of such scholarships under the Act, and quite 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 scholarship is the same whoever receives it, whether he be an Indian 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.
We hope that there would be even handed justice from the CBDT and all the subordinate officials of the Income-tax Department in the matter of applying the exemption for scholarships irrespective of to whom and by whom these scholarships are meted out
.Therefore , if you find that any scholarship/fellowship if granted to a foreigner has been made exempt, a claim by an Indian citizen can certainly be made
In nutshell
If you receive any money or facility which is given exclusively for education purpose , your claim for exemption u/s 10(16) will be correct. Even if the some of the amount is saved. However, the wages faking the scholarship will not be allowed exemption u/s 10(16)
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