Jigar M. Patel
International Tax Attorney
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 come to be interpreted liberally in several judicial pronouncements and it would also include within its scope and ambit, amounts of fellowships, stipends, grants for travel and incidental expenses, etc. awarded for acquiring education.
Scholarship Exempt even if not wholly spent!
An interesting question that would 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).
Trainee’s Stipend whether Exempt from Tax?
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.
Similarly, the Income-tax Appellate Tribunal, Jaipur Bench has in the case of ‘Sudhirkumar Sharma vs. ITO’ 17 TTJ 226, 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.
Taxability of Scholarship granted by Company to Employee’s Children
In a case where a company has instituted a scholarship scheme for the benefit of the children’s education of its employees, what would be the impact of taxability of such scholarship in the hands of the employee or his children? This interesting issue came to be considered by the Bombay High Court in the case of CIT vs. M.N. Nadkarni [1986] 161 ITR 544 (Bom.).
The Court approved the finding of the Tribunal the scholarship did not amount to a perquisite under Section 17(2) in view of the fact that the scholarship was paid entirely gratuitously by the company and in its sole discretion. The Court further held that the scholarships in question having been granted to meet the cost of education, they were exempt under Section 10(16), even if these were treated as having been paid to the employee as a perquisite.
