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Case Number
Judges
  • A.K Yog
  • Prakash Krishna, JJ.
Acts
  • section 256 (1) of the Income Tax Act, 1961 (hereinafter referred to as the Act).
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Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • A.K Yog
  • Prakash Krishna, JJ.
Acts
  • section 256 (1) of the Income Tax Act, 1961 (hereinafter referred to as the Act).
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Smart Summary

Concise Analytical Summary of the Opinion

Factual and Procedural Background

Two Income Tax references were heard together and disposed of by a common judgment because the questions of law and facts overlapped. Both references arise under section 256(1) of the Income Tax Act, 1961 and concern the assessment year 1988–89.

Income Tax Reference No. 25 of 1997 posed the question whether scholarship given to students of employees of the company should be included in the assessee's income. Income Tax Reference No. 104 of 1995 asked whether the ITAT was legally correct in confirming the lower appellate authority's order that allowed the scholarship to the assessee's son as exempt.

The facts (identical for both references) are: both assessees were employees of Modi Rubber Limited, Modipuram. The Assessing Officer (AO) found undisclosed amounts—Rs. 18,000 in the case of Shri B.L. Garg and Rs. 12,000 in the case of Shri Y.K. Seth—paid by the company to the assessee's son as scholarship. The AO rejected the claim of exemption under section 10(16) and treated the payments as a perquisite, adding them to the assessee's income. The Income Tax Appellate Tribunal (the Tribunal) held that the payments were scholarships to the children and thus exempt under section 10(16).

Appearances recorded in the opinion: Shri S. Chopra and Shri A.N. Mahajan appeared as standing counsel for the department; Shri Suyash Agrawal appeared for an assessee in one reference; in the other reference no counsel appeared for the assessee though a letter from the assessee raised a contention based on CBDT Circular No. 319/11 of 1987 regarding tax effect less than Rs. 30,000.

Legal Issues Presented

  1. Whether scholarship given to the students (children) of employees of the company ought to be included in the assessee's income?
  2. Whether the ITAT was legally correct in confirming the lower appellate authority's order that allowed the scholarship to the assessee's son as exempt (i.e., whether such scholarship is exempt under section 10(16) or is a taxable perquisite under section 17)?

Arguments of the Parties

Department's Arguments

  • The department relied on section 17(2)(iii)(c) of the Act, contending the scholarship paid by the employer to the assessee's son was in substance a perquisite and therefore taxable under the head "salaries".
  • It was argued that by paying the scholarship the company effectively reimbursed expenses that would otherwise have been incurred by the assessee, making the assessee the ultimate beneficiary.
  • The department contended that no formal scholarship scheme had been placed on record and that the payments were a device adopted by the company to reduce tax liabilities; the Court should interpret the Act to curb such tax-avoidance devices.
  • Reliance was placed (generically) upon certain judicial decisions (discussed in the opinion) in support of the department's position.

Assessee's Arguments

  • The assessee maintained that the amounts were paid as scholarships to the assessee's son and were paid gratis.
  • Even if, for the sake of argument, the scholarship were treated as a perquisite, the assessee relied on section 10(16) of the Act to argue that such scholarship is exempt (scholarship granted to meet the cost of education).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner of Income Tax, Tamil Nadu - IV v. V.K. Balachandran (1984) 147 ITR 4 (Madras High Court) Establishes that items listed in section 10 are receipts of an income-character but are nonetheless excluded from computation of taxable income; the heading and words of section 10 exclude specified receipts from total income. The Court agreed with this view and relied on it to support the proposition that even if the payment were a perquisite, it could still be excluded from total income under section 10(16).
Commissioner of Income-Tax v. M.N. Nadkarni (1986) 161 ITR 544 (Bombay High Court) Holds that when scholarship is paid gratuitously by the company in its sole discretion and is received by the children (not by the employee), such scholarship cannot be treated as a perquisite under section 17(2)(iii)(c). The Court treated this decision as a "complete answer" to the department's submissions and relied on it to reject the contention that the scholarship should be taxed as a perquisite in the hands of the employee.
Dr. V. Mahadev v. CIT (1990) 184 ITR 533 (Madras High Court) In that factual matrix the High Court held that amounts were wages/salary (overtime etc.) and not scholarship; the case turned on the Tribunal's finding that the payment represented wages. The Court in the present opinion distinguished Dr. V. Mahadev on facts because, unlike that case, there was no dispute here that the payment received by the assessee's son was in the nature of a scholarship and not wages.
Commissioner of Income Tax v. Raghu Sinha (2003) 262 ITR 378 Deals with reimbursement of medical expenses incurred on treatment of an employee. The opinion notes the case was cited by the assessee's side, but the Court found it not relevant to the question under section 10(16) in the present references.
Karmchari Union v. Union of India (2000) 243 ITR 143 (All LJ) Concerns taxation of various allowances (DA, CCA, HRA, leave encashment etc.) and related issues arising from an earlier judgment. The Court observed that this case (and related All India Defence Accounts Association v. Union of India) did not address section 10(16) and found no relevancy to the questions referred by the Tribunal.
All India Defence Accounts Association v. Union of India (1989) 175 ITR 494 Related to taxation of allowances and formed part of the jurisprudence referred to in Karmchari Union; concerned whether certain allowances are taxable. The Court noted that there was "not even a whisper" in these decisions about section 10(16) and therefore they were not pertinent to deciding the references before it.

Court's Reasoning and Analysis

The Court proceeded in stages, adhering closely to the materials placed before it:

  1. The Court began by examining the ordinary meaning of the word "scholarship" using three dictionary definitions (Webster's Third New International Dictionary, Funk & Wagnalls Standard Dictionary, and Encarta World English Dictionary). These definitions emphasize that a scholarship is a sum of money or maintenance/stipend offered to enable a student to pursue studies and to meet living/study expenses.
  2. The Court reviewed section 10 of the Income Tax Act (headed "Incomes not included in total income") and noted that clause 16 expressly excludes "scholarship granted to meet the cost of education" from total income. The Court emphasized that the heading and opening words of section 10 indicate that certain receipts of an income-character are nonetheless excluded from taxable total income.
  3. Applying the legal principle from V.K. Balachandran, the Court accepted that items enumerated under section 10 are receipts of an income-character but statutorily excluded; accordingly, even if a payment were characterized as a perquisite, it could still fall within the exclusion of section 10(16) if it is a scholarship meeting the cost of education.
  4. The Court addressed the department's contention that the scholarship was a perquisite under section 17(2)(iii)(c). It observed that the Tribunal had not referred, for the Court's opinion, a question whether the payment was a perquisite; thus reframing the issue was improper. More importantly, the Court relied on the Bombay High Court decision in M.N. Nadkarni which held that when scholarship is gratuitously paid by the company in its discretion and received by the children (not by the employee), it cannot be treated as a perquisite in the hands of the employee. The Court found this decision directly responsive to the department's submissions.
  5. The Court considered the other authorities cited by the department and noted factual distinctions (for example, Dr. V. Mahadev involved payments to the assessee that the Tribunal had found to be wages). For the cases relied upon by the assessee (e.g., Raghu Sinha, Karmchari Union and All India Defence Accounts Association), the Court found them inapposite because none addressed section 10(16).
  6. On the record before it, including the Tribunal's finding that the sums were scholarships paid to the children, the Court concluded that the Tribunal's view was in conformity with section 10(16) and that the department's contention to tax the amounts as perquisites was unsustainable in law.

Holding and Implications

Holding: The Court answered the questions referred by the Tribunal in the affirmative in favour of the assessee and against the department — i.e., the scholarship payments made by the company to the assessees' children are not includible in the assessee's taxable income and are exempt under section 10(16) of the Income Tax Act. The Court found the Tribunal's orders justified in law and in conformity with section 10(16). The opinion records "No order as to costs."

Implications:

  • Direct effect on the parties: The Tribunal's conclusion that the scholarship amounts paid to the children are exempt under section 10(16) is upheld; those amounts were not brought to tax in the hands of the employees.
  • The Court relied on existing precedent (notably M.N. Nadkarni and V.K. Balachandran) to resolve the matter on the basis of law and facts before it; the opinion did not purport to lay down any new general principle beyond applying section 10(16) and the cited authorities to the facts at hand.

Order accordingly.

Show full summary ...

    Commissioner Of Income Tax, Meerut v. Shri B.L Garg

    1. These two references were heard together and are being disposed of by a common judgment as the question of law and facts are overlapping with each other. The Income Tax Appellate Tribunal has made these references under section 256 (1) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The following question of law has been referred in Income Tax Reference No. 25 of 1997 for the assessment year 1988—89:—

    “Whether scholarship given to the students of employee's of the Co. be included in the assessee's income?”

    2. Whereas in the Income Tax Reference No. 104 of 1995, Income Tax Appellate Tribunal, Meerut has referred the following question for the assessment year 1988—89:—

    “Whether on the facts and in the circumstances of the case the 1TAT was legally correct in confirming the order of the lower Appellate Authority by allowing scholarship to the assessee's son as exempt?”

    3. The facts of both the above references are identical and the Tribunal while deciding the appeal in the case of Shri Y.K Seth, giving rise to the reference No. 104 of 1995, has followed its earlier order passed in the case of Shri B.L Garg giving rise to the reference no. 25 of 1997. Both the assessees were employees of Modi Rubber Limited, Modipuram in the relevant assessment years. While computing the taxable income, the assessing officer found that the assessee has not disclosed a sum of Rs. 18,000/- in the case of Shri B.L Garg and a sum of Rs. 12,000/- in the case of Shri Y.K Seth. These amount were paid by the Company to the assessee's son as scholarship. The Assessing Officer after rejecting the assessee's plea that the said amount is exempt under section 10(16) of the Act added them in the income of the assessee on the ground that the said sum is liable to be added in the income of the assessee being perquisite. The Tribunal in both the cases found that the payment was made by the employer to the children of the assessees as scholarship and as such the said amount is liable to be ex empt under section 10(16) of the Act.

    4. Shri S. Chopra, the learned standing counsel for the department who appeared in I.T.R No. 104 of 1995 made leading argu ment which was adopted by Shri A.N Mahajan, the learned standing counsel for the department in the connected Income Tax Ref erence. Shri Suyash Agrawal appeared on behalf of the assessee in I.T.R No. 25 of 1997. None appeared on behalf of the assessee in ITR No. 104 of 1995. But, the assessee through his letter submitted that reference should be rejected as tax effect is less than Rs. 30,000/- in view of the CBDT Circular No. 319/11 of 1987.

    5. The learned counsel for the department submitted with the help of Section 17(2)(iii)(c) of the Act that the amount given by company to the assessee's son as scholarship is a perquisite and liable to be taxed under the head salary under section 17 of the Act. It was submitted that by giving scholarship to the son of the assessee the company in a way reimbursed the amount of expenses which would have been incurred by the assessee. The assessee has, thus, been ultimate beneficiary and has been benefited by the employer company. It was further submitted that the scholarship was given to the assessee's son without there being any such scheme and at least no such scheme has been placed on the record. The grant of scholarship to the assessee's son was in the nature of device adopted by the company to reduce the tax liability and it was argued that we should interpret the Act in such a manner so as to curb the tax avoidance device, adopted by the assessee and his company. Reliance has been placed upon certain decisions which we will consider at the appropriate place.

    6. In contra, the learned counsel for the assessee submitted that there is no dispute that the amount was paid as scholarship to the assessee's son by the company. The payment was made gratis. Section 10 of the Act grants exemption to certain incomes. Elaborating the argument it was submitted that even assuming for the sake of argument that the amount of scholarship was perquisite, it is liable to be exempt under section 10(16) of the Act.

    7. We have given careful consideration to the respective submissions of the learned counsel for the parties. The meaning of word ‘scholarship’ as per Webester'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.

    8. It has been defined as maintenance or stipend for student awarded by an educational institution in Funk & Wagnalls Standard Dic tionary International Edition, which is repro duced as under:—

    “Scholarship - Maintenance or a stipend for a student awarded by an educational institution.”

    9. The Encarta World English Dictionary gives the following meaning to 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.

    10. Section 10 sets down various items of income which are outside the purview of to tal taxable total income. Section 10 of the Act is in Chapter III of the Act, the heading whereof is ‘incomes which do not form part of total income’. The heading of Section 10 is quite clear and does not admit any ambigu ity. The heading of section 10 itself is sug gestive of fact that certain receipts which are income are not included in total income. The relevant portion of section 10 reads as follows:—

    Incomes not included in total income-In computing the total income of previous year of any person, any income falling with in any of the following classes shall not be included—

    16. Scholarship granted to meet the cost of education.

    A bare perusal of section 10 would show that while computing the total income of previous year of any person certain incomes including scholarship granted to meet the cost of education shall not be included in the total income of previous year of any person.

    11. In Commissioner of Income Tax, Tamil Nadu - IV v. V.K Balachandran, (1984) 147 ITR 4 : (1984 Tax LR 1028) the Madras High Court has held that the opening words of Section 10 show very clearly that the items listed thereunder are undoubtedly receipts of an income - character but they are nonetheless to be excluded from the computation of the taxable income. We are in quite agreement of the aforesaid view of the Madras High Court and find sufficient force in the argument of the assessee that even if, for the sake of argument the payment of scholarship to assessee's son is treated as perquisite, is not liable to be included in view of section 10 of the Act. The various receipts or items of the income enumerated in section 10 presupposes that they are ‘income’. Otherwise there would have been no occasion for legislature to make a provision to exclude them from the total income of a person.

    12. The learned standing counsel for the department have canvass before this Court that the payment of scholarship was nothing but a perquisite to the assessee and as such it is liable to be included in the hands of assessee under section 17 of the Act. The said argument is misconceived and liable to be rejected for the reasons more than one. No question whether the payment of scholarship to an employee's son by a company is a perquisite or not, has not been referred by the Tribunal for the opinion of this Court, rightly pointed out by the learned counsel for the assessee. To this, the learned counsel for the department has submitted that the scholarship amount is liable to be included in the hands of the assessee under section 17(2)(iii) (c) of the Act. He submitted that the scholarship was paid without there being any scheme and as a device adopted by the company to avoid the payment of tax. We find from the order of the Tribunal in the case of B.L Garg that it has placed reliance upon a copy of its order in ITA No. 185 (Del) of 1992 for the assessment year 1988—89 in the case of assessees itself wherein a detailed order was passed. A copy of that order has not been made part of the paper book nor the learned counsel could inform as to whether any reference was filed or not by the department against the aforesaid order. The amount of scholarship was received by the assessee's son and not by the assessee has not been in dispute. In Commissioner Of Income-Tax v. M.N Nadkarni, (1986) 161 ITR 544:(1986 Tax LR 355) the Bombay High Court has held that when the scholarship was paid entirely gratuitously by the company and in its sole discretion and payment of scholarship amount was never received by the employee but the children concerned, the scholarship amount cannot be treated as a perquisite received by the assessee as contemplated under section 17(2)(iii)(c) of the Act. It has also rejected the contention of the Revenue to reframe the question and consider section 17(2)(iv) of the Act as there was no reference on that point by the Tribunal. This decision is the complete answer to the submissions made on behalf of the department.

    13. Now we will consider the cases relied upon by the learned standing counsel. Reliance has been placed upon a decision of Madras High Court in the case of Dr. V. Mahadev v. CIT, (1990) 184 ITR 533 : (1990 Tax LR 906). In this case the Tribunal found that the payment was received by the assessee as wages. Part of the amount represented overtime charges and taxes were deducted by the authority concerned. The assessee joined the medical school in the University of Masse-chussets. To fulfill the requirements of ‘American Board of Internal Medicine’, the assessee had done internship at a hospital and received certain amount which was claimed by him as scholarship amount. The Tribunal recorded a finding that the amount represented wages etc. In this fact situation, the High Court held that the payments, thus, received by the assessee was towards the pay or salary and was not scholarship. In this case the case of CIT v. V.K Balachandran, (1984 Tax LR 1028) (supra) was distinguished on the ground that the assessee in that case received the amounts for doing advance research in the field of mathematics and to defray the expenses of his travel, study etc. Therefore, the case of Dr. V. Mahadev (supra) is distinguishable on the facts. In the case in hands there is no dispute with regard to the nature of the amount received by the assessee's son, as the department at no stage contended that the amount received by the assessee's son was not in the nature of scholarship.

    14. The other cases relied upon by the learned counsel for the assessee; Commissioner of Income Tax v. Raghu Sinha, (2003) 262 ITR 378, which deals with the reimbursement of medical expenses incurred on treatment of employee; Karmchari Union v. Union of India, (2000) 243 ITR 143 : (2000 All LJ 711) which deals with the question as to whether various allowances namely dear-ness allowance, city compensatory allowance, house rent allowance, leave encashment etc. are taxable as income, which arose from a judgment of our court in the case of All India Defence Accounts Association v. Union of India, (1989) 175 ITR 494:(1989 Tax LR 139) being besides the points needs no detailed consideration. The learned standing counsel could not point out any relevancy of these cases with regard to the questions referred by the Tribunal for consideration. We have carefully examined these cases and we find that there is not even a whisper in any of these cases with respect to the provision of section 10 (16) of the Act, which is presently involved. In view of our discussion as above, we find that the order of the Tribunal is perfectly justified in law and the view taken by the Tribunal is in conformity with section 10 (16) of the Act. We answer the question referred in both the references in affirmative i.e in favour of the assessee and against the department. No order as to cost.

    15. Order accordingly.

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    Comments

    Commissioner Of Income Tax, Meerut v. Shri B.L Garg
    (Dec 16, 2005)