A. Ratnakar Rao v. Addl. Commissioner Of Income Tax., Karnataka .

Rama Jois, J.:— The Income-tax Appellate Tribunal, Bangalore Bench hag referred the following three questions for the opinion of this court.

“(1) Whether the Tribunal was justified in law in holding that the Commissioner was competent to consider before initiation of proceedings under Set ion 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 coining to the conclusion that where the Income-tax Officer has exempted a particular sum from tax and the Commissioner acts under Section 263 to withdraw such exemption it is for the assessee to lead evidence to show that the sura 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 “the Additional Commissioner of Income-tax that the amount of $. 7,725/- equivalent to Rs. 57,938/- received by the assessee from the Asst. Director of Jewish Hospital, Brooklyn, U.S.A, was not exempt from taxation as scholarship under Section 10(6) of the Income-tax Act, 1961?”.

2. The relevant facts which are Set out in the statement of the case are as follows:—

The assessment year is 1971–1972. The assessee filed the return of income for the period ending 31-3-1971. 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 1-7-1970 to 31-3-1971 by way of scholar-ship. Before the Income-tax Office he pleaded that the said amount was not taxable in view of Section 10(16) of the Income-tax. The Income-tax Officer 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 Income-tax Officer. Therefore, the Commissioner initiated action under Section 263 of the Act on 10-1-1975. He proposed to bring the income to tax on the 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 Income-tax Department had received a reply dated 4-3-1974 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 $. 1,664.46 and a payment of $. 123.78”

The assessee contended before the Commissioner that the entire amount received from Jewish Hospital by him was scholarship given to him for undergoing training in paediatrics. The Commissioner 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 income-tax officer to modify the assessment treating the said amount as income.

3. Against the order of the Commissioner the petitioner preferred an appeal to the Tribunal. The Tribunal even after having noticed that under the American Law, 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 fully exempted only to the extent of $. 300/- per month 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 assessre.

4. 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 as Annexure A, which reads.

“The Jewish Hospital and Medical Centre of Brooklyn has a large physician graduate training programmer. A trainee stipend of $. 10,300/- was paid to each physician during the academic year July 1, 1970 through June 30, 1971. The primary purpose of the programmer is to further the education and training of the recipient in this individual capacity and 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 tile benefit of, an individual trainee to aid him in the pursuit of study and research in paediatrics.”

(Underlined by us)

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 paediatrics. 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 paediatrics and also for the purpose of securing training in that field and it was not for the services rendered as such and services if any rendered-by the assessee was only incidental in the course of practical training. Attention of the Tribunal was invited to the position in law in the United States according to which 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 S. 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 ending 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 fellows ship?.

… … … …

Amounts received as scholarships find fellowship 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 from Jewish hospital conclusively establishes that the amount received was in the nature of scholarship. Once it is established that the amount received was in the nature of scholarship though the exemption given under United States' Law was limited to $. 300/- per month on the ground the course of education was not one leading to degree, there being no such restriction under Section 10(10) of the Income-tax Act, 1961, 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 Section 10(16) of the Income-tax 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.

6. Accordingly, our answer to question No. 3 is in the negative, that is, the Tribunal was in error in upholding the order of the Additional Commissioner of Income-tax that the amount of $. 7,724/- was not liable for exemption under Section 10(16) of the Income-tax Act.

7. In view of our answer to question No. 3, question No. 1 and 2 have become academic and need not be answered.