ORDER
Per Joginder Singh, Judicial Member. - This appeal is preferred by the assessee challenging the order of the ld. CIT(A) dated 23-1-2008 on the following grounds:—
"(i) That the order of the ld. CIT(A), Patiala is bad in law and against facts of the case.
(ii) That the order of the ld. CIT(A), Patiala is not justified in holding the scholarship/stipend received by the appellant as Salary income. He failed to appreciate the fact that amount was received by the appellant for pursuing the higher studies which he claimed as exempt under section 10(16) of the Income-tax Act, 1961.
(iii) That the order of the ld. CIT(A), Patiala is erred in not applying the ratio of the judgments cited during the hearing of appeal.
(iv) The appellant craves leave to add, amend or delete any of the grounds of appeal before it is finally heard."
2. During arguments we have heard Shri Rakesh Cajla, ld. Counsel for the assessee and Shri M. S. Bhatia, ld. Sr. D.R. The contention on behalf of the assessee is that the assessee is a student of post graduation in Rajindra Medical College and received stipend/scholarship of Rs. 2,65,955 and claimed exemption from tax under section 10(16) of the Act. Our attention was also invited to pages 8 to 11 of the paper book filed by the assessee. On the other hand the ld. Sr. D.R. pleaded that it is a salary, therefore, the impugned order was supported. Reliance was placed in Dr. Dr. V. Mahadev v. Commissioner Of Income-Tax. [1990] 184 ITR 533 (Mad.) and further contended that the cases relied upon by the assessee are not applicable to the present appeal.
3. We have considered the rival submissions and perused the material available on the file. Brief facts are that the assessee completed his MBBS degree and joined Rajindra Government Medical College, Patiala as a junior resident for post graduation degree. The assessee received Rs. 2,65,955 from the college as a scholarship/stipend for the purpose of higher education. The assessee claimed the impugned amount as exempt under section 10(16) of the Act which was disallowed by the ld. Assessing Officer. On appeal the assessment order was upheld which is under challenge before the Tribunal. The moot question to be decided by us is whether the amount so received by the assessee is a scholarship or a salary income. Before coming to any conclusion, we are supposed to see the terms and conditions in the bond executed between the assessee and the college which are available at pages 9 to 12 of the paper book The relevant portion is produced herewith:—
"Bond to be executed by the scholarship holder (major) and his/her sureties—
(i) Know all men by these present that we (1) Rahul Tugnait S/o Sh. DR. Sushil Kumar Tugnait R/o H.No. 2056 Gali Kamboon, Amritsar (hereinafter referred to as "the Obliger") and Sh. DR. Siri Chand S/o Sh. Dr. Shambhu Nath R/o V&PO Naushdra Panuan Jebjarn Taran (1st surety) and Sh. DR. Vikram Dutt Rambani S/o Sh. DR. Madan Lal Rambani R/o VPO Chabba Distt. Amritsar (2nd surety) (hereinafter jointly and severally referred to as "the sureties") do hereby jointly and severely bind ourselves and each of us, in the whole, our respective heirs, executors, and administrators to pay to the Governor of Punjab (hereinafter referred to as "The Government") on demand the sum of Rs. 3,00,000 (Rupees Three lakhs only) together with interest thereon from the date of demand at Government rates for being in force of Government loans.
(ii) Whereas the above bounded principal, has been selected to a Government scholarship of Rs. 8,700 basic stipend + D.A. admissible at current rate for 1st year, 8975 basis stipend + D.A. admissible at current rate for 2nd year and 9250 + D.A. admissible at current rate for 3rd year per month for the study M.S. (surgery) of at the Government Medical College, Patiala on condition of his/her executing a bond supported by the sureties in the terms appearing which the scholarship holder has agreed to do.
(iii) Now the conditions of the above written bond are that in the event of the above bounden principal discontinuing. Bond are that training course, or participating in a strike or being made to leave the training course on account of indiscipline or misconduct on his/her part or failing or refusing to serve the Government for a minimum continuous period of five years if required to do so by the Government within a period of 6 months after qualifying for full registration on completion of the course or for other reasons, considered sufficient by the Secretary to Government Punjab, Health & Family Welfare Department hereinafter referred to as the competent authority) whose decision in this behalf shall be final to enforce the bond. Principal and the sureties.
(iv) Shall jointly and severely pay to the Government on demand without demur a sum of Rupees Three lakhs for the purpose of this clause the expression refusal to serve the Government would include the refusal on the part of the Principal to appear before the selection committee of the Government, for personal interview etc. If any to consider his suitability of employment under the Government in terms of the bond.
(v) It shall be further condition of the bond that although the Principal have secured employment under the Government through his own effort or otherwise without the knowledge notice of the Government within the period of six months after qualifying for full registration passing the examination, such appointment shall still be automatically deemed to have been made by the Government in terms of this bond.
(vi) And upon making such payment the above written bond shall be void and of no effect but otherwise it shall be and remain in full force and virtue.
(vii) It is further agreed that in the event of the Principal being unsuccessful in any of the qualifying examination conducted in the said institute/college/hospital, the Government may at their discretion withhold the payment of scholarship for the prosecution of further studies and the decision of the competent authority in this behalf shall be final and binding."
4. If the terms and conditions, mutually agreed upon in the bond executed between the assessee and the college, are analyzed the bond itself says scholarship holders (page 9 of the paper book). The assessee has been selected for a Government scholarship of Rs. 8,700 for pursuing/studying post graduation course in Government Medical College (page 10 of the paper book). Even at 11 of the paper book, wherein the aforesaid terms and conditions has been mentioned the word 'used' are qualifying examination and withholding the payment of the scholarship for pursuing further studies has been mentioned. All these conditions and terminology used therein clearly suggest, firstly, the impugned amount is a scholarship/stipend for further studies and not a salary. Even the sureties (pages 13 & 14 of the paper book) in their respective affidavit has clearly sworn that the assessee was selected for pursuing post graduation course in surgery for the period from 2003 to 2006. The assessee also moved application under section 6(1) of RTI Act, on form A [Rule 3(1)], wherein in reply the Principal of Government Medical College, Patiala vide its letter dated 31-1-2008 has clearly termed the impugned amount as 'stipend' to the post graduate student. All the aforesaid documents clearly point that the assessee got the scholarship/stipend as provided exempted under section 10(16) of the Act, for pursuing higher studies, therefore, it cannot be termed as a 'salary' as provided under section 15 read with section 17(1) of the Act. If the wording used in section 10(16) of the Act is analyzed, it clearly speaks about scholarship granted to meet the cost of education, therefore, it can be said that even if it is an income in the hands of scholar recipient, it would not be included in the taxable total income because it is a scholarship to meet the cost of education. Presumably, there is a situation that the recipient does not spend the whole amount of scholarship towards education and is able to save something out of it, would not detract the same from the character of payment for scholarship. Our above view is further fortified by the decision in the case of CIT v. V.K. Balachandran [1984] 147 ITR 4 (Mad.).
5. The Hon'ble Bombay High Court, in the case of Commissioner Of Income-Tax v. M.N Nadkarni [1986] 161 ITR 544 even went a step further wherein the company, where the assessee was employee, granted scholarship to the children of its employee solely at its discretion, without any reference to the terms of employment of its employees, and the assessee's children received certain sum as scholarship from the company, these were held to be not includible in the computation of the total income of the assessee within the meaning of section 10(16) of the Act. Identical ratio was laid down in the case of Commissioner Of Income Tax, Meerut v. Shri B.L Garg [2006] 155 Taxman 189 (All.) and A. Ratanakar Rao v. Addl. CIT [1981] 128 ITR 527 (Kar.). The ld. Sr. D.R. during arguments, relied upon the decision of the Hon'ble Madras High Court in the case of Dr. V. Mahadev ( supra) wherein the assessee joined Medical School in America. The assessee was paid some amount for services as intern, which was described as wages. The impugned amount paid was held to be not exempted under the Act. In that case the services of the assessee were required by the school as a intern but in the present appeal the scholarship/stipend was given to the assessee in the capacity of a student for pursuing higher studies, therefore, in our humble opinion this judicial pronouncement may not help the revenue as distinguishable on facts. In view of these facts it can be said that the assessee is having a strong case in its favour.
6. Even if this appeal is viewed with angle of section 15 of the Act, which speaks about chargeability of salary section 15 of the Act is reproduced herewith:—
"The following income shall be chargeable to income-tax under the head "Salaries"—
(a) any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer through not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.
Explanation 1.—For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.
Explanation 2.—Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "salary" for the purposes of this section."
7. For getting salary normally there must be employee-employer or master-servant/agent relationship. The distinction between a servant or as agent can be summarised as under:-
"(i) Generally a master can tell his servant what to do and how to do and how to do it.
(ii) Generally a principle cannot tell his agent how to carry out his instructions;
(iii) A servant is under more complete control than an agent;
(iv) Generally, a servant is a person who not only receives - instructions from his master but is subject to his master's right to control instructions but is generally free to carry out those instructions according to his own direction;
(v) Generally a servant qua servant has no authority to make contracts on behalf of his principal;
(vi) Generally an agent is paid commission upon effecting the result which he has been instructed by his principal to achieve;
(vii) Generally a servant is paid wages or salary."
8. For ascertaining whether a person is a servant or an agent, a rough and ready test is whether under the terms of his employment the employer exercises a supervisory control in respect of the work entrusted to the person. A servant acts under the direct control/supervisory control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time to time by his principal/controller/supervisor. But this test is not universal in its application and does not determine in every case, having regard to the nature of employment, that he is a servant. A person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. Generally it may be possible to say that the greater the amount of direct control over the person employed, the stronger is the conclusion the possibility of the services rendered being in the nature of principal and agent. It is not possible to lay down any precise rule to distinguish one kind of employment from the other. The nature of the particular business and the nature of the duties of the employee will require to be considered in each case, in order to arrive at a conclusion as to whether the person employed is a servant or an agent. In each case the principle for ascertaining remains the same.
9. Section 16 of the Act speaks about deduction from salaries whereas section 17 speaks about "salary", "perquisite" and 'profits in lieu of salary' etc. A conjoint reading of sections 15, 16 and 17 nowhere includes scholarship/stipend which have been mentioned in section 10(16) of the Act. Therefore, it can be said that the stipend/scholarship has been specifically precluded from the mischief of sub-clauses (1) and (2) of section 17 of the Act.
10. If the aforesaid sections are analyzed by keeping them in juxtaposition, with the terms and conditions used in the bond, it can be said that it is neither a salary/wages nor perquisite. Even the Hon'ble Calcutta High Court in the case of Commissioner Of Income-Tax v. Jnan Prakash Ghosh. [1992] 62 Taxman 151 went to the extent that the professionals rendering the incidental services are not servants. Our above view is further fortified by the following decision:-
(i) Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 (SC).
(ii) Ram Prashad v. CIT [1972] 86 ITR 122 (SC).
(iii) Piyare Lal Adishwar Lal v. CIT [1960] 40 ITR 17 (SC).
11. Therefore, unless and until a master servant relation is brought on record by the revenue, suggesting that the assessee is an employee of the college, the stand of the revenue cannot remain on its legs.
12. We are also tempting to reproduce some of the relevant portion with regard to section 10(16) from the commentary of Acharya Shuklendra:
"Scholarships granted to meet the cost of education [clause (16)] - Clause (16) exempts the scholarships granted to meet the cost of education. Where the assessee receives a trainee stipend from a U.S. Hospital to aim him in his pursuit of study and research and not for services rendered and the services, if any are only incidental to the course of practical training, such a stipend would be a scholarship and would be exempt under clause (16). In fact, this clause recog- nizes statutorily the departmental instructions issued in this behalf under the 1922 Act.
(i )Concept of scholarship and extent of exemption - By scholarship as ordinarily understood, we mean anything which makes education free of charge, or at a concessional rate of fees. In section 10(16) however, scholarship is not used in that sense of something in educational opportunity which is given free. The basic postulate of a scholarship in clause (16) is that it is an income receipt. Nevertheless, it is excluded from the total income by being brought under section 10. The view of the Income-tax statute of a "Scholarship", therefore, differs from the popular of dictionary view of a "Scholarship". Whereas under the popular view, scholarship is education made available gratis, the sense in which the same expression is used in the Income-tax Act, is positive payment made to a scholar for pursuit of his education. The considerations which make up the concept of a "Scholarship for meeting the cost of education" in section 10(16) are that the payment is intended to be an income receipt in the hands of the scholar and that whatever is paid is intended to meet the cost of education of the recipient. Since the purpose of the payment 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 requirements are all beside the point. It is enough if the whole object of the payment 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). If the payment is only for the cost of education the fact that the recipient does not spend the whole of the amount or saves something out of it or utilizes it for other purposes would not detract from the character of the payment being one for scholarship. Circulars issued by the Central Board have also proceeded on a liberal understanding of the provisions of section 10(16). Accordingly, where a professor of mathematics is granted a grant-in-aid by a foreign university for doing advanced research in the field of mathematics, the amount of grant-in-aid would be scholarship under clause (16), and exempt even if a part or it had been utilized for the purposes of maintaining wife and children. The discretionary scholarship granted by the employer to the children of employees cannot be treated as a perquisite in the hands of children of employees because no right is created in their favour. Even if such scholarship is regarded as a perquisite, it would be exempt under clause (16) in the hands of the recipient. However, an amount paid to the assessee in the for services as an intern in a medical hospital, where service as an intern is necessary for a person who joins a medical school, cannot be regarded as a scholarship so as to qualify for exemption under this clause".
(ii) Instances of scholarships - The following are the instances of scholarships exempt under clause (16), as recognized by the department.
(1)
Annual allowance granted to retiring research scientists by CSIR, New Delhi
(2)
Stipend of research fellowships for working under the National Commission for the compilation of History of Scientists in India under the auspices of National Institute of Scientists of India.
(3)
Fulbright grants described as 'maintenance allowance' given to Fulbright students.
(4)
Fulbright grant described as 'maintenance allowance' given to American tutors prosecuting studies in India.
(5)
Junior/Senior fellowships awarded by the Department of Atomic Energy.
(6)
Financial assistance to teachers in the universities for undertaking research of learned work in science subjects and humanities.
(7)
Maintenance allowance granted to foreign trainees under the scheme of the International Association for the exchange of students for Technical Experience.
(8)
Research fellowship in engineering, technology, humanities and science subject.
(9)
Junior and Senior research fellowships awarded by CSIR.
(10)
National research fellowship and fellowships to German nationals awarded by the Ministry of Education.
(11)
Living allowance/stipend paid to foreign trainees coming to India under the technical co-operation scheme of the Colombo plan and special commonwealth African Assistance Plan."
13. We are also reproducing herewith certain notifications/letters etc. issued by the competent authorities in respect of scholarship and other allowances paid to scientists, retired scientists, teachers and other research fellows etc. which speaks about exemption and denial in respect to section 10(16) of the Act.
"Allowance to retired scientists - Annual allowance payable to retired scientists under the scheme for 'utilization of the services of retired scientists in the field of agriculture, animal husbandry and allied sciences' is not a payment to meet the cost of education and will be taxable in the hands of the recipients - Letter : [F. No. 24/35/66-IT(A-I)] dated 4-10-1966.
Allowance of Rs. 6,000 per annum to the retiring research scientists granted by the Council of Scientific & Industrial Research New Delhi should be treated as exempt from tax in the hands of the recipients under section 10(16) - Letter [F. No. 24/2/69-IT(A-I)], dated 14-1-1968.
Stipend paid by NCCHSI - Stipend of research fellowships working under the National Commission for the Compilation of History of sciences in India under the auspices of the National Institute of Sciences of India should be treated as exempt from tax in the hands of recipients under section 10(16) - Letter: F. No. 24/25/68-IT(A-I), dated 18-9-1966.
Fulbright grant to American Tutors - Fulbright grant described as 'maintenance allowance' of Rs. 1,000 p.m. given to American Tutors may be treated as exempt from tax under section 10(16) - Letter : F. No. 24/22/67-IT(A-I), dated 7-7-1967.
Research Fellowships paid by Atomic Energy Department - Junior and Senior Research fellowships (of Rs. 300 - Rs. 500 p.m.) instituted by the Department of Atomic Energy for study and research in the field of Nuclear Physics, Cosmic Rays Agriculture, Biochemistry, Bio-physics, Botany, Zoology, Organic Chemistry, Electronics and Micrology are to be treated as exempt from tax in the hands of the recipients under section 10(16) - Letter F. No. 25/37/6-IT(A-I), dated 2-12-1966.
Non-recurring grants to teachers - Non-recurring grant (maximum of Rs. 5,000) payable to teachers for purchase of special apparatus, special chemicals, stores, books, consumables etc. and for field-work in connection with research in science subject and humanities will be exempt from tax under section 10(16) - Letter : F. No. 24/7/64-IT(A-I), dated 24-3-1964.
Maintenance allowance under exchange scheme of IAESTE - Maintenance allowance of Rs. 400 p.m. paid to foreign trainees, coming under the exchange scheme of IAESTE should be exempted from payment of income-tax under section 10(16) - Letter . F. No 24/4/64-IT(A-I), dated 12-2-1994.
Research fellowship of UGC - Research fellowships in engineering technology, humanities and science subject given by University Grants Commission will be exempt under section 10(16). Contingent grant of Rs. 1,000 for petty expenses will also be exempt - Letter: F. No 24/34/62-IT(A-I), dated 25-1-1983.
Research fellow in CSIR - Junior and senior research fellowships (Rs. 300 - Rs. 500 p.m.) granted by the Council of Scientific and Industrial Research, New Delhi should be treated as exempt from tax in the hands of recipients - Circular No. 3 (XXIII - 23), dated 12-1-1961.
Fellowships to German Nationals - National research fellowships in science and technology and fellowships to German nationals study- ing in India under German Industrial Co-operative Scheme should be treated as scholarships granted to meet the cost of education and exempted from tax - Circular No. 49(XXIII-12), dated 13-12-1956.
Living allowance/stipend under Colombo Plan and Special Commonwealth African Assistance Plan - Living allowance/stipend (Rs. 200 - Rs. 600 p.m.) paid to foreign trainees coming to India under the technical cooperation scheme of the Colombo Plan and the Special Common Wealth African Assistance Plan would be exempt from tax under section 10(16) - Source, Income-tax Circular published by the Directorate of Inspection (Research, Statistics and Publication), 1968 edition p. 89.
Fellowships granted by Scientific Research and Cultural Affairs Ministry - Out of the fellowships awarded under technical teachers training programme by the Ministry of Scientific Research and Cultural Affairs an amount of Rs. 250 per month (representing the cost of education) may be treated as exempt from Income-tax - Circular No. 11(XXIII-24) [F. No. 27/67/60-IT(A-I)], dated 4-4-1961."
14. Viewed from aforesaid different angles and facts of the present appeal, it can be said that the scholarship/stipend received by a student from College/Government for pursuing higher studies, cannot be termed as salary therefore this appeal of the assessee is allowed.