Is Alimony Paid To Wife Taxable In Her Hand?

What will be the tax implications of the following payments received by a divorced lady from her former husband: Fixed maintenance charges at Rs.25,000 p.m. for six to eight months (after the divorce) followed by two lump sum payments of Rs.5 lakhs each as final settlement (can we call this alimony?). Will there be any difference in the nature of taxability in case the lady in question is a Muslim? AP Thazhathethil , Ahmedabad

The Higher legal authorities have considered the isse which type of receipt comes in the category of income liable to be taxed under Income Tax Act. Every types of receipt should be judged on following parameters and if all the conditions are satisfied , the receipt may become taxable as income

1. It must be a periodical monetary return ;
2. Should be a return for labour and/or skill and/or capital;
3. Coming in with regularity, or expected regularity;
4. From a definite source;
5. E excluding a receipt "in the nature of a mere windfall", i.e., not a windfall in regard only to the extent or quantum of what is received.

It should also be noted that ,not always the receipt should emanate from labour or skill, sometimes even voluntary payments partakes the character of “income” .

Coming to your specific question, the Bombay High Court in Princess Maheshwari Devi of Pratapgarh v. Commissioner of Income-tax 147 ITR 258 (Bom) answered the two questions raised before it

(1) Whether, alimony received by the assessee under section 25 of the Hindu Marriage Act, 1955, on nullity of marriage, is income in her hands and liable to tax ?

The Court held : No . The reasons were as under

In our view, from the point of view of taxability, the decree must be regarded as a transaction in which the right of the assessee to get maintenance from her ex husband was recognized and given effect to. That right was undoubtedly a capital asset. By the decree that right has been diminished or partly extinguished by the payment of the lump, sum of Rs. 25,000 and balance of that right has been worked out in the shape of monthly payments of alimony of Rs. 750 which, as we have pointed out, could be regarded as income. It is, in our view, beyond doubt that, had the amount of Rs. 25,000 not been awarded in a lump sum under the decree to the assessee, a larger monthly sum would have been awarded to her on account of alimony. It is not as if the payment of Rs. 25,000 can be looked upon as a commutation of any future monthly or annual payments because there was no pre existing right in the assessee to obtain any monthly payment at all. Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, in our view, the receipt of that amount must be looked upon as a capital receipt

(2) Whether, on the facts and in the circumstances of the case, the alimony of Rs. 750 per month received by the assessee from her ex husband on the nullity of marriage is income in her hands liable to tax ?

The amount of Rs. 750 per month is what the assessee periodically and regularly gets and is entitled to get under this decree. This amount must, therefore, be looked upon as a return from the said decree which is the definite source thereof. The word " return ", in our view, in a case like this, can never be interpreted as meaning only a return for labour or skill employed on capital invested. Such a definition of " return " would be too narrow and would exclude the case of voluntary payments, when it is the settled position in law that in some cases even voluntary payments can be regarded as " income ". Although it is true that it could never be said that the assessee entered into the marriage with any view to get alimony on the other hand, it cannot be denied that the assessee consciously obtained the decree and obtaining the decree did involve some effort on the part of the assessee. The monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be "income" within the meaning of the said term in the said Act.

So, in your case also , if monthly payments should be taxable where as lump sum may be treated as capital receipt. However , important to note that if the settlement is as per court , the Revenue authorities will not raise question ..If the settlement is out of court, the Revenue authorities , as is the nature, may raise the question regarding the taxability of Lump sum payments. Therefore, it is better to get the stamp of Court in case of settlement.

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Is Salary or Pension Received By Employees Of United Nations Tax Free?

Yes is the emphatice answer .
The provision given under the United Nations (Privileges And Immunities) Act, 1947 shall override all other laws passed in India , is given in section 2 which is as under :

2. Conferment on United Nations and its representatives and officers
and certain privileges and immunities.
(1) Notwithstanding anything to the country contained in any other law, the provisions set out in the Schedule to this Act of the Convention on the Privileges and Immunities, adopted by the General Assembly of the United Nations on the 13th day of February, 1946, shall have the force of Law in India.

The salary or emoluments received by employees of United Nations organization are not taxable because of the express provision u/s 18(b) of the United Nations (Privileges And Immunities) Act, 1947 . The said section provides as under

SECTION 18.
Officials of the United Nations shall;
(a) ……………..
(b)
Be exempt from taxation on the salaries and emoluments paid of them by the
United Nations;

Is pension received by widow of UN employee tax free?
Yes. This issue was before Calcutta High Court in CIT vs Smt Dipali Goswami [1985] 156 ITR 36 (CAL.)
Facts of the case
Smt. Dipali Goswami, the respondent assessee, is the widow of the late Gurdas Goswami, an I.A.S. Officer of West Bengal Cadre, who had been employed under the United Nations Organisation. During his service with the United Nations Organisation, Shri Goswami had been contributing to the United Nations joint Staff Pension Fund (hereinafter referred to as "the Pension Fund"). On the death of Shri Goswami, the assessee became entitled to a pension from the United Nations Organisation. During the course of the assessment proceeding for the assessment years 1971-72, 1972-73 and 1973-74, it was claimed by the assessee that the pension received by her from the United Nations Organisation was exempt from tax. In support of this claim, the assessee relied on section 18(b) of the United Nations (Privileges and Immunities) Act, 1947. The ITO rejected this claim and held that, in terms of section 17(1)(ii) of the I.T. Act, 1961, the amounts were includible in the assessee's total income inasmuch as the expression "salary" included any annuity or pension and, as such, pension received by the assessee from the Pension Fund was a taxable receipt.

Issue before the court was to decide the question “when the pension is received by the widow of an employee who died in harness, can it be treated as pension exempt from taxation.” Calcutta High Court held
What is received by the widow is in effect the benefit earned by the assessee's husband as an official of the United Nations. That is the reason why such benefit is assessed under the head " Salaries " although there is no contractual relationship of employer and employee between the widow and the United Nations. Even if pension is not a deferred payment of salary, since the pension in this case is deemed to be salary under section 17 and is sought to be taxed under section 15, it must be held to be exempt under the Privileges and Immunities Act, whether received by the official himself or his heir or nominee. It is the nature and character of the receipt and not the character of the recipient that would determine the question whether the receipt is exempt from taxation. What would have been exempt from the hands of the deceased official would necessarily be exempt in the hands of the widow. We are, therefore, of the opinion that the pension paid to the widow of the deceased employee of the UN.
The CBDT Circular No. 293, dated February 10, 1981, in this regard states:

" ............. Apart from salary received by the employees of the United
Nations Organisation or any person covered under the U.N. (Privileges and
Immunities) Act, 1947, pension received by them from the U.N. will also be
exempt from income-tax."

Other case laws .

The Karnataka High Court in the case of CIT v. Ramaiah [1980] 126 ITR 638 considered the effect of section 18(b) of article V of the Schedule to the United Nations (Privileges and Immunities) Act, 1947. There the assessee was a former employee of the United Nations Organisation who had been receiving pension from the United Nations. The question was whether such pension was exempt from taxation. The Karnataka High Court held that the amount of pension received is chargeable to tax under the head "Salary" and the meaning of the expression "salary" given in section 17 automatically applies to any amount of pension received by a person which is chargeable to tax under the head "Salary". The amount of pension received by an employee from the United Nations Organisation falls within the description of the word "salary" and the immunity granted under the said Privileges and Immunities Act becomes applicable. Therefore, the pension received by any former employee from the United Nations was exempt from taxation.

In the case of Addl. CIT v. Garg [1982] 133 ITR 1, the Delhi High Court was considering the assessability of the amount allowable as a child benefit under art VIII(1) of the Regulations of the United Nations Joint Staff Pension Fund. The ITO included the said benefit in the hands of the assessee who was a former employee of the World Health Organisation. It was held in that case that the child benefit is the income of the child and not of the participant. The amount of benefit derived by the child did not fall within the provision of section 17 of the Act.

In the case of CIT v. Dr. Narula [1984] 150 ITR 21, the Delhi High Court held that section 2 of the United Nations (Privileges and Immunities) Act, 1947, read with section 18, clause (b) of article V of the Schedule thereto, inter alia, grants exemption from taxation in respect of salaries and emoluments paid by the United Nations to its officials. Since under section 17 of the I.T. Act, 1961, "salary" has been defined to include pension, the pension received by the officials of the UNO, after retirement, from the United Nations joint Staff Pension Fund will also be exempt from tax. There, the pension was received by the assessee, a former employee of the United Nations.

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Can You Get Exemption U/s 54F Even If Builder Does Not Complete House Within Three Years?

We have sold a old land long term asset and invested for the purchase and construction of a flat in a apartment in Bangalore, with the one year of sold of asset and claimed deduction u/s 54 f of income tax act, but later the builder is not completed the possession of the apartment within 3 years and still the apartment is under construction. as per the income tax law the period of 3 years is lapsed. the period of 3 years is lapsed without any mistake from our side. what is your suggestion on this matter. Kumar, Banglore .

The exemption u/s 54F is for those assessee who gets long term gains on any asset other than house property and who uses all the sales consideration within a specified period for purchase or constructing a residential house. The specified period in case of house purchase is one year before or two years after the date of transfer of asset on which gains were made. However, for construction, section 54 provides , time limit of three years. Therefore , your question is very valid what happens if the builder has not completed the house within three years. Will you get or not?

While the plain reading and strict application of the provision u/s 54F compel one to think that exemption is not allowable in case of delay beyond 3 years, higher judicial authorities have rescued taxpayers by giving relief in those cases where they found that most of the sales consideration have been spent for construction of house , still some portions were not complete for various reasons. The appellate authorities have taken the view that section 54F being relief provision, should be viewed in a bit of relaxed manner. Two of the judgements in this regard are given below which provides that exemption can be claimed even if construction is not completed within 3 years. However, remember in both the case the court was satisfied that either full amount or most of the amount of sales consideration were already used . The decision has elaborated on the reasons why the CBDT issued circulars for such relief and that the word "institution ' in the circular will include "builder".

Assistant Commissioner of Income-tax, Circle 25(3) v. Smt. Sunder Kaur Sujan Singh Gadh [2005] 3 SOT 206 (Mum.)
Brief facts of the case are, that the assessee had sold a residential flat No. 4 in Vasant Vihar, 14th Khar Road, Mumbai-52, for a total consideration of Rs. 41 lakhs as per agreement dated 13-1-1997. The said flat had been purchased by the assessee for a sum of Rs. 7.75 lakhs on 10-7-1992. As against the sale proceeds of Rs. 41 lakhs the assessee had invested a sum of Rs. 11,47,500 towards purchase of another residential house property at Ahmedabad. The builders M/s. Radhe Developers (India) Ltd., of Ahmedabad, Gujarat had, issued an allotment letter dated 26-2-1996 to the assessee allotting flat No. B-62 in the building names as Thirthdham and Rs. 11,47,500 were paid by the assessee to the developers in two instalments, i.e., Rs. 10 lakhs were paid on 5-1-1996 and Rs. 1,47,500 were paid on 12-1-1996 out of her capital account with M/s. Harmohan Singh Sujan Singh. Subsequently, the builder had not constructed the 'B'-Block in Thirthdham in respect of which the allotment letter was issued by them to the assessee and as an alternative the membership of the assessee was shifted to flat No. C-32 in the same building. The possession of the said flat No. C-32 was handed over to the assessee before 4-1-2000 as is evident from the builder's letters dated 19-11-1999 and 4-1-2000.

The decision of Tribunal was

Vide Board's Circular No. 471, dated 15-10-1986 it has been explained that to
qualify investment for construction under section 54F the crucial date is the
date of allotment of flat by DDA and payment of instalment was only a follow-up
action and taking possession of the flat is only a formality, of course, instalments have to be paid by the allottee as per the schedule fixed by the DDA. As per Board's Circular No. 672, dated 16-12-1993 the Board after referring to the above mentioned Circular No. 471 extended the facility of exemption under sections 54 and 54F in respect of allotment of flats/house by co-operative societies and other institutions, and the allotment and construction of the flat by co-operative societies and other institutions are to be considered in similar manner for the purpose of allowing exemption under section 54 . The above circulars are binding on the revenue authorities under section 119 of the Act. Since the flat has been allotted to the assessee by the builder who would fall in the category of other institutions mentioned in the circulars, it has to be taken as a case of construction of the residential flat and not as a purchase of a residential flat.

The second decision in this regard is that ITAT , Madras which in case of Mrs. Seetha Subramanian. vs Assistant Commissioner Of Income-Tax. [59 ITD 94] on the fact that CIT , after enquiry by an Inspector found that the house is not completed and passed order u/s 263 by which he disallowed the claim of assessee u/s 54F ruled as under

Before the Tribunal, the contention of the assessee was that the provisions of section 54F is a beneficial provision for promoting the construction of residential houses.Therefore, the said provision has to be construed liberally and for achieving
the purpose for which it was incorporated in the statute. In support of the said
contention the assessee relied upon the decision in the case of Bajaj Tempo Ltd. The assessee also relied upon certain circulars issued by the CBDT. One of the circulars was Circular No. 471, dated 15th October, 1986. This was issued by the CBDT clarifying the position that where an assessee acquires a flat by an allotment under the self-financing scheme of the Delhi Development Authority, the allotment itself is sufficient compliance for getting the benefit under section 54F, even though the assessee has not paid all the instalments due under the said scheme. Later by another Circular No. 672, dated 16th December, 1993, the CBDT has issued clarification extending the same benefits for acquisition of houses or flats on allotment under similar schemes. Therefore it was contended that the intention of the Legislature was to invest in the acquisition of a residential house and completion of construction or occupation is not required. We find force in the argument of the learned counsel for the assessee. The said intention is very clear from the two circulars issued by the CBDT, where it was held that an assessee is entitled to the benefit of sections 54 and 54F, if an assessee gets an allotment under the self financing scheme and pays the first instalment of the cost of construction. From that it is clear that in order to get the benefit under section 54F the assessee need not complete the construction of the house and occupy the same. Admittedly in the present case, the assessee had invested the entire net consideration within the stipulated period and in fact has even constructed the entire residential property, except some finishing to make it fit for occupation. As the assessee has substantially completed all the work of construction and has invested the entire net consideration, it has to be inferred that the assessee has complied with the conditions provided under section 54F.

A similar case was considered by the Delhi Bench of this Tribunal in the case of Satish Chandra Gupta v. Assessing Officer [1995] 54 ITD 508 and this Tribunal after considering the provisions of section 54 as well as section 55 held that the claim cannot be denied on the ground that the construction the house started by the assessee was not completed within the stipulated period of three years and some work was carried out thereafter. The said decision also supports the assessee's contention. Under the above circumstances, especially in the light of the circulars issued by the Central Board of Direct Taxes, we hold that the Commissioner of Income-tax was not justified in revising the assessment of the Assessing Officer. Hence we set aside the order of the CIT and restore that of the Assessing Officer.

Did you read What Happens If Possession of Flats Gets Delayed Beyond 3 Years? in case of house property income?

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What Are The Types Of Pension Exempt From Tax?

Whether pension received by gallantry award holder is taxable as per Income Tax Act. Somya Krishnan ,Kochi
Yes, pension received by gallantry award holder is tax free , but the types of award is also notified. Section 10(18) of the I T Act provides exemption for such gallantry award winner and even to the family pension received by member of the family of gallantry winner. Read the provision below :

18) any income by way of—

(i) pension received
by an individual who has been in the service of the Central Government or State Government and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or such other gallantry award as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(ii) family pension received by any member of the family of an individual referred to in sub-clause (i).

The notified Gallantry awards can be found here.

The meaning of family is given in Explanation under clause 5 of section 10 which is as under

For the purposes of this clause, family, in relation to an individual, means
(i) the spouse and children of the individual ; and
(ii) the parents, brothers and sisters of the individual or any of them, wholly or mainly dependent on the individual;

Is there any other tax free pension ?

Yes, clause 19 of section 10 provides that pension received by widow or children of members of armed forces who dies in course of duties are tax free. Read the provision

(19) family pension received by the widow or children or nominated heirs, as the case may be, of a member of the armed forces (including para-military forces) of the Union, where the death of such member has occurred in the course of operational duties, in such circumstances and subject to such conditions, as may be prescribed;

What are the prescribed circumstances?

Inserted by the Income-tax (Fourth Amendment) Rules, 2005,w.e.f. 9-2-2005.

2BBA. (1) For the purposes of clause (19) of section 10, the circumstances of death of a member of the armed forces (including paramilitary forces) of the Union in the course of operational duties shall be the following, namely:—

(i) acts of violence or kidnapping or attacks by terrorists or anti-social elements;

(ii) action against extremists or anti-social elements;

(iii) enemy action in international war;

(iv) action during deployment with a peace keeping mission abroad;

(v) border skirmishes;

(vi) laying or clearance of mines including enemy mines as also mine sweeping operations;

(vii) explosions of mines while laying operationally oriented mine-fields or lifting or negotiation minefields laid by the enemy or own forces in operational areas near international borders or the line of control;

(viii) in the aid of civil power in dealing with natural calamities and rescue operations;

(ix) in the aid of civil power in quelling agitation or riots or revolts by
demonstrators.

(2) It shall be certified by the Head of the Department where the deceased member of the armed forces(including paramilitary forces) last served, or the service headquarters, as the case may be, that the death of such member has occurred in the course of operational duties in circumstances mentioned in sub-rule (1).

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Can You Get Exemption U/s 54 or 54F If House Is Taken On Lease?

I am about to purchase a part of house (Linter) in rural Himahcal Pradesh out of my long term capital proceeds. But as per the local by laws outsiders of Himachal cannot purchase such property in rural area... Only via media is that I get the same on perpetual lease (or 99 year lease).My question is weather the investment in the said house and expenses on construction the same to make it livable on the said leased property is allowable under 54F of the income tax act. Sulekha ,Shimla
Section 54F states that if sales consideration of a long term capital asset other than residential house is utilised for purchase or construction of a house , the exemption from tax is to the extent the sale consideration is used for such purchase. The issue whether the taking lease of 99 years constitute "purchase" for the purpose of section 54F.

Section 54F is a beneficial enactment giving relief to the assessee .It well-settled that in construing a beneficial enactment, the view that advances the object of the beneficial enactment and serves its purpose must be preferred to the one which obstructs the objects and paralyses the purpose of the beneficial enactment as per the decision of the apex court in Kunal Singh v. Union of India [2003] 4 SCC 524.

The same question" whether the house purchased on lease " constitute "purchase" for the purpose of section 54 was before Guahati High Court in case of Commissioner of Income-tax v. Rajesh Kumar Jalan [2006] 286 ITR 274 (Gau) . The court held the decision in favour of assessee .

The basis of decision of Guahati High Court was the case of A. R. Krishnamurthy And Another.vs CIT 176 ITR 417 , the Supreme Court referred a decision of Patna High court in Traders and Miners Ltd. v, CIT [1955] 27 ITR 341, where a Division Bench of the Court, interpreting the expression "transfer of a capital asset", held as under (at page 345) :

We think that the expression 'transfer' in the section includes not only a permanent transfer but also a temporary transfer of title to the property in question and lease of mines for any period would fall within the ambit of section 12B of the Act. It was also contended by Mr. Dutt that a transaction of lease did not tantamount to a transfer of title but that a mere contractual right was created. We do not think that this argument is correct. A lease of land is transfer of interest in the land and creates right in rem : and there is a transfer of title in favour of the lessee though the lessor has right of reversion after the period of the lease terminates.This decision has been referred to with approval by this court in R. K. Palshikar (HUF) v. CIT [1988] 172 ITR 311”

Therefore, in my opinion, a lease hold right on house property which shows that the property is in all practical sense has been transferred to you by virtue of 99 years lease is as good as purchase and accordingly the claim of exemption u/s 54 or 54F will be valid.

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Why Sur Charge Can Not Be Imposed Despite Having Income Exceeding Rs 10 Lacs?

i) My taxable income from salary = 780000
ii) Short term capital gain (from shares) = 115000
iii)Long term capital gain (from shares) = 120000

My total income by adding above( i ,ii,iii ) crosses RS 10 lakhs . Am I liable for 10% surcharge.I have no investment for deduction u/s 80C.
William Alex Dias, Mumbai

The surcharge is imposed if the total income of an individual exceeds Rs 10 lakhs. It is seen from your question that you have long term capital gains of Rs 1,20,000. If these shares are listed shares , sold through stock exchange and securities transaction tax was paid on it, the long term gains on such shares are exempt by virtue of section 10(38) of the I T Act.

Significance of exemption u/s 10(38)

The section 10 of the I T Act provides exemption provisions. The opening line is significant. It starts as under

10. Incomes not included in total income.
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….

Clause 38 of section 10 provides from exemption of long term capital gains if the shares are listed, sold through stock exchange and STT is paid on the sale.That means that in your case total income can not include RS 1,20,000. Therefore the total income being less than 10 lakh , no surcharge is payable by you.

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How To Know If Stipend or Scholarship or Fellowship Awarded To You Is Tax Exempt?

1.Dear Sir,I am on a Commonwealth Professional Fellowship to UK for 03 months. If I save some of my stipend would be tax exempted. However, I would be paying tax for the income I had for rest of 09 months in India. Thus please suggest about the status of stipend I receive here in United Kingdom. Pushkin Phartiyal , Nainital 2.I am a research scholar doing my integrated PHD in Harish-Chandra Research Institute, Allahabad (an autonomous institute funded by department of atomic energy ). I get fellowship of 14000/- per month. I want to know whether I need to pay any income tax on it or not. How is it exempted from tax (if it is) ?I ask this to account officer here, he says it is taxable as its not scholarship but a fellowship. Are fellowship and scholarship are treated different sources of income legally? Rajarshi Tiwari , Allahabad 3. I am a Senior Research Fellow in Defence Research and Development Organization. I am geting fellowship amount 14000/- Rs. per month. I want to know is this fellowship amount come in Income Tax or exempted . Navin Kumar , Mussoori 4. Are awards and fellowships that are being given to the scientists are taxable? Pl. carify. K. Srinivasu, New Delhi 5. Whether fellowship given to research fellows exempted from tax or not .Amrita , Agra 6. A fellow receives certain amount (Rs. 1,80,000=00 p.a.) as fellowship form Harish-Chandra Research Institute, Allahabad, an Institution fully aided by Department of Atomic Energy, Government of India. Whether this fellowship is exempt from Income Tax? Naresh Kumar Arora ,Allhabad 7.I am a Junior Research Fellow working under DBT project. My annual income is around 1.8lakhs.According to IT section 10(16) fellowships of CSIR and other national organisations are exempted from tax. Sarika , Banglore 8. I was offered with Junior Research Fellowship (JRF) on Department of Science and Technology (DST), Govt. of India sponsored project implemented at one of the Research Institutes in Kerala.As far I know, the Research Fellowships are exempted from tax under section 10(16) of the IT Act. Kindly advice. Sreejith, Trivendrum

Although , answer to this topic was given by me in nthe past, but so many new queries were raised in the past , that I feel it warrants a detailed article. Hence , topic is selected as "Topic of the Week"

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
....
(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

1. Commissioner of Income-tax v. B.L. Garg [2007] 289 ITR 218 (All)
2. 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.
...........
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)

1. Fellowship by Department by Atomic Energy
2. Financial assista