Decided by: ITAT, CHANDIGARH BENCH `SME-B’, In The case of: Dr. Rahul Tugnait v.ITO, appeal No. :ITA NO. 197/CHD/2008, Decided on: JUNE 30, 2008


5. 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 T7Te 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.

For getting salary normally there must be employee – employer or master – servant/agent relationship. The distinction between a servant or as agent can be summarized 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;

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 is 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 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.

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 form 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 if 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.

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 section, 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 clause (1) & (2) of section 17 of the Act.

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 CIT v. Jnan Parkesh Ghosh [62 Taxman 151 (Cal)] went to the extent that the professionals rendering the incidental services are not servants. Our above view is further forttfied by the following decision:-

i. Lakshimnarayana Ram Gopal & Son Ltd vs. State [25 ITR 449 (SC)]

ii. Ramprasad v. CIT [86 ITR 122 (SC)].

iii. Piyare Lal Adishwar Lal v. CIT [40 ITR 70 (SC)]

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.

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 [cl.(16)] – Clause (16) exempts the /scholarships granted to meet the cost of education. Where the assesses receives a trainee stipend from a U.S. Hospital to aim him in his pursuit of study and research and not for Hospital to aid 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 cI.(16). In fact, this clause recognizes 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 confessional 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 cIause (1.6) 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 s. 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 toe exclude the amount form the taxable income u/s 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 s. 10(16). Accordingly, where a professor of mathematics is granted a grant-in-aid by a foreign university for doing advanced research in the filed of mathematics, the amount of granl-in aid would be scholarship under cl(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 perquisile 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.

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/Govt for pursuing higher studies, cannot be termed as salary. Therefore, this appeal of the assessee is allowed.

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