Taxability of Stipend to Medical Students
Whether stipend paid to the students who are prosecuting Post Graduate Diploma/Degree Courses is an income? Whether such sum paid by the college is liable to Tax Deduction at Source (TDS) under the Income Tax ACT, 1961?
The issue was duly discussed in my article at https://thetaxtalk.com/2016/04/18/section-80e-scholarship-received-meet-cost-education-tax-free/
Same issue was duly considered in the write case of Junior Doctors Association vs. Chief Commissioner of Income Tax, W.P No.1309/2007, Decided On, 02 May 2008.
The entire copy of the order is produced herewith for the benefit of the readers:www.TheTaxTalk.com
Junior Doctors Association v/s Chief Commissioner Of Income Tax
W.P No.1309/2007
Decided On, 02 May 2008
At, High Court of Madhya Pradesh
By, THE HONOURABLE MR. JUSTICE S.K. SETH
For the Appearing Parties: G.M. Chaphekar, S.K. Jain, R.L. Jain, V. Mandlik, Anand Pathak, Advocates.
Judgment Text
S.K. SETH, J.
(1.) The only question involved in this petition is whether stipend paid by the State Government to the students who are prosecuting Post Graduate Diploma/Degree Courses, is an income under the head of salary and as such, is liable to Tax Deduction at Source (TDS) under the Income Tax ACT, 1961 ?
(2.) In this petition, the order impugned is dated 28.12.2006 read with letter dated 8.3.2000 of the income tax Officer (TDS)-I, Indore.
(3.) There is no factual controversy involved. Suffice it to say that petitioner No. 2 is a member of petitioner No. 1 Society. It is a duly registered society and comprises of members who are prosecuting Post Graduation Diploma or Degree Courses in different branches of Medical Science.
(4.) State Government by Order dated 23.12.2005 (Ann. D) sanctioned revised Stipend w.e.f. 1.1.2006 for the Junior Doctors. So far as Junior Doctors who are prosecuting Post Gradation Diploma/ Degree Courses are concerned, www.TheTaxTalk.comrevised fixed monthly stipend payable was as per the following rate :-
First Year Degree/Diploma
Rs. 14,000/-
Second Year Degree/Diploma
Rs. 14,500/-
Third Year Degree/Diploma
Rs. 15,000/-
(5.) On 28.12.2006, Dean, MGM Medical College, Indore informed all P.G. students regarding TDS on the stipend amount if gross amount exceeds Rs. 1,00,000/- and if any one desires that there should be no TDS then such student was required to furnish necessary exemption certificate, failing which TDS would be deducted before the end of the Financial Year 2006-2007. Said document is available on record as Annexure ‘F’. This led to filing of the present petition for the following relief:-
“(i) It be declared that scholarship paid/payable to the students of the post-degree/post-diploma courses of medical sciences is exempt from Income Tax. (ii) The Respondent No. 2 be directed by an appropriate writ not to deduct TDS from the scholarship of the members of the petitioner No.1 (iii) The respondent No. 1 be directed by an appropriate writ to refund the tax with interest recovered from members of the Petitioner 1.”
(6.) Shri Chaphekar, learned senior counsel appearing for the petitioners, submitted that stipend paid to students prosecuting P.G. Diploma or Degree Courses is not salary as known commonly, but is a misnomer for scholarship to defray the cost of education. He submitted that there is no relationship of employer and employee between the State and the PG students. Thus, according to him stipend partake the character of scholarship and is not liable to income tax under any head including ‘salary’. In support of his contention he cited various authorities.
(7.) Respondent No. 1, 2 and 3 in separate replies justified the collection of TDS from the stipend treating it to be salary as it was payable under particular head under the budget allocation as mentioned in Annexure ‘C. Shri Jain, learned Senior Counsel for Revenue as well as the State Counsel, in this connection referred to Annexure R-5, order of the State Government dated 8.3.1999 that in addition to fixed monthly stipend, person would also get ‘Dearness Allowance’, therefore, stipend partake the.character of’ salary’; ‘remuneration’ or ‘perquisite’. Reliance is also placed on the Post Graduate Medical Education Regulation, 2000 flamed by the Medical Council of India as well as on the order dated 8.3.2000 passed by the ITO(TDS)-I, Indore In addition to above defences, learned counsels appearing for respondents also referred to Webster’s Dictionary, explaining the meaning of word ‘stipend’ and P. Ramanatha Aiyer’s Advanced Law lexicon 3rd Edition to explain the meaning of ‘Perk’. To sum up, the case of respondents is that what members of petitioner No. 1 get is either a salary or a perk but not scholarship and as such TDS is as per law and does not call for interference.
(8.) Before embarking upon the journey, it would be useful to notice the relevant legal position in brief. Section 4 of the Indian Income Tax Act, 1961 (herein after referred to as ‘the Act’ for short) is the charging section and provides for charging of tax after computation on ‘the total income of the previous year of a person’. Computation of total income from different heads including ‘salary’ is provided in Chapter IV of the Act. The word ‘salary’ has not been defined in the Act, however, incomes which do not form salary of total income have been enumerated in Section 10 of the Act. For the case in hand Section 10(16) would be relevant, hence, it is reproduced below for ready reference :- ’10(16) Scholarship granted to meet the cost of education’
(9.) Section 17 defines the expression “salary” for purposes of Sections 15 and 16 which deal with “Salary” as one of the head of income. Now, the Act does not define the expression “salary” conceptually but, merely proceeds to state what is included therein and what is excluded therefrom, therefore, it is necessary to examine whether stipend paid to PG students is a salary, perquisite or profits in lieu of salary.
(10.) Words ‘stipend’ and ‘scholarship’ have not been defined in the Act. According to Webster Dictionary word ‘stipend’ means Settled pay or compensation for services, whether paid daily, monthly, or annually, “service’ is defined to mean an act of serving; the occupation of a servant; the performance of labour for the benefit of another, or at another’s command; attendance of an inferior, hired helper, slave, etc., on a superior, employer, master, or the like; also, spiritual obedience and love. One of the meaning ascribed to the word ‘Scholarship’ in the same dictionary is ‘Maintenance for a scholar; a foundation for the support of a student’. www.TheTaxTalk.com Thus it is clear that the word “stipend’ and ‘Scholarship’ have two different connotations and cannot be used as synonyms. Stipend is a compensation paid for service rendered for the benefit of other, whereas scholarship is paid for the maintenance of a scholar or student (emphasis is added). It is in this background we have to see whether amount paid to PG students is really a stipend or scholarship.
(11.) In A.Ratnakar Rao vs. Addl. Commissioner of Income Tax, Bangalore reported in [1981] 128 ITR 527, the question before the Division Bench of Karnataka High Court was whether stipend received by an Indian Doctor to undergo training in pediatrics in a foreign hospital was correctly brought to tax as income? The Division Bench while answering the reference it) favour of the assessee, held that if stipend/fellowship money received is to further the education and training of the recipient and that such payment does not represent compensation for service to patients, then such payment is excluded from the income under Section 10(16) of the Act and the whole amount received by the assessee stands exempted except the amount received as compensation for part time job.
(12.) Next case down the line is from Madras High Court reported in [1984] 147 ITR 4-Commissioner of Income Tax Tamil Nadu vs. VK.Balachandran. Facts there were in brief are as under. Assessee, a Professor of Mathematics in the Ramanujam Institute was given grant-in-aid of $ 10,000 and other fringe payments during the academic year 1970-71 by the Princeton Institute of Advanced studies, New Jersey. Assessee claimed exemption under Section 10(16) of the Act from payment of income tax in respect of grant-in-aid received by him. ITO turned down the plea of assessee but on appeal, the AAC upheld the contention of assessee that grant-in- aid was not a salary in absence of relationship of employee and employer between the assessee and the foreign Institute and the amount paid to the assessee was for doing the research work as a student of mathematics. It was observed by their Lordship as under :- “In s. 10(16), scholarship is 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. Nonetheless 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 ‘scholarship’. Whereas under the popular view, scholarship is education made available gratis, the sense in which the same expression is used in the IT. Act is positive payment made to a scholar for pursuit of his education. If the scholarship is made free, it would not naturally come within the ambit of s. 10(16). In the sense of payment made for t studies, scholarship necessarily means some payment made to person to meet the cost of education, the payment being made to the person pursuing the education and incurring the cost thereof. There are, 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 payment intended to be income receipt in the hands of scholar. The other one is that whatever is paid is intended to meet the cost of education, the question whether the quantum of payment is adequate, or is or is not in excess of requirement are all beside the point. A scholarship may only meet the partial cost of education. www.TheTaxTalk.com 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 spent the surplus otherwise. It is not the appropriation of the scholarship that matters. If the whole object’ is to meet the cost of education of a person, then that is enough. No further enquiry is called for in order to exclude the amount from the taxable total income under s. 10(16).”
(13.) Another decision relevant is of the Bombay High Court in the matter of Commissioner of Income Tax vs. M.N. Nadkarni reported in [19S6] 161 ITR 544. The Division Bench of Bombay High Court comprising of Justice Kania and Justice Bharucha, JJ (as both of their Lordship then were), held that particular amount (scholarship) paid by the Company to the wards of the managing staff to meet the cost of education, is not a perquisite and as such is not liable to be taxed as a salary income.
(14.) Shri Jain also referred to Division Bench decision of Madras High Court in the case of Dr. V. Mahadev vs. Commissioner of Income tax reported in [1990] 184 ITR 533. That was a case where assessee joined a medical school ia the University of Massachusetts. Internship in a hospital for the specified period was compulsory and the assessee was paid wages representing overtime charges and that Federal and State Taxes were deducted from it. It was in this context, the High Court on reference held that amount paid to the assessee was not scholarship within the meaning of Section 10(16) of the Act.
(15.) Shri Jain learned counsel for Revenue next referred to a Division Bench decision of Orissa High Court in case of Commissioner of Income Tax vs. Bijay Kishore Kapoor reported in [1993] 202 ITR 129. The point for consideration there was whether addition to salary, commission received from the employer was a salary income, or income from other sources. In that case, employer paid the commission and showed in the accounts the payment of commission under the head ‘Salary’ and after deducting tax at source, amount was paid to assessee. Assessee showed the amounts under the head ‘Income from other sources’ and claimed deductions. That was not accepted by the A.O., however in appeal, Appellate Assistant Commissioner of income Tax accepted the contention of assessee. Same position was maintained by the ITAT. At Revenue’s instance, reference was made to the High Court. High Court while answering the reference held that payment of commission was an income under the head of ‘Salary’ and no deduction was permissible except, as provided in Section 16(i) the Act.
(16.) Last case to which reference was made was from Punjab and Haryana High Court in Commissioner of Income Tax vs. Dr. Mrs. Usha Verma reported in [2002] 254 ITR 404. Again that was case of Doctor employed in a Government Medical College and was attending to Out Door Patients in paying clinic attached to the College. Assessee claimed income derived from ‘paying clinic’ was an income from other sources. It was not accepted by the High Court on the ground that by virtue of the employment, assessee was permitted to work in the ‘paying clinic’ and was her share in the fee was given by the Government on the basis of rates fixed by the Government, therefore it was not held to be a ‘business income’. The fact situation prevailing above referred three decisions were altogether different from facts of the case in hand, Thus, we are of the opinion that these cases do. not help in any manner to advance the case of Revenue. Nor the Medical Council Post Graduate Medical Education Regulations, 2000 help the Revenue.
(17.) On the other hand, Pre-P.G. Entrance Test conduct of examination and Admission Rules clearly show that PG courses are full time courses and students undergoing PG Course are not allowed to do private practice or part time job during the entire period of study (emphasis is added). Admittedly, there is no relationship of employer and employee between the State Government and a student doing PG Course. A PG student may be required to examine or attend to a patient but that part of the course and stipend is not being for any kind of service rendered by a PG student. Thus, it is obvious that stipend paid to a PG student is to meet the cost of education and thus would be in the mature of scholarship. Learned counsels for respondents were certainly not justified in saying that PG students getting stipend is also getting “dearness allowance”. First of all the order sanctioning the payment of stipend clearly states that no dearness allowance would be payable on the stipend money. And this position has been reinforced by the statement of the Dean MGM Medical College at the close of arguments as is recorded in the order sheet. That being the position it is enough and no further enquiry is called for in order to execute the amount from the taxable total income under section 10(16) of the Act. www.TheTaxTalk.com
(18) In view of the foregoing discussion, we are of the opinion that the learned ITO (TDS)-I Indore was erroneous in his approach when he advised Dean that TDS would be attracted in respect of stipend paid to PG Students. In view of the foregoing discussion, we allow the writ petition and quash the order dated 28.12.2006 read with letter dated 8.3.2000. We further direct that if any sum is /was deducted as TDS from the stipend, it shall be refunded forthwith to such PG Students (whether decree or diploma course).
(19) In view of the foregoing discussion this petition is allowed and impuged order is hereby set aside. There shall be no order as costs. Petition allowed.
