Scholarship / stipend – a case of capital receipt besides being exempt under section 10(16)

[CA DEV KUMAR KOTHARI]

Section 4 and 10(16) of the Income-tax Act, 1961

Dr. Rahul Tugnait Vs. Income-tax Officer, Ward-4, Patiala- 2008 (6) TMI 229 - ITAT CHANDIGARH-B 

CIT v V. K. Balachandran- 1982 (11) TMI 5 - MADRAS High Court

A.Ratnakar Rao v Addl. CIT- 1981 (1) TMI 62 - KARNATAKA High Court

Dr. V. Mahadev v CIT- 1990 (3) TMI 57 - MADRAS High Court

Lakshimnarayana Ram Gopal & Son Ltd vs. State -1954 (4) TMI 2 - SUPREME Court

Ramprasad v. CIT - 1972 (4) TMI 1 - SUPREME Court

Piyare Lal Adishwar Lal v. CIT- 1960 (4) TMI 4 - SUPREME Court

CIT v. Jnan Parkesh Ghosh -1989 (8) TMI 3 - CALCUTTA High Court

Human capital is needed by all:

Human capital is very important not only for the individual himself , his family but also for the society as a whole and for any organization which need human resources for carrying out activity of any nature. We need experts, highly skilled, skilled, semi-skilled persons, even unskilled persons and laborers in different organizations doing any activity of manufacture of goods, producing goods or rendering of services. Even in a small organization of our family we need various capabilities of family members to carry the functioning of personal and family affairs smoothly and efficiently.

Three- four generations ago in our family system of our ancestors and particularly joint families generally we find large number of family members and that was considered a source of capital for family. However, with need and fashion of nucleolus families, number of members in families are falling, and therefore, we find scarcity of working hands in family and we are more dependent to hire human resources.

Human capital

Human capital can be described as the team of people or available people with knowledge, information, skills, competencies, expertise and various attributes personal and social attributes like capability to apply knowledge and expertise, gather information and apply it for some purpose in hand, creativity and application of creativity, ability to produce useful things or services and add value to goods and assets or information etc.

In context of society or national economy human capital is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biological, cultural and psychological complexity as they interact in explicit and/or economic transactions.

Investment in human capital - many theories explicitly connect investment in human capital development to education, and the role of human capital in economic development, productivity growth, and innovation has frequently been cited as a justification for government subsidies for education and job skills training.

Human capital or work force is one of three most important basic factors of production other being land and capital (represented by physical resources other than land. In modern technical financial analysis, the term "balanced growth" refers to the goal of equal growth of both aggregate human capabilities and physical assets that produce goods and services.

Human capital has much more importance of qualitative factors than other assets. Therefore, much more attention is required for this factor of economy because quality y of human resources determines to a great extent success or failure and extent of success etc. Thus quality of human resources with human management including the role of leadership and talent, get more importance when various economies or segments of any economy are in competition .

In different contexts and settings human capital is also called as one sort of intangible assets, social capital, a part of national capital, instructional capital, knowledge base habits or systems with the instructions they compile and manage, or the "intellectual capital" .

Competence and capital

Unlike physical labor (and the other factors of production), competence is:

• Expandable and self generating with having and applying more knowledge and information while working. For example a professional person like doctor, advocate or CA will get more experience, their competence base will increase, as will their endowment of human capital. With more competence, the value of capital inform of competence increases.
• The economics of scarcity is replaced by the economics of self-generation, therefore, competence and human capital base can be improved more meaningfully by promoting self-creation of further competence.
• It is transportable and shareable: competence, especially knowledge, can be moved and shared provided there are other persons who can understand and apply the knowledge and get experienced. This shows that the second tier of human force must have capability to learn from first tier of human force. In other words there must be willing seniors to impart education and training and there must also be capable and willing juniors who can learn and get expertise from seniors.
• This transfer does not prevent its use by the original holder. However, the transfer of knowledge may reduce its scarcity or degree of scarcity   and therefore, value may decrease for the original possessor because he has more competitors.

Competence, ability, skills or knowledge? Often the term "knowledge" is used. "Competence" is broader and includes thinking ability ("intelligence") and further abilities like motoric and artistic abilities. "Skill" stands for narrow, domain-specific ability. The broader terms "competence" and "ability" are interchangeable.

For any society human resources with suitable mix of competence, ability and skills and capacity to apply knowledge is very much necessary. The human resource is most important capital base, because the human resources can only make other capital base workable.

Education- a personal capital base:

Education, knowledge, information, and experience and art of applying them are important capital base of a person who wants to earn his livelihood by using his skills which are developed by education, training and experience. After getting basic education, and even after getting advanced education, practice to apply knowledge is important to Get further expertise. Experience and expertise make capital base stronger of a person.

Any receipt in nature of subsidy or grant –in-aid or scholarship or stipend

for education may be a capital receipt:

Education, training and, experience are capital assets of any person. Expenses incurred by individual himself or his parents or other family members are capital expenses and are not in nature of revenue expenses or allowable expenses (except when tuition expenses are allowed as an incentive e.g. under section 80C of Income-tax Act,1961).

If one properly account for expenses incurred to gain education   such expenses can be capitalized and shown as an item of assets like intangible assets. If any amount is received to meet such costs, then the amount to be capitalized will be reduced from the receipt which is specifically given to meet cost of education.

Therefore, receipt in nature of any subsidy, grant-in-aid, scholarship, stipend or assistance or financial help received for the purpose of education, training and experience will be of nature of ‘capital receipt’. Therefore, such receipts cannot be considered as any income in nature of profit or gain or revenue receipt.

Furthermore, when such subsidy, grant-in-aid etc. is in nature of stipend or scholarship to meet cost of education, then such scholarship is specifically exempt u/s 10(16) of the Income-tax Act, 1961.

Stipend during education and training period:

Stipend received during education and training period can be in nature of capital receipt. In this regard following factors can be relevant for consideration:

Scholarship:

A payment made in nature of scholarship , stipend, grant-in-aid or subsidy will be in nature of capital receipt because the payment is specifically described as such for some particular purpose and the purpose is generally a public purpose – to have more educated and trained man power for the society.

Amount: Generally a fraction of normal remuneration is received as stipend.

The purpose is to gain more knowledge, expertise, degree, diploma and certificate of course undertaken involving further education, studies and training.

For example once a person is qualified as MBBS doctor, he/ she would not like to be dependent on parents for related education training and further studies.

Post MBBS, during course of internship and house job for gaining specialized knowledge and expertise in particular field and obtaining a certificate for the same and also during pursuing studies for   MD or MS one has to devote time, undertake studies, and sacrifice higher earnings to gain further knowledge and expertise.

Therefore, the stipend or honorarium paid during course of internship, house job and MD/MS/ DMS and during training period for professional qualifications or obtaining diploma or degree etc. is capital receipt and is also in nature of scholarship to meet cost of education which is inclusive of training because by training and on job training one can learn how to apply knowledge.  

Analysis of judgment of Tribunal in the case of Dr. Rahul Tugnait:

In this case the assessee a qualified MBBS doctor was pursuing higher education (MD/MS) and was granted scholarship / stipend which he claimed exempt u/s 10 (16). The AO and CIT(A) considered the same as income falling under head “salaries”. The Tribunal considered the nature of grant and held that the amount was scholarship exempt u/s 10 (16).

In this case assessee has not raised contention of the amount being a capital receipt. The author feels that the amount paid during education, educational training like internship or article ship,   house job or pursuing higher education, by way of stipend or scholarship or grant –in-aid or subsidy, or even remuneration by whatever name called is in substance a capital receipt for the reason that the amount paid is with a view to facilitate acquiring higher education , knowledge and to develop skills required for the general benefit of society at large and it is with a public purpose in mind as a primary reason.

We may consider another reasoning – in a medical college run by government, the fees payable by students is nominal whereas in private medical colleges fees charged is much higher. The difference between fees charged by private medical college and government medical college cannot be considered a profit or gain or revenue receipt of student of government medical college. This is because the government have established medical colleges for benefit of public at large and to satisfy its responsibilities of providing education and medical facilities for public. On the same analogy, the amount paid to students / trainees for acquiring education, knowledge, expertise cannot be considered as revenue receipt in hand of recipient. A capital receipt cannot be taxed as income.