Employer's scholarship for employee's children not taxable under Income-tax Act

The scholarship amount given by the employer to the children of the assessee-employee was held not to be a benefit under section 17(2)(iii) of the Income-tax Act, 1961. Additionally, the scholarship amount was deemed exempt under section 10(16) of the Act. The court ruled in favor of the assessee, directing the Commissioner to bear the costs of the reference.

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Issues Involved:
1. Whether the scholarship amount given by the employer to the children of the assessee-employee is a benefit under section 17(2)(iii) of the Income-tax Act, 1961.
2. Whether the scholarship amount given by the employer to the children of the assessee-employee is exempt under section 10(16) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Scholarship as a Benefit under Section 17(2)(iii)
The Tribunal examined whether the scholarship amount of Rs. 2,400 given by the employer to the children of the assessee-employee constitutes a benefit under section 17(2)(iii) of the Income-tax Act, 1961. The relevant facts are that the assessee was an employee of Goodlass Nerolac Paints Ltd., and the company had instituted a scholarship scheme for the children of the managing staff. The grant of scholarships was at the sole discretion of the company, and no employee had a right to claim such scholarships. The scholarships were paid directly to the children and not to the employee.

The Tribunal noted that the terms of employment did not confer any right on the assessee to expect the company to pay scholarships to his children. The scholarships were paid directly to the children and not to the assessee, indicating that the payment was not a benefit received by the assessee. The Tribunal concluded that the scholarships could not be considered a perquisite under section 17(2)(iii) as the benefits referred to in this section are direct benefits to the employee, not indirect ones.

The Revenue also argued that the scholarship amount should be considered a perquisite under section 17(2)(iv) as it discharged an obligation of the assessee. However, the Tribunal rejected this argument, stating that the Revenue had not provided material evidence to show that the assessee would have spent Rs. 100 per month on the education of each child. Therefore, the Tribunal held that the scholarship amount could not be characterized as a payment made by the employer in respect of an obligation that would have otherwise been payable by the assessee.

Issue 2: Exemption under Section 10(16)
The second issue was whether the scholarship amount is exempt under section 10(16) of the Income-tax Act, 1961. The Tribunal's decision on this issue was referred to at the instance of the assessee. Section 10(16) exempts "scholarships granted to meet the cost of education" from being included in the total income.

The Tribunal noted that since the scholarship amount was not considered a perquisite given to the assessee, it was unnecessary to decide on the exemption under section 10(16). However, the Tribunal proceeded to address the issue, stating that even if the scholarship amount were considered a perquisite, it would still be exempt under section 10(16) as it was granted to meet the cost of education. The argument that the scholarship was paid directly to the children and not to the assessee was rejected. If the amounts were to be included in the income of the assessee as perquisites, they would be regarded as scholarships and thus exempt under section 10(16).

Conclusion:
1. The scholarship amount given by the employer to the children of the assessee-employee is not a benefit under section 17(2)(iii) of the Income-tax Act, 1961.
2. The scholarship amount given by the employer to the children of the assessee-employee is exempt under section 10(16) of the Income-tax Act, 1961.

The court answered both questions in the affirmative and in favor of the assessee. The Commissioner was ordered to pay the costs of the reference.

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