1. This is an appeal filed by the revenue against the order of the AAC, H-Range, Bombay.
2. The assessee is an individual and the appeal relates to the assessment year 1977-78. The assessee was an employee of Goodlass Nerolac Paints 8Ltd. ('the company'). The company had instituted a scholarship scheme for the children of the management staff called 'The Goodlass Nerolac Paints Ltd. Scholarship Scheme'. Clauses 3, 4, 5, 7, 8, 9, 11 and 12 of this scheme are as follows : 3. The object of the scheme is the grant of scholarships to the children of the managing staff towards their education.
4. The grant of scholarships in accordance with the scheme shall be in the sole and uncontrolled discretion of the company.
5. The managing staff or their children or their families or any other person whomsoever shall have no right of action, claim or demand whatso ever against the company or the Board for or in relation to or in connection with the grant or otherwise of any scholarship under this scheme.
7. Subject to Rule 4, children of the managing staff, who have completed not less than five years of age and who are admitted to a school or educa tional institution approved in writing by the company, shall alone be eligible for grant of a scholarship by the company under this scheme and the company may require the production of satisfactory proof of age of such children before granting any scholarship under this scheme.
8. No scholarship shall be granted by the company under this scheme to children of the managing staff, who fail in their annual final examinations or who discontinue their education or who, in the opinion of the company, are irregular at school or educational institution or whose progress does not warrant the grant or continuance by the company of any scholarship under this scheme ; provided, however, the directors will have discretion to grant or to continue to grant scholarship to such children of the manag ing staff having regard to the facts of the case.
9. No scholarship shall be granted by the company under this scheme to children of the managing staff, who have completed 23 years of age. The company may require production of satisfactory proof of age of such children before granting any scholarship under this scheme.
11. The amount of scholarship that may be granted by the company under this scheme shall be payable to the children of the managing staff and not to the managing staff. In cases where the scholarship is granted by the company to the children of the managing staff, who have not attained the age of majority, special bank accounts shall be opened in the name of their respective mothers or legal guardians and the amount of scholarship granted by the company to them shall be credited direct to such accounts every month or at such other interval of time as the company may determine.
12. The amount of any scholarship that may be granted by the company under this scheme to any children of the managing staff shall not constitute, nor is it intended to constitute, remuneration of the managing staff and the managing staff shall have no right, title, claim or interest thereto or therein whatsoever.
Under this scheme, the two children of the assessee, Master Uday Mathur and Miss Shaila Mathur, received scholarship from the company amounting to Rs. 1,800 and Rs. 1,650 during the previous year relevant to this assessment year. It was claimed before the 1TO that these scholarships were received not by the assessee but by his two children, besides they were received by the assessee's wife on behalf of the two children and, therefore, the aggregate of these two scholarships amounting to Rs. 3,450 cannot be included in the assessee's total income. The ITO, however, held that these amounts are indirect payments by the company to the assessee and consequently constitute salary income. This amount was, therefore, added to the income disclosed under the head 'Salaries' by the ITO while completing the assessment. On appeal, the AAC, following the order of the Tribunal in the case of ITO v. Shri DM.Kothari [IT Appeal Nos. 3680 and 3681 (Bom.) of 1972-73], held that these scholarship amounts could not be included in the assessee's total income. The AAC, therefore, deleted the addition of Rs. 3,450 on this account made by the ITO. The revenue was aggrieved by the order of the AAC and, therefore, came up in appeal before the Tribunal.
3. The Vice President and Judicial Member of the Tribunal, before whom the matter came up for hearing, were of the view that the earlier decision of the Tribunal in the case of Shri D.M. Kothari {supra) requires reconsi deration and the issue is of general importance, which will affect not only a number of other employees of the same company but employees of a number of other companies as well. They, therefore, made a reference to the President of the Tribunal proposing the constitution of a Special Bench to dispose of this appeal. The President of the Tribunal agreed with this proposal and that is how the matter has come up for hearing and disposal before this Special Bench.
4. The learned departmental representative, Shri Tuli, at the outset submitted to us that even though there was a judgment of the Hon'ble Bombay High Court in the case of CIT v. M.N. Nadkarni [IT Reference No.133 of 1975] on this very issue, the Hon'ble High Court in its judg ment did not consider whether this scholarship amount could be brought to tax in view of the provisions of Section 17(2)(iv) of the Income-tax Act, 1961 ('the Act') on the ground that even though the argument under sec tion 17(2)(iv) was specifically canvassed by the revenue before the Tribunal, the Tribunal gave reasons for rejecting that argument and rejected it, the question framed by the Commissioner for reference was only in respect of the claim under Section 17(2)(iii)(c), which had also been argued by the revenue before the Tribunal. In these circumstances, according to Shri Tuli, the revenue could still argue on the claim of taxability of the scholarship amount in view of the provisions of Section 17(2)(iv). Proceed ing further Shri Tuli submitted to us that Section I7(2)(iv) lays down that any sum paid by the employer in respect of any obligation, which but for such payment would have been payable by the assessee, is included in the definition of 'perquisite'. For this purpose, according to Shri Tuli, it was not necessary that the payment must be made by the employer directly to the employee and even if the payment was made indirectly the provisions of Section 17(2)(JV) will be attracted. According to Shri Tuli, as a result of the scholarship amounts received, these amounts could have been used for the upkeep of the children or for their education or for other purposes of the family of the assessee. Shri Tuli pointed out that with the award of the scholarships cash had come to the assessee's family to augment his resources and it was for the assessee and his family to decide how to spend the amount. Reference was made by him to Mulla's Hindu Law in support of the contention that it was an obligation of a Hindu to maintain his aged parents, wife, children, etc., and this includes in the case of children their proper education and upbringing. Our attention was invited to the ruling of the Hon'ble Allahabad High Court in the case of CIT v. Rev. J.C. Manry [1942] 10 ITR 205 wherein their Lordships laid down that the allowance paid to the assessee to meet the additional cost of maintenance and education of children was in the nature of perquisite, which was liable to tax.
The details of the scholarship scheme were pointed out to us and Shri Tuli submitted before us that the payment depended on the relationship of the children with the management staff of the company and the service of the management staff of the company and not on the scholastic attainments of the children concerned. In this connection, Shri Tuli pointed out that there was no special fund or trust created for the purpose by the company. Our attention was invited to Clauses (e) and (g) of Rule 3 of the Income-tax Rules, 1962, which laid down that the value of benefit to an assessee resulting from the provision of free education facilities for any member of his household shall be determined as the sum equal to the amount of the expenditure incurred by the employer in that behalf or where the educational institution itself was managed and run by the employer for the benefit of all his employees as a group, with reference to the reasonable cost of such education in a similar institution in or near the locality and further that the value of any benefit or amenity not included in the preceding clauses of this rule shall be determined on such basis and such amount as the ITO considers fair and reasonable. Shri Tuli vehemently argued before us that the definition of 'perquisite' under Clause (2) of Section 17 was merely inclusive and, therefore, included other items also, which were not specifically mentioned in the definition and even the method of valuation of the perquisite by Clause (g) of Rule 3 suggested that there could be a number of items, which came within the definition of 'perquisite' mention of which was not made in the inclusive definition under Clause (2) of Section 17. The decision of the Tribunal in the case of M. Thiagarajan v. Fourth ITO [1984] 9 ITD 647 (Mad.) was cited in support of the contention that even if there was no agreement or contract between the company and its employees, such an agreement or contract could be inferred by the conduct of the parties. The definition of 'scholarship' as appearing in the Chambers Twentieth Century Dictionary was referred to in support of the contention that scholarship means a grant for the maintenance of a pupil or student and not a payment made for whatever purpose under the garb of scholarship. We were taken to paragraph 4 of the order of the Tribunal in the case of Shri D.M. Kothari (supra), where the finding of the Tribunal was that there was no obligation on the children receiving the scholarship or the guardian of the children to use the amount of the scholarship for any specific purpose and the company had not reserved the right to inspect in what manner the scholarship amount was spent. The ruling of the Hon'ble Supreme Court in the case of CIT v.Taj Mahal Hotel AIR 1972 SC 168, was cited in support of the contention that the word 'includes' is often used in the interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of a statute and when so used these words and phrases must be construed as comprehending not only such things as they signify according to the nature and import but also those things, which the interpretation clause declares that they shall include. Summing up Shri Tuli vehemently argued before us that the so-called scholarship under consideration here was in reality an additional allowance paid to the management staff to meet the cost of maintenance and education of the children and this amount was a perquisite or, alternatively, profit in lieu of salary, which was liable to tax.
5. Another point made out by Shri Tuli was that the so-called scholarship under consideration here was not paid to the assessee but to the assessee's children and, therefore, the provisions of Section 10(16) of the Act will have no application. On this basis, according to Shri Tuli, the assessee cannot claim that the amount of Rs. 3,450 was scholarship granted to meet the cost of education and, therefore, even if it was income it was exempt under Clause (16) of Section 10.
6. Shri Tuli, therefore, vehemently argued before us that the addition of the scholarship amount of Rs. 3,450 to the income of the assessee under the head 'Salaries' was perfectly justified and was wrongly deleted in appeal by the AAC.7. On the other hand, the assessee's learned counsel, Shri Mehta, submitted that no fee or any other education expense of the assessee's children was paid by the company. On the other hand, what was paid by the company under the scholarship scheme was scholarships to children of the manage ment staff of the company who were between the ages of 5 and 23 and who were studying in a school or educational institution approved in writing by the company. Reference was made by him to Clauses 4, 5 and another Clause 12 of the scholarship scheme, according to which it had been laid down that the grant of scholarship was in the sole and uncontrolled discretion of the company and the management staff or their children or their families or any other person whomsoever shall have no right of action, claim or demand whatsoever against the company or the Board for or in relation to or in connection with the grant or otherwise of any scholarship under the scholarship scheme and any scholarship that may be granted under the scheme to the children of the management staff shall not constitute nor are intended to constitute remuneration of the management staff and the management staff shall have no right, title, claim or interest thereto or therein whatsoever. Besides, according to Shri Mehta, if the payment depended on the service of the management staff all the management staff would have become entitled to the payment under the scholarship scheme whereas in the present case the payments under the scholarship scheme are limited only to the children of the management staff, who are between 5 and 23 years of age, who are admitted to a school or educational institution approved in writing by the company, and that too under the sole and uncontrolled discretion of the company. This, according to Shri Mehta, clearly shows that the payment of scholarship under the scheme by the company has nothing to do with the service of the management staff and depends entirely on the children of the management staff studying in schools or educational institutions approved in writing by the company, fulfilling the age restrictions and the sole and uncontrolled discretion of the company. Our attention was invited to the conditions of employment specified by letters of the company dated 26-9-1972 and 17-7-1975 wherein there is no mention of any scholarship being given by the company to the children of the management staff. This, according to Shri Mehta, clinches the issue that the grant of scholarship under the scholarship scheme by the company at its sole and uncontrolled discretion to which the management staff or their families or their children had no right, title, claim, etc., had nothing to do with the service of the management staff of which the assessee was one and was, on the other hand, scholarship granted by the company at its sole and uncontrolled discretion to the children of the management staff who fulfilled the conditions laid down under the scholarship scheme. Our attention was invited to the ruling of the Hon'ble Delhi High Court in the case of Addl. CITv. R.S. Garg, wherein their Lordships laid down that the children's benefit even when received by a retired U.N. employee was an amount receivable by the child and not by his father. The ruling of the Hon'ble Bombay High Court in the case of CITv. Indokem (P.) Ltd. [1981] 132 ITR 125 was cited before us in support of the contention that a cash payment by the company to its employees is not a perquisite or benefit. Shri Mehta submitted to us that there was no material, circumstantial or otherwise, to show that the scholarship amounts, which were not paid to the assessee but to his wife who received them for and on behalf of the children went to reduce the assessee's expenses on the children.
8. Shri Mehta then referred to the judgment of the Hon'ble Bombay High Court in the case of M.N. Nadkami (supra) wherein their Lordships of the Hon'ble High Court dealt with this very scholarship scheme and held that the scholarship amount given by the company to the children of the management staff was not a 'benefit' within the meaning of Section 17 (2)(iii) and besides this was an amount, which was exempt under the provisions of Clause (16) of Section 10. He, therefore, vehemently contended that the arguments of the learned departmental representative, Shri Tuli, that the amounts represented by the scholarship constituted 'perquisite' within the meaning of Section 17(2)(iii) or that the amount represented by the scholarship was not exempt under Section 10(16) was without any merit in view of the ruling of the Hon'ble Bombay High Court on this very issue dealing with this very scholarship scheme.
9. Summing up, Shri Mehta vehemently argued before us that whichever way the matter was looked into, the scholarships granted by the company to the assessee's children under the scholarship scheme could not be included in the assessee's income and the addition on this account made by the ITO was rightly deleted by the AAC in appeal.
10. We have carefully considered the rival submissions. The meaning of 'scholarship' as appearing in Chambers Twentieth Century Dictionary is as follows: ...scholarly learning ; a foundation or grant for the maintenance of a pupil or student; the status and emoluments of such a pupil or student.... (p. 1209) The first issue for determination, therefore, is whether what is said to be a grant in the sole and uncontrolled discretion of the company under the scholarship scheme is based on the scholastic pursuits or attainments of the children to whom the grant is made or whether the grant is made on the consideration of the recipients being the children of the management staff. Here it will be necessary to point out that there is merit in the submission of the learned departmental representative, Shri Tuli, that even if there is no agreement or contract between the company and its employees, such an agreement or contract could be inferred by the conduct of the parties. Viewed in this context there was a query by the Bench to the assessee's learned counsel to point out any instance of any child of the management staff within the stipulated age limits who was studying in a school or educational institution approved in writing by the company who was denied a scholarship under the scholarship scheme or to whom the scholarship already granted was stopped during the previous year. In response to this query, only one instance was pointed out to us of Abhay Thirodkar, son of Shri Y.G. Thirodkar, distribution manager, to whom the grant under the scholarship scheme was stopped because Abhay Thirodkar failed in the examination or because his progress was not satisfactory. However, no evidence in support of this statement was produced before us. On the other hand, according to the particulars filed before us, the remark against Abhay Thirodkar was 'left', which clearly means that the grant under the scholarship scheme was discontinued to him because his father, Shri Y.G. Thirodkar, distribution manager, left the service of the company. No other instance of any child who was eligible under the scholarship scheme to whom scholarship was not granted or to whom the scholarship once granted was discontinued in the so-called sole and uncontrolled discretion of the company was pointed out to us. This clearly shows that the grants under the scholarship scheme were not in consideration of any scholastic pursuits or attainments of the children of the management staff but were in consideration of the recipients under the scholarship scheme being the children of the management staff who were within the prescribed age limit and were studying in a school or educational institution approved in writing by the company.
11. It makes no difference and it is really immaterial whether the payment is made to the assessee or to a bank account opened in the name of the assessee's wife because in either case the money becomes available to the assessee and his family for meeting the expenses of the upkeep and education of the children.
12. It is also necessary here to point out that, as mentioned by the learned departmental representative, Shri Tuli, and highlighted by him, the ayments under the scheme were not made out of any special fund or trust created for the purpose but by the company, which was the assessee's employer.
13. What emerges from these facts is that the payments under the scholarship scheme by the company, which was the assessee's employer, were made by the company in consideration of the recipients under the scholar ship scheme being the children of the management staff of the company, and even though these payments were not made to the assessee but to a special bank account opened in the name of the mother of the children, i.e., the assessee's wife, these amounts became available to the assessee or his family to meet the assessee's obligations of the upkeep and education of the children or to meet other family expenses.
14. However, the Hon'ble Bombay High Court in the case of M.N. Nadkarni (supra) had occasion to consider this very scholarship scheme and held on the basis of material and the arguments advanced that the payments under this scholarship scheme did not amount to a perquisite received by the assessee as contemplated by Section 17(2)(iii)(c). Their Lordships further held that the payments under the scholarship scheme were granted to meet the cost of education and, therefore, these amounts were entitled to exemption under the provisions of Clause (16) of Section 10.
15. The ruling of the Hon'ble Bombay High Court is a binding authority forus. Following, with respect, therefore, the ruling of the Hon'ble Bombay High Court in the case of M.N. Nadkarni (supra) we hold that the amount of Rs. 3,450 paid by the company under the scholarship scheme to the assessee's children could not be included in the assessef's total income, The addition on this account made by the ITO was, therefore, unjustified and was rightly deleted in appeal by the AAC. The order of the AAC, therefore, appears to be correct and is upheld.