Stipend of articled clerk of CA is not taxable as income. In view of author, stipend is ‘capital receipt’ and is scholarship for education.

SUDHIR KUMAR SHARMA. Versus INCOME TAX OFFICER - 1983 (4) TMI 109 - ITAT JAIPUR

Earlier article:

Scholarship / stipend – a case of capital receipt besides being exempt under section 10(16) as scholarship- for more detailed discussion readers may refer to various related provisions and many judgments as referred to in earlier article

Training as an Articled Clerk to purse course of CA:

To purse studies and training for course of Chartered accountancy one need to have minimum entry qualification. For joining CA course one has to undergo educational course and qualify in examinations conducted by ICAI and also compulsory training as an articled clerk or audit clerk under a CA in practice.

Major part of compulsory training can be provided only by Chartered Accountant in practice. There is also provision for industrial training for a part of total training which can be availed on satisfaction of certain conditions. The provisions relating to entitlement to train articled clerks/ audit clerks by CA individually or by a firm of CA, duration of training, leave to be granted for examination and other leaves, transfers from one CA to another CA and minimum stipend etc. are provided in relevant Regulations.

Expenses during education and training:

The articled clerk has to incur expenses on account of fees payable to ICAI, books, stationary, fees payable for tuitions and coaching classes, and day-to-day expenses in attending office of CA or clients of CA, classes, institutional activities and also expenses to maintain himself. All these expenses are in nature of ‘cost of education’.

Capital building exercise:

A candidate who is eligible to join CA course can get some employment (say as a clerk or salesman) and earn much more than the amount of stipend. However, he sacrifices the same just to improve his capabilities which lead to more and better opportunities in future as a trained person in accounts, audit and some laws and as a qualified CA. The exercise of pursuing CA course is to built capital base in form of knowledge, skills, practical exposures and experience, information base, methods for application of knowledge and information a recognized degree which enable him to engage as A CA in practice or CA in service at higher emoluments.

Therefore, costs incurred during CA training and education is capital costs for development of own human resources. The stipend received is in nature of a financial assistance, grant or subsidy to meet such capital costs. Therefore, stipend or scholarship received is in nature of ‘capital receipt’.

Tribunals judgment:

In case of Sudhir Kumar Sharma (Spura.) The Tribunal held that the stipend received by an articled clerk is not income. The contentions raised before Tribunal and reasoning given by Tribunal for so holding are in a different manner, however, the reasoning is based on basic concepts of ‘capital receipt’ and ‘revenue receipt’.

The facts and contentions considered and allowed are analyzed below:

The facts is that an articled clerk joins a Chartered Accountant with a view to learning the work of Chartered Accountants and receiving training thereof.
Shri Nanda (the Departmental Representative), himself argued that any graduate either in Commerce or Arts or Science is eligible to receive training of a Chartered Accountant and a A newly recruited graduate is not supposed to have any knowledge of the work of Chartered Accountant, and, therefore, no contribution can be made by him in the work of Chartered Accountant.
So an articled clerk, who joins a Chartered Accountant with a view to learning and receiving training cannot assist the Chartered Accountant in his work.
Therefore, it cannot be said that the payment was made by the concern of Chartered Accountants to the assessee for the services rendered by him.
The contention of Shri Sharma (Authorised Representative of assessee) appears to be correct that the prescribed amount was paid to the assessee to enable him to meet out the cost of books, examination fee, coaching fee, which he has to pay during the course of training.
Mere use of the word ‘stipend’ does not mean that the payment was made to the assessee for the services rendered by him to Chartered Accountant in his work.
The Tribunal has to see the reality of the payment and it cannot be guided by the word ‘stipend’. Seeing the background as exposed by Shri Sharma and the purpose of the assessee joining the Chartered Accountant, I am inclined to accept the case of the assessee that the payment was not made for any services rendered by the assessee to the chartered Accountant in his work, but it was made to meet out the cost of books, coaching fee, examination fee etc.
Tribunal thus held that the stipend being received by the assessee is not his income and hence is not taxable and appeal was allowed.

Authors observations:

The main purpose of articled clerk to join a CA is to receive training which is supplemental to the studies of CA course and help in learning various skills required for the profession of CA. Though the principal CA may get some benefit of the work done by his trainees, the work done by his trainees may be very valuable also and the same work can be a source of earning of the CA. That is the value addition made by a trainee for the CA. The CA is liable to treat such value addition as his professional income.

Even a fresh graduate can work for CA under guidance of CA. The trainee receives instructions from CA, and then attend client. Usually a fresh trainee is given some work at office of CA with a view to teach preliminary aspects. Then fresher trainees are deputed to offices of clients, but usually fresher trainees are sent along with a senior trainee. During deputation to client for audit or other work, the trainee work in a team of people of client and other colleagues deputed by CA. The candidate get lot of chances to learn about organization, activities, applicable law and procedures, method of accounting, accounting policies , auditing practices etc. All these learning are essential and incidental for the target of becoming a CA- the primary capital base, which is created by pursuing and completing course of CA.

Therefore, any receipt of money during course of such gestation period of building-up career is a ‘capital receipt’, whether any service is rendered or not in immaterial for the trainee. The purpose of trainee is to become a CA and acquire an improved source of earning. The expenses incurred for the purpose of education and training are capital expenses, and therefore any receipt of money in course and incidental to such training are also capital receipts.