The crisis, which has been simmering for a while, is believed to have turned ugly just before general elections are to be announced.
At its crux is a massive Rs 2,727 crore financial support package to the university over a period of 12 years. The finance ministrys Department of Expenditure has asked the Ministry of External Affairs, the nodal ministry for the project, the reasons why government rules should not apply to the project.
The university is yet to begin functioning fully, and its campus is still under construction in Rajgir. It has a small office in Delhi for the vice-chancellor and faculty members and aims to start its academic session this year.
The provocation for the crisis, sources said, was the huge expenditure being incurred on maintaining the governing body of the university, known earlier as the Nalanda Mentor Group, as well as the tax-free salaries to the tune of $80,000 dollars per year to some of the top functionaries of the university.
Faculty salary packages range around $50,000-55,000 per year.
Upset by these queries, Sen - who is part of the 12-member governing body - conveyed to the MEA at the highest levels that he would resign if such objections were not opposed and quashed, source said.
He is learnt to have given a similar message to the Prime Ministers Office and the Planning Commission.
Taken aback, the government is said to be looking at some of the amendments to the Nalanda University Act that could possibly grant full financial autonomy and also a permanent tenure to the university top brass.
The universitys argument has been that full autonomy must mean complete financial independence. But since the government is putting much of the money, the finance ministry feels there has to be oversight and accountability - a view that has takers even in the MEA.
A high-level meeting was planned Monday to resolve this issue, but was called off at the last moment leading to further speculation.
The Nalanda University (Amendment Bill), 2013 was introduced in the Rajya Sabha last September by the Ministry of External Affairs. The amendments seek to provide for the Government of India to meet the universitys capital and recurring expenditure to the extent required and also to ensure that the university attains a truly international stature and is able to attract eminent academics from across the world.
However, there have been concerns raised - among others by the Parliamentary Standing Committee - about the immunities and privileges being extended to the university. More recently, President Pranab Mukherjee wrote to the Ministry of External Affairs asking them to speed up processes related to the university, appoint a CEO and shift staff operating from Delhi to the campus in Rajgir in Bihar.