ITC LIMITED GURGAON Vs. COMMR.OF I.T(TDS) DELHI
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 4435-37 of 2016, Judgment Date: Apr 26, 2016
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 4435-37 of 2016
(ARISING OUT OF SLP (CIVIL) NOS.20822-20824 OF 2011)
ITC LIMITED GURGAON …APPELLANT
VERSUS
COMMISSIONER OF I.T. (TDS) DELHI …RESPONDENT
WITH
CIVIL APPEAL NOS. 4438-40 of 2016
(ARISING OUT OF SLP (CIVIL) NOS.9587-9589 OF 2012)
CIVIL APPEAL NO. 4441 of 2016
(ARISING OUT OF SLP (CIVIL) NO.10653 OF 2012)
CIVIL APPEAL NO. 4442 of 2016
(ARISING OUT OF SLP (CIVIL) NO.17964 OF 2012)
CIVIL APPEAL NOS. 4443-44 of 2016
(ARISING OUT OF SLP (CIVIL) NOS.18128-18129 OF 2012)
J U D G M E N T
R.F. Nariman, J.
1. Leave granted.
2. These appeals arise out of a common judgment of the Delhi High Court
dated 11.5.2011.
3. The assessees are engaged in the business of owning, operating, and
managing hotels. Surveys conducted at the business premises of the
assessees allegedly revealed that the assessees had been paying tips to its
employees but not deducting taxes thereon.
4. The Assessing Officer treated the receipt of the tips as income under
the head “salary” in the hands of the various employees and held that the
assessees were liable to deduct tax at source from such payments under
Section 192 of the Income Tax Act, 1961. The assessees were treated by the
Assessing Officers as assessees-in-default under Section 201(1) of the Act.
The Assessing Officers in various assessment orders worked out the
different amounts of tax to be paid by all the aforesaid assessees under
Section 201(1), as also interest under Section 201 (1A) of the said Act for
assessment years 2003-2004, 2004-2005 and 2005-2006.
5. The CIT (Appeals) vide his common order dated 28.11.2008 allowed the
various appeals of the assessees holding that the assessees could not be
treated as assessees- in-default under Section 201(1) of the Act for non-
deduction of tax on tips collected by them and distributed to their
employees. Appeals filed by the Revenue to the Income Tax Appellate
Tribunal (ITAT) came to be dismissed by the Tribunal by relying upon its
own order for assessment year 1986-1987 in the case of ITC and the case of
Nehru Palace Hotels Limited. Against the said orders of the Tribunal,
appeals were preferred by the Revenue to the High Court.
6. The High Court vide the impugned judgment dated 11.5.2011 framed the
questions of law as follows:-
“(a) Whether on the facts and in the circumstances of the case, the Ld.
ITAT erred in law and on merits holding that the assessee was not an
“assessee in default” for short/non deduction of tax at source on account
of banquet and restaurant tips collected and paid by it to its employees?
(b) Whether on the facts and in the circumstances of the case, the Ld. ITAT
erred in law and on merits in holding that the payment of banquet and
restaurant tips to the employees of the assessee in its capacity as
employer were not profits in lieu of salary within the meaning of Section
17 (3) (ii) of the Income Tax Act, 1961?”
7. The High Court held, after considering Sections 15, 17 and 192 of the
Income Tax Act, that tips would amount to ‘profit in addition to salary or
wages’ and would fall under Section 15(b) read with Section 17(1)(iv) and
17(3)(ii). Even so, the High Court held that when tips are received by
employees directly in cash, the employer has no role to play and would
therefore be outside the purview of Section 192 of the Act. However, the
moment a tip is included and paid by way of a credit card by a customer,
since such tip goes into the account of the employer after which it is
distributed to the employees, the receipt of such money from the employer
would, according to the High Court, amount to “salary” within the extended
definition contained in Section 17 of the Act. For arriving at this
interpretation, the High Court relied upon the decision of this Court in
Karamchari Union, Agra v. Union of India, (2000) 3 SCC 335, while
distinguishing the judgments of this Court in Rambagh Palace Hotel v.
Rajasthan Hotel Workers' Union, (1976) 4 SCC 817 and Quality Inn Southern
Star v. ESI Corpn., (2008) 2 SCC 549. After distinguishing the said
judgments, the High Court arrived at the following conclusion:-
“From the above discussion, we may conclude that the receipt of the tips
constitute income at the hands of the recipients and is chargeable to the
income tax under the head “salary” under Section 15 of the Act. That being
so, it was obligatory upon the assessees to deduct taxes at source from
such payments under Section 192 of the Act.”
8. Since the assesses were, therefore, declared to be assessees-in-
default under Section 201 of the Act, the High Court found that despite the
fact that the assessees did not deduct the said amounts based on a bonafide
belief and no dishonest intention could be attributed to any of them, yet
the High Court held that levy of interest under Section 201(1A) would
follow, as the payment of simple interest under the said provision is
mandatory; and not being penal in nature, no question of bonafide belief
would arise to absolve the assessees from any interest liability under the
said provision.
9. Learned senior advocates Shri Vohra and Shri Syali, assailed the
judgment of the High Court before us. They argued that tips are paid by
customers out of their own volition as payments to the employees being
waiters in a restaurant for the quality of service provided to them and for
courteous behavior. Since this payment is gratuitous, and the assessees
act as mere trustees in collecting the tips charged to the customers’
credit cards, and then pass over the same to the employees, it is clear
that no amount by way of tip has any connection with the contract of
employment between the employer and the employee. They further submitted
that the tips received by the employees are not remuneration or reward for
services rendered by the employees to the assessees. They argued that there
was no vested right of an employee to claim any tip from a customer. It
was further argued that the expression “employer” contained in Sections 15
and 17 is of crucial importance, and must be contrasted with the expression
“any person” occurring in Section 17 (3)(iii). It was also argued, based on
the Hotel Receipts Tax Act and a circular issued thereunder, that tips do
not form any part of taxable receipts of the employers. Further, we were
shown a publication in which guidelines were issued by the Australian Tax
Office stating that voluntary tips are not consideration for the supply of
food or service in a hotel or restaurant. The intervenor represented by
Shri S. Ganesh also argued that Section 192 is attracted only when any
person responsible for paying any income chargeable under the head “salary”
is to deduct income tax on the amount payable. According to the learned
counsel, since the income received from tips is not income chargeable under
the head “salary”, so far as the employees are concerned, but income from
other sources, Section 192 is not at all attracted. It was further agued
by him that the machinery provision contained in Section 192 is not
possible of compliance inasmuch as it is impossible for the employer to
predicate how much each individual employee would get by way of income from
tips, particularly when the schemes for distribution are many and varied
and may include different sums being received by different employees based
on various criteria. He also argued that no question of Section 201 would
come into play in this case as it is only in consequence of failure to
comply with Section 192 that Section 201 is at all attracted. It was also
argued that since the High Court had found that the conduct of the
assessees was bonafide, interest therefore could not have been charged from
them under Section 201(1A). All the learned counsel have relied upon
various judgments of this Court and other courts in support of their
submissions.
10. Shri Neeraj K. Kaul, learned Additional Solicitor General, appearing
on behalf of the Revenue, argued that Section 15(b) referred to salary that
is “paid” or “allowed” to an employee by or on behalf of an employer, and
stated that the expression “allowed” is an expression of wide import and
would include amounts such as tips paid by employers to their employees.
He also relied upon Section 17(3) (ii) to state that any payment received
by an assessee from an employer would be regarded as ‘profit in lieu of
salary’, and that since the amount of tips received by way of credit cards
from the customer are first put into the employer’s account and thereafter
received by the employees from the employer, that was sufficient to attract
‘profits in lieu of salary’ as defined. According to the learned counsel,
the section makes no reference to the contract of employment, which is
therefore a foreigner to the Section. The learned Additional Solicitor
General for this proposition relied heavily upon Karamchari Union, Agra’s
case (supra), to buttress this submission and stated that the High Court
correctly relied upon the said decision. He went on to add that the
judgments contained in Rambagh Palace Hotel and Quality Inn Southern Star
were not directly on point and were rightly distinguished by the High
Court. He also supported the finding of the High Court that bonafide
belief would have no bearing on payability of interest under Section
201(1A). He referred to the provision of section 192(3) in order to
buttress his submission that the machinery provisions contained in Section
192 could easily be worked out as monthly estimates of the tips that were
received or receivable had to be made by the employer.
11. Before adverting to the contentions raised by counsel for both the
parties, it will be necessary to set out some of the provisions of the
Income Tax Act.
“192. Salary (1) Any person responsible for paying any income chargeable
under the head "Salaries" shall, at the time of payment, deduct income-tax
on the amount payable at the average rate of income-tax computed on the
basis of the rates in force for the financial year in which the payment is
made, on the estimated income of the assessee under this head for that
financial year.
xx
(3) The person responsible for making the payment referred to in sub-
section (1) or sub-section (1A) or sub-section (2) or sub-section (2A) or
sub-section (2B) may, at the time of making any deduction, increase or
reduce the amount to be deducted under this section for the purpose of
adjusting any excess or deficiency arising out of any previous deduction or
failure to deduct during the financial year.
201. Consequences of failure to deduct or pay.
(1) Where any person, including the principal officer of a company,—
(a) who is required to deduct any sum in accordance with the provisions of
this Act; or
(b) referred to in sub-section (1A) of section 192, being an employer, does
not deduct, or does not pay, or after so deducting fails to pay, the whole
or any part of the tax, as required by or under this Act, then, such
person, shall, without prejudice to any other consequences which he may
incur, be deemed to be an assessee in default in respect of such tax:
Provided that any person, including the principal officer of a company, who
fails to deduct the whole or any part of the tax in accordance with the
provisions of this Chapter on the sum paid to a resident or on the sum
credited to the account of a resident shall not be deemed to be an assessee
in default in respect of such tax if such resident—
(i) has furnished his return of income under section 139;
(ii) has taken into account such sum for computing income in such return of
income; and
(iii) has paid the tax due on the income declared by him in such return of
income,
and the person furnishes a certificate to this effect from an
accountant in such form as may be prescribed:
Provided further that no penalty shall be charged under section 221 from
such person, unless the Assessing Officer is satisfied that such person,
without good and sufficient reasons, has failed to deduct and pay such tax.
(1A) Without prejudice to the provisions of sub-section (1), if any such
person, principal officer or company as is referred to in that sub-section
does not deduct the whole or any part of the tax or after deducting fails
to pay the tax as required by or under this Act, he or it shall be liable
to pay simple interest,—
(i) at one per cent for every month or part of a month on the amount of
such tax from the date on which such tax was deductible to the date on
which such tax is deducted; and
(ii) at one and one-half per cent for every month or part of a month on the
amount of such tax from the date on which such tax was deducted to the date
on which such tax is actually paid,
and such interest shall be paid before furnishing the statement in
accordance with the provisions of sub-section (3) of section 200:
Provided that in case any person, including the principal officer of a
company fails to deduct the whole or any part of the tax in accordance with
the provisions of this Chapter on the sum paid to a resident or on the sum
credited to the account of a resident but is not deemed to be an assessee
in default under the first proviso to sub-section (1), the interest under
clause (i) shall be payable from the date on which such tax was deductible
to the date of furnishing of return of income by such resident.
15. Salaries. The following income shall be chargeable to income-tax under
the head "Salaries"—
(a) any salary due from an employer or a former employer to an assessee in
the previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf
of an employer or a former employer though not due or before it became due
to him;
(c) any arrears of salary paid or allowed to him in the previous year by
or on behalf of an employer or a former employer, if not charged to income-
tax for any earlier previous year.
Explanation 1.—For the removal of doubts, it is hereby declared that where
any salary paid in advance is included in the total income of any person
for any previous year it shall not be included again in the total income of
the person when the salary becomes due.
Explanation 2.—Any salary, bonus, commission or remuneration, by whatever
name called, due to, or received by, a partner of a firm from the firm
shall not be regarded as "salary" for the purposes of this section.
17. "Salary", "perquisite" and "profits in lieu of salary" defined. For the
purposes of sections 15 and 16 and of this section,—
(1) "salary" includes—
xx
(iv) any fees, commissions, perquisites or profits in lieu of or in
addition to any salary or wages;
xx
(3) "profits in lieu of salary" includes—
(i) the amount of any compensation due to or received by an assessee from
his employer or former employer at or in connection with the termination of
his employment or the modification of the terms and conditions relating
thereto;
(ii) any payment (other than any payment referred to in clause (10),
clause (10A), clause (10B), clause (11), clause (12), clause (13) or clause
(13A) of section 10), due to or received by an assessee from an employer or
a former employer or from a provident or other fund, to the extent to which
it does not consist of contributions by the assessee or interest on such
contributions or any sum received under a Keyman insurance policy including
the sum allocated by way of bonus on such policy.
Explanation.—For the purposes of this sub-clause, the expression "Keyman
insurance policy" shall have the meaning assigned to it in clause (10D) of
section 10;
(iii) any amount due to or received, whether in lump sum or otherwise,
by any assessee from any person—
(A) before his joining any employment with that person; or
(B) after cessation of his employment with that person.”
12. At this stage it is important to analyse Section 192 of the Income
Tax Act. First and foremost, under sub-section (1) thereof, “any person
responsible” for paying any income chargeable under the head “salaries” is
alone brought into the dragnet of deduction of tax at source. The person
responsible for paying an employee an amount which is to be regarded as the
employee’s income is only the employer. In the facts of the present case,
it is clear that the person who is responsible for paying the employee is
not the employer at all, but a third person – namely, the customer. Also,
if an employee receives income chargeable under a head other than the head
“salaries”, then Section 192 does not get attracted at all. In Emil
Webber v. CIT, (1993) 2 SCC 453, the Ballarpur Paper and Straw Board Mills
wanted to set up a caustic soda/chlorine manufacturing plant at Ballarpur.
For this purpose, it entered into two agreements with Krebs, a French
concern, which in turn entered into an agreement with a Swiss concern for
making available services of certain personnel. The assessee, Emil Webber,
was a person engaged by the Swiss concern. The assessee came to India and
worked in connection with the setting up of the said plant. The question
that was posed before this Court was whether the tax component paid by
Ballarpur of the assessee’s taxable income could be included within the
income of the assessee. This Court, in answering the said question,
specifically stated in paragraph 8, that the question arose as to under
which head of income should the said income be placed. This Court held
that inasmuch as the assessee is not an employee of Ballarpur, which made
the payment, it cannot be brought within the purview of Section 17 of the
Act. Thus, such income must necessarily be placed under Section 56(1) of
the Act as ‘income from other sources’.
13. Following the aforesaid decision, it is clear that as income from
tips would be chargeable in the hands of the employees as income from other
sources, such tips being received from customers and not from the employer,
Section 192 would not get attracted at all on the facts of the present
case.
14. Section 15 of the Act is in three parts. Sub-clause (a) refers to
salary that is “due” from an employer or a former employer, whether paid or
not. Under this sub-clause, salary is taxable upon accrual – it matters not
whether payment is actually made or not. On the other hand, under sub-
clause (b), with which we are directly concerned, any salary that is paid
or allowed to an employee by or on behalf of an employer or former employer
though not due, or before it becomes due, becomes taxable. Under this sub-
clause, it matters not whether the salary is at all due. Payment made or
allowance given to the employee by or on behalf of an employer or former
employer is sufficient to bring such payment or allowance to tax under the
said sub-clause. Under sub-clause (c) any arrears of salary paid or allowed
to an employee by or on behalf of an employer or previous employer if not
earlier charged to income tax in any previous year is also brought to tax.
15. It can be seen, on an analysis of Section 15, that for the said
Section to apply, there should be a vested right in an employee to claim
any salary from an employer or former employer, whether due or not if paid;
or paid or allowed, though not due. In CIT v. L.W. Russel reported in 53
ITR 91 (SC), this Court dealt with the provisions of Section 7(1) of the
1922 Act, which preceded Sections 15 and 17 of the present Act. Holding
that it is necessary for the employee to have a vested right to receive an
amount from his employer before he could be brought to tax under the head
“salaries”, this Court held:-
“Now let us look at the provisions of section 7(1) of the Act in order to
ascertain whether such a contingent right is hit by the said provisions.
The material part of the section reads:
“7.(1) -The tax shall be payable by an assessee under the head
‘salaries’ in respect of any salary or wages, any annuity, pension or
gratuity, and any fees, commissions, perquisites, or profits in lieu of, or
in addition to, any salary or wages, which are allowed to him by or are due
to him, whether paid or not, from, or are paid by or on behalf
of................ a company.....................
Explanation I- For the purpose of this section, ‘perquisite’ includes-
(v) any sum payable by the employer, whether directly or through a fund to
which the provisions of Chapters IXA and IXB do not apply, to effect an
assurance on the life of the assessee or in respect of a contract of
annuity on the life of the assessees.”
This section imposes a tax on the remuneration of an employee. It
presupposes the existence of the relationship of employer and employee. The
present case is sought to be brought under the head "perquisites in lieu
of, or in addition to, any salary or wages, which are allowed to him by or
are due to him, whether paid or not, from, or are paid by or on behalf of a
company". The expression "perquisites" is defined in the Oxford Dictionary
as "casual emoluments, fee or profit attached to an office or position in
addition to salary or wages". Explanation 1 to Section 7(1) of the Act
gives an inclusive definition. Clause (v) thereof includes within the
meaning of "perquisites" any sum payable by the employer, whether directly
or through a fund to which the provisions of Chapters IXA and IXB do not
apply, to effect an assurance on the life of the assessee or in respect of
a contract for an annuity on the life of the assessee. A combined reading
of the substantive part of Section 7(1) and clause (v) of Explanation 1
thereto makes it clear that if a sum of money is allowed by the employee by
or is due to him from or is paid to enable the latter to effect an
insurance on his life, the said sum would be a perquisite within the
meaning of section 7(1) of the Act and, therefore, would be eligible to
tax. But before such sum becomes so exigible, it shall either be paid to
the employee or allowed to him by or due to him from the employer. So far
as the expression "paid" is concerned, there is no difficulty, for it takes
in every receipt by the employee from the employer whether it was due to
him or not. The expression "due" followed by the qualifying clause "whether
paid or not" shows that there shall be an obligation on the part of the
employer to pay that amount and a right on the employee to claim the same.
The expression "allowed", it is said, is of a wider connotation and any
credit made in the employer's account is covered thereby. The word
"allowed" was introduced in the section by the Finance Act of 1955. The
said expression in the legal terminology is equivalent to "fixed, taken
into account, set apart, granted". It takes in perquisites given in cash or
in kind or in money or money's worth and also amenities which are not
convertible into money. It implies that a right is conferred on the
employee in respect of those perquisites. One cannot be said to allow a
perquisite to an employee if the employee has no right to the same. It
cannot apply to contingent payments to which the employee has no right till
the contingency occurs. In short, the employee must have a vested right
therein.”
16. On the facts of the present case, it is clear that there is no vested
right in the employee to claim any amount of tip from his employer. Tips
being purely voluntary amounts that may or may not be paid by customers for
services rendered to them would not, therefore, fall within Section 15(b)
at all. Also, it is clear that salary must be paid or allowed to an
employee in the previous year “by or on behalf of” an employer. Even
assuming that the expression “allowed” is an expression of width, the
salary must be paid by or on behalf of an employer. It must first be
noticed that the expression “employer” is different from the expression
“person”. An “employer” is a person who employs another person under a
contract of employment, express or implied, to perform work for the
employer. Therefore, Section 15(b) necessarily has reference to the
contract of employment between employer and employee, and salary paid or
allowed must therefore have reference to such contract of employment. On
the facts of the present case, it is clear that the amount of tip paid by
the employer to the employees has no reference to the contract of
employment at all. Tips are received by the employer in a fiduciary
capacity as trustee for payments that are received from customers which
they disburse to their employees for service rendered to the customer.
There is, therefore, no reference to the contract of employment when these
amounts are paid by the employer to the employee. Shri Kaul, however,
argued that there is an indirect reference to the contract of employment
inasmuch as but for such contract, tips to employees could not possibly
have been paid at all. We are afraid that this argument must
be rejected for the simple reason that the payments received by
the employees have no reference whatsoever to the contract of employment
and are received from the customer, the employer only being a conduit in a
fiduciary capacity in between the two. Indeed, if Shri Kaul’s arguments
were to be accepted, even the position accepted by the revenue and
consequently the High Court that tips given in cash, which admittedly are
not covered by Section 192, would also then be covered inasmuch as such
tips also would not have been given but for the contract of employment
between employer and employee. Clearly, therefore, such argument does not
avail Revenue.
17. However, the sheet anchor of Shri Kaul’s submission is Section
17(3)(ii) in which Shri Kaul stressed that any payment received by an
assessee from an employer would be regarded as profits in lieu of salary.
According to Shri Kaul it is undisputable that payments were received by
the employees from their employer and that, without more, Section 17 would
therefore be attracted to the facts of the case. This argument again cannot
be countenanced for the simple reason that Section 17(3) itself uses two
different expressions – “employer” in sub-clause (ii) and “person” in sub-
clause (iii). Obviously “person” is wider than “employer”. Even the word
“person” which appears in the said sub-clause has reference either to a
future employer or a past employer. Therefore, it is clear that under the
scheme of Section 17, payment must be by an employer, whether such employer
is a future employer or a past employer of the employee in question. When
sub-clause (ii) uses the expression “employer”, it uses the said expression
in the same sense as is used in Section 15, as the opening line of Section
17 itself states that “for the purposes of Section 15” salary includes
profits in lieu of salary. We have already held that the word “employer”
in Section 15 necessarily brings in a contract of employment, express or
implied, and for this reason also we are afraid we are not able to accept
Shri Kaul’s argument.
18. The judgment of this Court in CIT v. L.W. Russel reported in 53 ITR
91 (SC) was relied upon by Shri Kaul stating that the expression “allowed”
is of a wider connotation and would be equivalent to “fixed, taken into
account, set apart or granted”. We have already held that given the fact
that the expression “allowed” is of wide amplitude, yet the other
expressions in Section 15 as construed by us would exclude tips from its
purview.
19. Interestingly, this Court in Rambagh Palace Hotel’s case (supra), in
paragraph No.2 held as under:-
“We regret to be unable to agree with the counsel on this point. It is well-
known that in important hotels in the country — the appellant is now a five
star hotel — the customers are of the affluent variety and pay tips either
to the waiters directly or in the shape of service charges or otherwise to
the management along with the bill for the items consumed. In short, the
true character of tips cannot be treated as any payment made by the
management out of its pocket but a transfer of what is collected to the
staff as it is intended by the payer to be so distributed. It may also
happen that more money comes in by way of tips into the pockets of the
management than distributed by it. We cannot therefore consider the receipt
of tips by the staff as anything like a payment made by the management to
its employees warranting consideration by the tribunal to depress the award
of dearness allowance. Of course, it is a factor which may perhaps be in
the mind of the tribunal when he finalised the actual figures. There is no
reason for us to think that although not specifically put down in his
order, the tribunal has lost sight of this circumstance. For this reason,
we think there is no ground for interference with the award of the
Industrial Tribunal. Having regard to the fair way the case has been placed
before us, we do not regard this as a case where costs should be awarded
while dismissing the appeal. The appeal is dismissed but the parties will
bear their own costs.”
This judgment was followed in Quality Inn Southern Star v. ESI Corpn.,
(2008) 2 SCC 549.
20. Shri Kaul sought to distinguish the aforesaid judgments as they arose
in contexts that were outside the Income Tax Act. For this, he relied upon
Jagatram Ahuja v. Commissioner of Gift Tax, Hyderabad, (2000) 8 SCC 249 at
paragraph 23, for the proposition that words judicially construed in a
particular statute cannot be a guide to construction of the same words in
another statute, unless the concerned statutes are statutes in pari
materia. He argued that the Rambagh Palace Hotel judgment arose in the
context of an award made by the Industrial Tribunal in favour of the
workers of the Rambagh Palace Hotel who had raised a dispute on the score
that the price index having gone up, the workers were entitled to adequate
compensation by way of dearness allowance. It is in this context, that
according to Shri Kaul, this Court held that the true character of tips
cannot be treated as any payment made by the management out of its pocket
but only as a transfer of what is collected, to the staff, as it is
intended by the employer to be distributed to the staff.
21. Shri Kaul may be right in his submission that generally speaking the
context of the two statutes being different, no reliance can be placed as a
precedent on the Rambagh Palace Hotel case. However, we may point out that
the statement by this Court that the true character of tips cannot be
treated as any payment made by the management but only as a transfer of
what is collected from the customer and paid to the staff is equally
applicable to the facts of the present case. Similarly, the Quality Inn
Southern Star case was also a judgment in a different context, namely the
Employees’ State Insurance Act, 1948. In that case, it was held that the
amounts of tips received by employees were not in the nature of wages as
they were not given to the employees under the terms of the contract of
employment, either express or implied. The aforesaid statement made by this
Court, though made in a different context, would apply on all fours in the
present case, again for the reasons mentioned hereinabove.
22. Along the lines of the aforesaid judgments, the House of Lords, in
Wrottesley v. Regent Street Florida Restaurant, [1951] 2 K.B. 277 dealt
with a case in which, under a tronc system, customers’ tips are shared out
between the waiters, and, in some cases, other members of the staff. This
judgment arose under Section 9(2) of the Catering Wages Act, 1943 which
provided that if an employer fails to pay to a worker, to whom a wages
regulation order applies, remuneration not less than the statutory minimum
remuneration (clear of all deductions), he shall be guilty of an offence.
The question that arose in that case is whether tips received by waiters
under the tronc system were to be regarded as “remuneration” so as to take
the employer out of Section 9 (2) aforesaid. In this context, the House of
Lords held:
“What we have to decide is whether, when a waiter receives a payment from
the tronc in the manner found in the case, that sum can be regarded as
remuneration paid to him by, or as remuneration obtained by him in cash
from, his employer. In our opinion, when a customer gives a tip to a waiter
the money becomes the property of the latter. The customer has no intention
of giving anything to the employer. Mr. Salmon, indeed, did not contend
that in a case where no tronc existed, a tip given by a customer could be
regarded as remuneration paid by or obtained from the employer. But where
the tronc system obtains the money given by the customer is paid into a
tronc or pool by the waiter so that it then becomes the joint property of
all those entitled to share in the pool. In parenthesis, it may be seen by
reference to a French dictionary, that the word tronc is applied to a box
or receptacle for money, and can be used to indicate, for instance, a poor
box.
It seems to us that there is no ground for saying that these tips ever
became the property of the employers. Even if the box were kept in the
actual custody of the employer he would have no title to the money: the
position would be exactly the same as if the owner of some bank notes and
coin put them in a bag and handed it to some person to keep for him. When
the tronc money is shared out the waiters are dividing up their own money.
Accordingly, we hold that the sums received from the tronc by the waiters
cannot be taken into account in computing the amounts paid by the
respondents to them.”
23. We approve of the reasoning contained in this judgment and hold that
payments of collected tips made in the manner indicated in Paras 7 and 9
above would not be payments made “by or on behalf of” an employer. We
agree with the statement of law that there is no ground for saying that
these tips ever became the property of the employers. Even if the box were
kept in the actual custody of the employer he would have no title to the
money as he would hold such money in a fiduciary capacity for and on behalf
of his employees. In the said circumstances, it is clear that such payments
would be outside the purview of Section 15(b) of the Act.
24. It remains to deal with the sheet anchor of Shri Kaul’s submission,
which is this Court’s judgment in Karamchari Union, Agra v. Union of India,
(2000) 3 SCC 335. In this judgment, this Court was faced with whether city
compensatory allowance and other allowances such as house rent allowance
are “salary” under Section 17. This Court held that Section 17 gives an
exhaustive meaning to the expression “salary” by extending the ordinary
connotation of the word to fees, commissions, perquisites or payments of
profits in lieu of salary which are not ordinarily considered to be salary.
The question posed before this Court was what does the expression “salary”
signify. Would it also include any payment received from the employer
relatable to or out of the profits or could it be understood as
any pecuniary gain or advantage? This Court held:-
“In our view, even though there is much substance in the contentions raised
by the learned counsel for the assessee yet it is to be stated that the Act
is a self-contained code and the taxability of the receipt of any amount or
allowance is to be determined on the basis of the meaning given to the
words or phrases in the Act. Section 2(24) of the Act gives a wide
inclusive definition to the word “income”. Similarly, for levying tax on
salary income, an exhaustive definition is given under Section 17, which
includes perquisites and profits in lieu of salary. The only exclusion
provided under sub-section (3) is any payment referable to clause (10),
clause (10-A), clause (10-B), clause (11), clause (12), clause (13) or
clause (13-A) of Section 10. In view of this specific inclusion and
exclusion in the meaning of the word “income” and “salary”, it is rightly
submitted that payment received by the assessee has no connection with the
profits of the employer. The word “profits” is used only to convey any
“advantage” or “gain” by receipt of any payment by the employee.
Applying the aforesaid general meaning of the word “profits” and
considering the dictionary (sic statutory) meaning given to it under
Sections 17(1)(iv) and (3)(ii), it can be said that “advantage” in terms of
payment of money received by the employee from the employer in relation or
in addition to any salary or wages would be covered by the inclusive
definition of the word “salary”. Because of the inclusive meaning given to
the phrase “profits in lieu of salary” would include “any payment” due to
or received by an assessee from an employer, even though it has no
connection with the profits of the employer. It is true that the
legislature might have avoided giving an inclusive meaning to the word
“salary” by stating that any payment received by the employee from an
employer would be considered to be salary except the payments which are
excluded by Section 17(3)(ii) i.e. clause (10), (10-A), (10-B), (11), (12),
(13) or (13-A) of Section 10. However, it is for the legislature to decide
the same. This would not mean that by giving an exhaustive and inclusive
meaning, the word “profits” can be given a meaning only when it pertains to
sharing of profits by the employer. For the assessee, the receipt of such
amount would be a profit, gain or advantage in addition to salary, even
though it is not named as salary. Therefore, the word “profits” in context
is required to be understood as a gain or advantage to the assessee. Hence,
it is not possible to accept the contention of the learned counsel for the
employee that as the CCA amount is paid to meet the additional expenditure
as contemplated by the statutory Service Rules, it cannot be said to be
profit, gain or additional salary. Under the Act, such receipt of the
amount as conceded is covered by the definition of the word “income” and as
provided it would be in addition to salary. Hence, it would be part and
parcel of income by way of salary, which would be a taxable one.
In the result, we hold that DA, CCA and HRA would be taxable income. Since,
counsel for the employees did not make any submission with regard to other
allowances like night allowance, tuition fee, leave encashment linked with
leave travel concession, running allowance etc. we do not pass any order
with regard to those allowances.” [at paras 23, 25 and 28]
25. All that was held by this Court in the aforesaid decision is that
even if an amount is received by an employee which has no connection with
the profits of the employer, it may yet be salary as any advantage or gain
by receipt of such payment would be included in the expression “profits in
lieu of salary”. Hence, this court did not accede to the contention of
learned counsel for the assessee that as the CCA amount is paid to meet
additional expenditure as contemplated by statutory service rules, it
cannot be said to be “profit”. This Court finally held that CCA and HRA
would be taxable income in the hands of the employee.
26. It is well settled that a case is an authority, for what it decides,
and not for what logically follows from it. This case in no manner
supports Shri Kaul’s submission on Section 17(3)(ii) that the moment any
amount is received from an employer by an employee, without more, such
amount becomes a profit in lieu of salary. In the Karamchari Union
judgment, CCA and HRA arose directly from the employer – employee
relationship. The question the Court had to answer was whether a pecuniary
advantage in the form of CCA and HRA would be covered by Section 17, which
the Court answered in the affirmative. This Court’s decision cannot be
understood to mean that even de hors the employer – employee relationship,
any amount received from the employer by an employee would become ‘salary’
under Section 17. We are, therefore, unable to subscribe to the High
Court’s view in understanding this decision to mean that so long as the
employer pays an amount to an employee, even in a fiduciary capacity and de
hors the employer – employee relationship, the amount so paid would come
within the head “salary”.
27. Shri Kaul also relied upon two English judgments and one Australian
judgment to buttress his submission.
28. Before adverting to the English judgments, it is necessary first to
set out the statutory scheme contained in Schedule E of the English Income
Tax Act, 1918.
“SCHEDULE E
Tax under Schedule E shall be charged in respect or every public office or
employment of profit and in respect of every annuity, pension, or stipend
payable by the Crown or out of the public revenue of the United Kingdom,
other than annuities charged under Schedule C, for every twenty shillings
of the annual amount thereof.”
“1. Tax under this Schedule shall be annually charged on every person
having or exercising an office or employment of profit mentioned in this
Schedule, or to whom any annuity, pension, or stipend, as described in this
Schedule, is payable, in respect of all salaries, fees, wages, perquisites
or profits whatsoever therefrom for the year of assessment, except as
otherwise provided, after deducting the amount of duties or other sums
payable or chargeable on the same by virtue of any Act of Parliament, where
the same have been really and bona fide paid and borne by the party to be
charged.”
29. The difference in language between the U.K. Act and Sections 15 and
17 of the Income Tax Act, 1961 is obvious. There need not be an employer
employee relationship under Schedule E read with Rule 1 to attract the
aforesaid provision. Since this is the case, it is clear that amounts that
are received by any person chargeable under the said Schedule and Rule
become taxable even if the said amount is paid by a third person. Keeping
this vital difference in view, let us analyse the two English judgments
relied upon by Shri Kaul.
30. In Calvert (Inspector of Taxes) v. Wainwright, [1947] 1 KB 526, the
question posed before the King’s Bench was: Are tips received by taxi
drivers from their customers assessable to income tax in their hands? The
King’s Bench Division held that such tips are assessable under Schedule E
read with Rule 1 of the Income tax Act, 1918. In so holding, the King’s
Bench held that though persons like taxi drivers have no vested right to
ask for tips, they would yet be covered. This is for the reason that Rule
1 indicates that emoluments may be received either from the employer or
from a third party as a reward for services rendered in the course of
employment. This case is obviously distinguishable, first, on the ground
that an emolument received from a third party is not covered by Sections 15
and 17 of the Indian Income Tax Act unless such emolument is on behalf of
an employer. Secondly, the case dealt with whether such emoluments may be
taxable in the hands of the taxi driver. It is nobody’s case that the
amount of tips received by the employees in the present cases are not
taxable in their hands – indeed learned counsel for the assessees have
stated that they are so taxable as income from other sources. The question
that we have to determine is somewhat different – whether the person
responsible for paying salary income to his employee is liable to deduct
the tax of the employee and pay it over on an estimated basis under Section
192 of the Income Tax Act. For both the aforesaid reasons, this judgment
therefore does not take Shri Kaul’s case any further.
31. Similarly, the judgment in Moorhouse (Inspector of Taxes) v. Dooland,
[1955] 2 W.L.R. 96, also arose under Schedule E Rule 1. The question posed
in that case was whether collections made by a professional cricketer for
his own benefit under a contract with a cricket club could be assessed to
tax under the aforesaid provisions. The Court of Appeal, in holding that
such sum could so be assessed to income tax, held that by an express term
in the contract of employment the cricketer was entitled to solicit
contributions from spectators. Since this was the actual situation before
the Court of Appeal, the Court of Appeal held that from the standpoint of
the recipient, such voluntary payments accrued to him by virtue of his
employment by the cricket club. A distinction was made by the Court of
Appeal, regard being had to the U.K. statute, between voluntary payments
made in circumstances on a ground personal to the recipient as opposed to
those which arise from his contract of employment. The Court of Appeal
held that given the special facts of the case, being the clause contained
in the contract of employment, that the said amounts could not be said to
be purely personal to the cricketer but arose from his contract of
employment. For the very reasons given in distinguishing the earlier U.K.
judgment, we find this judgment also has no application as the U.K. statute
is markedly different from Sections 15 and 17 of the Indian Income Tax Act,
and that consequently the tests applied by the English Courts, being based
upon the language of the U.K. Income Tax Act, would not apply to the
situation in India.
32. A judgment cited by the appellants has also to be dealt with in this
context. In Hochstrasser (Inspector of Taxes) v. Mayes, [1960] A.C. 376, a
certain company employed many persons in numerous factories in different
places. The employees were required by their service agreement to be
prepared to serve the employer wherever required. A housing scheme was
entered into with the employees under which, whenever the employee had to
shift residence, and in so shifting would incur a loss on selling the house
in the place from which he was transferred, the Company would compensate
such loss. This loss was the subject matter of assessment under Schedule E
of the Income Tax Act, 1918. The House of Lords, in this judgment, had to
deal with paragraph 2 of Schedule E which reads as follows:-
“2. Tax under this Schedule shall also be charged in respect of any
office employment or pension, the profits or gains arising or accruing from
which would be chargeable to tax under Schedule D but for the proviso to
paragraph 1 of that Schedule….”
33. The House of Lords held that it is not enough for the Crown to
establish that the employee would not have received the sum on which tax is
claimed had he not been an employee at all. The Court must be satisfied
that the service agreement was the causa causans and not merely the causa
sine qua non of the receipt of the amount.
34. Having held that the judgments cited by Shri Kaul would have no
application to the facts of this case because they deal with the U.K. Act,
which is different in material particular from the Indian Act, this case
would also be tarnished with the same brush. However, we find that
paragraph 2 of Schedule E speaks of profits or gains arising or accruing
from any office or employment. This statutory provision, unlike paragraph
1 of the Schedule E, comes somewhat close to Section 15 of the Indian
Income Tax Act as construed by us, and consequently the test of proximity
with the service agreement, which was applied by the House of Lords, is a
test applicable to the facts of the present case. We find, therefore, that
the contract of employment in the present cases, not being the proximate
cause for the receipt of tips by the employee from a customer, the same
would be outside the dragnet of Sections 15 and 17 of the Income Tax Act.
35. Shri Kaul also cited before us the decision of the Supreme Court of
Western Australia reported in 85 ATC 4283 (Kelly v. Federal Commissioner of
Taxation). Suffice it to say that this very judgment distinguished some of
the English judgments on the ground that the Australian Act was not in pari
materia with Schedule E of the English Income Tax Act, 1918. This being
the case, and the Australian Act being far removed from the Indian Income
Tax Act, we do not feel this judgment throws any further light on the issue
at hand.
36. Shri Kaul further argued that in a cross appeal filed by the
Commissioner of Income Tax, we should set aside all observations made by
the High Court insofar as penalty is concerned. We find on a reading of
the assessment order dated 29.3.2007, that penalty proceedings under
Section 271C were separately initiated by the Assessing Officer, and
consequently form no part of this appeal. Indeed we have been told that by
an order dated 19.6.2013, penalty under the said Section has been levied
against ITC in Civil Appeals arising from SLP(C) Nos.20822-20824 of 2011.
Since the High Court judgment is being set aside in toto, none of the
observations on penalty would consequently bind either of the parties.
37. A great deal of argument was made by both sides on the nature of
interest contained in Section 201(1A) of the Act. We find it unnecessary
to go into this question for the simple reason that as held in Commissioner
of Income Tax, New Delhi v. Eli Lilly and Company (India) Private Limited,
(2009) 15 SCC 1 at paragraph 91, interest under section 201(1A) can only be
levied when a person is declared as an assessee-in-default. Having found
that the appellants in the present cases are outside Section 192 of the
Act, the appellants cannot be stated to be assessees-in-default and hence
no question of interest therefore arises.
38. In the view we have taken it is unnecessary to go into various other
submissions made by counsel on both sides. The appeals filed by the
assessees are, therefore, allowed and civil appeals arising out of SLP
(Civil) Nos.9587-9589 of 2012 filed by Revenue are dismissed. The judgment
of the High Court is set aside with no order as to costs.
……………………J.
(Kurian Joseph)
……………………J.
New Delhi; (R.F. Nariman)
April 26, 2016