Friday, May 6, 2016



                        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)





                      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
assesses allegedly revealed that the assesses 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

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.


(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
     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—
(iv)  any fees, commissions,  perquisites  or  profits  in  lieu  of  or  in
addition to any salary or wages;
(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
(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

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

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

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
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

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.


                                        (Kurian Joseph)


New Delhi;                              (R.F. Nariman)

April 26, 2016

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