# lTC LIMITED GURGAON v. COMMISSIONER OF LT. (TDS) DELHI

- **Citation:** [2016] 3 S.C.R. 23
- **Court:** Supreme Court of India
- **Decided:** 2016-04-26
- **Case number:** Civil Appeal Nos. 4435-37 of2016
- **Bench:** Kurian Joseph, R.F. Nariman
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ltc-limited-gurgaon-v-commissioner-of-lt-tds-delhi-31106
- **Pages:** 25

## Headnote

Income Tax Act, 1961: s.192 - Applicability of - Held: If an
employee receives income chargeable under a head other than the
head ··salaries", then s.192 does not get attracted at all - In the
instant case, assessee was engaged in the business of hotels and
paying tips collected fro111 custo111ers to its employees but not
deducting taxes thereon -
Assessing Officer erred in treating the
receipt of the tips as income under the head 'salary' in the hands of
the various employees and in holding that assessee is liable to deduct
tax at source from such payments uls.192 of the Act - As income
fro111 tips would be chargeable in the hands of the employees as
income ji·om other sources, such tips being received fro111 customers
and not from the employer, s.192 is not attracted - The payments
received by the e111ployees have no reference whatsoever to the
contract of e111ployment and are received from the customer, the
employer only being a conduit in a fiduciary capacity in between
the two.
Allowing the assessees' appeals and dismissing the
revenue's appeal, the Court
HELD: 1. Under sub-section (1) of Section 192, "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 unde,r a head other
than the head "salaries", then Section 192 does not get attracted
at all. As income from tips would be chargeable in the hands of
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[20I6J 3 s:c.R.
A · the employees as income from other sources, such tips being
rec.eived from customers and not from the employer, Section 192
would not get attracted at all on the facts of the present case.
[Paras''12, 13) (33-E-G; 34-C)
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2. Section 15 of the Act is in three parts. Sub-clause (a)
refers to salary that is "due" from an employer or a forme'r
employer, whether paid or not. Under this sub-clause, salary is
taxable upon accrual - it matters not whether payment is actually
made or riot. On the other hand, under sub-clause (b), 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 ~llowed to an employee by or on behalf of an employer or
previous employer if not earlier charged to income tax 1n any
previous year is also brought to tax. 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~ ln the present case, it is clear that there is no
vested right in the employee to claim any amount of tip from his
employe1: Tips being purely voluntary am~unts 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, salary must
f,.
be .paid or allowed to an.employee in the previous year "by or on
behalf of'' an employer. Even assuming that. the expression
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· "allowed" is an expression of width, the salary must be paid by
' ()r 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

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[2016] 3 S.C.R. 23
lTC LIMITED GURGAON
v.
COMMISSIONER OF LT. (TDS) DELHI
(Civil Appeal Nos. 4435-37 of2016)
APRIL 26, 2016
[KURIAN JOSEPH AND R.F. NARIMAN, JJ.J
Income Tax Act, 1961: s.192 - Applicability of - Held: If an
employee receives income chargeable under a head other than the
head ··salaries", then s.192 does not get attracted at all - In the
instant case, assessee was engaged in the business of hotels and
paying tips collected fro111 custo111ers to its employees but not
deducting taxes thereon -
Assessing Officer erred in treating the
receipt of the tips as income under the head 'salary' in the hands of
the various employees and in holding that assessee is liable to deduct
tax at source from such payments uls.192 of the Act - As income
fro111 tips would be chargeable in the hands of the employees as
income ji·om other sources, such tips being received fro111 customers
and not from the employer, s.192 is not attracted - The payments
received by the e111ployees have no reference whatsoever to the
contract of e111ployment and are received from the customer, the
employer only being a conduit in a fiduciary capacity in between
the two.
Allowing the assessees' appeals and dismissing the
revenue's appeal, the Court
HELD: 1. Under sub-section (1) of Section 192, "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 unde,r a head other
than the head "salaries", then Section 192 does not get attracted
at all. As income from tips would be chargeable in the hands of
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[20I6J 3 s:c.R.
A · the employees as income from other sources, such tips being
rec.eived from customers and not from the employer, Section 192
would not get attracted at all on the facts of the present case.
[Paras''12, 13) (33-E-G; 34-C)
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2. Section 15 of the Act is in three parts. Sub-clause (a)
refers to salary that is "due" from an employer or a forme'r
employer, whether paid or not. Under this sub-clause, salary is
taxable upon accrual - it matters not whether payment is actually
made or riot. On the other hand, under sub-clause (b), 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 ~llowed to an employee by or on behalf of an employer or
previous employer if not earlier charged to income tax 1n any
previous year is also brought to tax. 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~ ln the present case, it is clear that there is no
vested right in the employee to claim any amount of tip from his
employe1: Tips being purely voluntary am~unts 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, salary must
f,.
be .paid or allowed to an.employee in the previous year "by or on
behalf of'' an employer. Even assuming that. the expression
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· "allowed" is an expression of width, the salary must be paid by
' ()r 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
die employe·r .. 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.· The amount of tip paid by the employer
to the eniployel!.$ has .no reference to the contract of employment
ITC LIMITED GURGAON v. COMMISSIONER OF l.T. (TDS)
DELHI
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. [Paras 14, 15, 16] [34-D-G; 36-F-H; 37-A-B]
3. Even 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. [Para 17] [37-G]
Emil Webber v. CIT 1993 (2) SCR 27 : (1993) 2 SCC
453 - relied on.
CIT i: L. W. Russel 53 ITR 91 (SC); Jagatram Ahuja v.
Commissioner of Gift Tax, Hyderabad 2000 (4) Suppl.
SCR 1 : (2000) 8 SCC 249; Wrottesley v. Regent Street
Florida Restaurant [1951] 2 K.B. 277; Calvert
(Inspector of Taxes) v. Wainwright, [1947] 1 KB 526;
Moorhouse (Inspector of Taxes) v. Dooland [1955] 2
W.L.R. 96; Hochstrasser (Inspector of Taxes) v. Mayes
[1960] A.C. 376; Co111111issioner of Income Tax, Nell'
Delhi v. Eli Lilly and Company (India) Private Limited
2009 (5) SCR 20 : (2009) 15 SCC 1; Karamchari
Union, Agra v. Union of India 2000 (2) SCR 33 : (2000)
3 SCC 335; Rambagh Palace Hotel v. Rajasthan Hotel
Workers' Union (1976) 4 SCC 817; Quality Inn
Southern Star v. ES! Corpn. 2007 (12) SCR 790 : (2008)
2 sec 549 - referred to.
Case Law Reference
2000 (2) SCR 33
referred to
Para 7
(1976) 4 sec 817
referred to
Para 7
2007 (12) SCR 790
referred to
Para 7
1993 (2) SCR 27
relied on
Para 12
53 ITR 91 (SC)
referred to
Para 15
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[2016) 3 S.C.R.
2000 ( 4) Suppl. SCR 1
referred to
Para 20
[1951] 2 K.B. 277
referred to
Para 22
[1947] 1 KB 526
referred to
Para 30
[1955) 2 W.L.R. 96
referred to
Para 31
[1960) A.C. 376
referred to
Para32
2009 (5) SCR 20
referred to
Para 37
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 443537 of2016 .
. ,
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From the Judgment and Order dated 11.05.2011 of the High Court
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of Delhi at New Delhi in ITA Nos. 475 of2010, 476 of2010 and 860 of
2010.
WITH
C. A. Nos. 443 8-40, 4441, 4442, 4443-44 OF 201 (i.
Ajay Vohra, Sr. Adv., Ms. Kavita Jha, Mrs. Anil Katiyar, Ms. Husnal
Syali, Mayank Negi, Tarun Singh, Aditya Singh, Rameshwar Prasad
Goyal, Ms. Mahua Katra, Advs., with him for the Appellant.
N. K. Kaul, ASG, S. Ganesh, Sr. Adv., Ms. Vanita Bhargava, Ajay
Bhargava, Abhisar Bairagi (For Mis. Khaitan & Co.), Ms. Chanan
Parwani, Sanyat Lodha, Arij it Prasad, Nitesh Daryanani, 8. V. Balaram
Das, Advs. for the Respondent.
The Judgment of the Court was delivered by
R.F. NARIMAN, J. I. 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
ITC LIMITED GURGAON v. COMMISSIONER OF J.T. (TDS)
DELHI [R.F. NARIMAN, J.]
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 ( 1 A)
of the said Act for assessment years 2003-2004, 2004-2005 and 20052006.
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 20 I (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 I 1.5.201 I
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 I 7 (3)(ii) of the Income Tax Act, 196 I?"
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
salaty or wages' and would fall under Section lS(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, ac<;ording to the High Court, amount to "salary"
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within the extended definition Gontained 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-indefault 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, yetthe High Court held that levy of interest under s.ection 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 betwee1i 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 fron:i 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 pers.on" occurring in Section 17
ITC LIMITED GURGAON v. COMMISSIONER OF l.T. (TDS)
DELHI [R.F. NARIMAN, J.]
(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 20 I 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 20 I (I A). 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 I 5(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
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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 20l(IA). He referred to the
provision of sect,ion 192(3) in order to buttress his submission that the
machinery provisions contained in Section 192 cou Id 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 (I) Any person responsible for paying any income
chargeable under the head "Salaries" sh al I. 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 asscssce under this head for that financial year.
(3) The person responsible for making the payment referred to in
sub-section (I) or sub-section (I A) or sub-section (2) or subsection (2A) or sub-section (28) 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
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arising out of any previous deduction or failure to deduct during
the financial year.
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201. Consequences of failure to deduct or pay.
(I) 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 (IA) of section 192, being an employe1~
does not deduct, or does not pay, or after so deducting fails to pay,
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the whole or any part of the tax. as required by or under this Act,
ITC LIMITED GURGAON v. COMMISSIONER OF I.T. (TDS)
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DELHI [R.F. NARIMAN, J.]
then. such person, shall, without prejudice t<l any other
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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
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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 <111
accountant in such form as may be prescribed:
Provided further that no penalty shall be charged under sectio11
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.
( 1 A) Without prejudice to the provisions of sub-section (I). if any
such person, principal officer or company as is reforred 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
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a company fails to deduct the whole or any part of the tax in
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[2016] 3 S.C.R.
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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 (I), the interest under clause (i) shall be payable
from the date on which such tax was deductible to the date of
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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 I .-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,-
(J) "salary" includesG
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(iv) any fees, commissions, perquisites or profits in lieu of or in
addition to any salary or wages;
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(3) "profits in lieu of salary" includes-
ITC LIMITED GURGAON v. COMMISSIONER OF l.T. (TDS)
DELHI [R.F. NAR!MAN, J.]
(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 (JOA), clause (JOB), 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.-Forthe purposes of this sub-clause, the expression
"Keyman insurance policy" shall have the meaning assigned to it
in clause (1 OD) of section IO;
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(iii) any amount due to or received, whether in lump sum or
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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 ce1iain 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
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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 ofBallarpur, 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( I) 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 ofan 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
ofan employeror previous employer ifnot 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 Cou11 held:-
ITC LIMITED GURGAON v. COMMfSSIONER OF l.T. (TDS)
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"Now let us look at the provisions of section 7(1) of the Act in
A
order to ascertain whether such a contingent right is hit by the
said provisions. The material part of the section reads:
"7 .(I )-The tax shall be payable by an assessee under the head
'salaries' in respect ofany salary or wages, any annuity, pension
or gratuity, and any fees, commissio11s, perquisites, or profits
B
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 fXA 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 I to Section 7( I) 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( I) and clause (v) of Explanation I 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,
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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 ifthe
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, fa! I within
Section l 5(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 l 5(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
ITC LIMITED GURGAON v. COMMISSIONER OF I.T. (TDS)
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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 ofShri Kaul's submission is Section
I 7(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)
itselfuses 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.
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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
ft:om 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 oftips 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
ITC LIMITED GURGAON v. COMMISSIONER OF I.T'. (TDS)
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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.