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2016 (4) TMI 1055 - SUPREME COURT

2016 (4) TMI 1055 - SUPREME COURT - [2016] 384 ITR 14 - TDS u/s 192 - short/non deduction of tax at source on account of banquet and restaurant tips collected and paid by it to its employees - assessee in default - Held that:- Payments of collected tips made in the manner 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 actu .....

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ceived from an employer by an employee, without more, such amount becomes a profit in lieu of salary. In the Karamchari Union judgment [2000 (2) TMI 11 - SUPREME Court] 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 – em .....

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tained 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 (3) TMI 33 - SUPREME COURT) 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 an .....

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S.18128-18129 OF 2012) JUDGMENT R. F. Nariman, J. 1. Leave granted. 2. These appeals arise out of a common judgment of the Delhi High Court dated 11.5.2011. 3. The assessees are engaged in the business of owning, operating, and managing hotels. Surveys conducted at the business premises of the assessees allegedly revealed that the assessees had been paying tips to its employees but not deducting taxes thereon. 4. The Assessing Officer treated the receipt of the tips as income under the head sala .....

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essment 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 assesseesin- 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 .....

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et 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 .....

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es, 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., (200 .....

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essees-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 inter .....

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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 i .....

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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 n .....

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cted. It was also argued that since the High Court had found that the conduct of the assessees was bonafide, interest therefore could not have been charged from them under Section 201(1A). All the learned counsel have relied upon various judgments of this Court and other courts in support of their submissions. 10. Shri Neeraj K. Kaul, learned Additional Solicitor General, appearing on behalf of the Revenue, argued that Section 15(b) referred to salary that is paid or allowed to an employee by or .....

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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 Ra .....

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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 incometax computed on the basis of the rates in force for the financial year in which the payment is made, on t .....

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ces 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 t .....

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mputing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed: Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient reasons, has failed to deduct and pay such tax. (1A) Without prejudice to the provisions o .....

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th 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 subsection (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 credi .....

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t; (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 .....

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salary" includes- xx (iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; xx (3) "profits in lieu of salary" includes- (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto; (ii) any payment (other than any payment referred to in clause (10), clause (10A), clau .....

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icy" 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 .....

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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 s .....

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ght within the purview of Section 17 of the Act. Thus, such income must necessarily be placed under Section 56(1) of the Act as income from other sources . 13. Following the aforesaid decision, it is clear that as income from tips would be chargeable in the hands of the employees as income from other sources, such tips being received from customers and not from the employer, Section 192 would not get attracted at all on the facts of the present case. 14. Section 15 of the Act is in three parts. .....

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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, .....

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alaries , 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 h .....

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esupposes 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& .....

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reto 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, .....

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t; 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 s .....

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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 .....

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mer. 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 .....

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ail 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 1 .....

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, 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 re .....

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l 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 pa .....

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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. ES .....

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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 wha .....

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d 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 differ .....

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s 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 tro .....

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t where the tronc system obtains the money given by the customer is paid into a tronc or pool by the waiter so that it then becomes the joint property of all those entitled to share in the pool. In parenthesis, it may be seen by reference to a French dictionary, that the word tronc is applied to a box or receptacle for money, and can be used to indicate, for instance, a poor box. It seems to us that there is no ground for saying that these tips ever became the property of the employers. Even if .....

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he 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 em .....

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e 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 i .....

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nd profits in lieu of salary. The only exclusion provided under subsection (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 recei .....

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d 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 th .....

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ontention 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, .....

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t 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 au .....

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red 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 relationsh .....

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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 .....

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ce 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 h .....

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st, 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 .....

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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 .....

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at 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 .....

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he 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 pro .....

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l 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 .....

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t 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 Cou .....

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