TaxTMI 
TaxTMI 
2016 (4) TMI 1055
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 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 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 j....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct 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 em....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oyees. 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 machine....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 subsection (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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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......................
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpression in the legal terminology is equivalent to "fixed, taken into account, set apart, granted". It takes in perquisites given in cash or in kind or in money or money's worth and also amenities which are not convertible into money. It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein." 16. On the facts of the present case, it is clear that there is no vested right in the employee to claim any amount of tip from his employer. Tips being purely voluntary amounts that may or may not be paid by customers for services rendered to them would not, therefore, fall within Section 15(b) at all. Also, it is clear that salary must be paid or allowed to an employee in the previous year "by or on behalf of" an employer. Even assuming that the expression "allowed" is an expression of width, the salary must be paid by or on behalf of an employer. It must first be noticed that the expression "employer" ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd "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 pur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ere 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t and in respect of every annuity, pension, or stipend payable by the Crown or out of the public revenue of the United Kingdom, other than annuities charged under Schedule C, for every twenty shillings of the annual amount thereof." "1. Tax under this Schedule shall be annually charged on every person having or exercising an office or employment of profit mentioned in this Schedule, or to whom any annuity, pension, or stipend, as described in this Schedule, is payable, in respect of all salaries, fees, wages, perquisites or profits whatsoever therefrom for the year of assessment, except as otherwise provided, after deducting the amount of duties or other sums payable or chargeable on the same by virtue of any Act of Parliament, where the same have been really and bona fide paid and borne by the party to be charged." 29. The difference in language between the U.K. Act and Sections 15 and 17 of the Income Tax Act, 1961 is obvious. There need not be an employer employee relationship under Schedule E read with Rule 1 to attract the aforesaid provision. Since this is the case, it is clear that amounts that are received by any person chargeable under the said Schedule and Rule beco....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tandpoint 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 differen....