ITC LIMITED GURGAON vs. COMMR.OF I.T(TDS) DELHI

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NOS. 4435-37 of 2016 (ARISING OUT OF SLP (CIVIL) NOS.20822-20824 OF 2011) ITC LIMITED GURGAON …APPELLANT VERSUS COMMISSIONER OF I.T. (TDS) DELHI …RESPONDENT WITH CIVIL APPEAL NOS. 4438-40 of 2016 (ARISING OUT OF SLP (CIVIL) NOS.9587-9589 OF 2012) CIVIL APPEAL NO. 4441 of 2016 (ARISING OUT OF SLP (CIVIL) NO.10653 OF 2012) CIVIL APPEAL NO. 4442 of 2016 (ARISING OUT OF SLP (CIVIL) NO.17964 OF 2012) CIVIL APPEAL NOS. 4443-44 of 2016 (ARISING OUT OF SLP (CIVIL) NOS.18128-18129 OF 2012) JUDGMENT 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. 1 Page 1 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

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 JUDGMENT 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 2 Page 2 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

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?” JUDGMENT 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 3 Page 3 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

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

SCC 335, while distinguishing the judgments of this Court in

judgments, the High Court arrived at the following conclusion:-

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JUDGMENT 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 5 Page 5 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

JUDGMENT 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 6 Page 6 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.

JUDGMENT 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.

appearing on behalf of the Revenue, argued that Section 15(b) 7 Page 7 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

learned Additional Solicitor General for this proposition relied

buttress this submission and stated that the High Court correctly relied upon the said decision. He went on to add that

rightly distinguished by the High Court. He also supported the 8 Page 8 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

xx (3) The person responsible for making the payment referred to in sub-section (1) or sub-section (1A) or sub-section (2) or sub-section (2A) or sub-section (2B) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous 9 Page 9

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dragnet of deduction of tax at source. The person responsible JUDGMENT 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”,

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Mills wanted to set up a caustic soda/chlorine manufacturing plant at Ballarpur. For this purpose, it entered into two

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 JUDGMENT 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’. 14 Page 14 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

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, JUDGMENT 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 15 Page 15 employer or previous employer if not earlier charged to income tax in any previous year is also brought to tax.

“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: JUDGMENT “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..................... 16 Page 16 Explanation I- For the purpose of this section, ‘perquisite’ includes-

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 JUDGMENT 17 Page 17

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 JUDGMENT 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 18 Page 18 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

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, JUDGMENT 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 19 Page 19 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.

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 JUDGMENT 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 20 Page 20 “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

JUDGMENT argument.

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 21 Page 21 expressions in Section 15 as construed by us would exclude tips from its purview.

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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

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 23 Page 23 what is collected, to the staff, as it is intended by the employer to be distributed to the staff.

1948. In that case, it was held that the amounts of tips JUDGMENT 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. 24 Page 24

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 JUDGMENT 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 25 Page 25

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which are not ordinarily considered to be salary. The question JUDGMENT 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:- 27 Page 27

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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] JUDGMENT

that even if an amount is received by an employee which has no connection with the profits of the employer, it may yet be 29 Page 29 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

by an employee, without more, such amount becomes a profit

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 30 Page 30 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 JUDGMENT 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 31 Page 31

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 JUDGMENT 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 32 Page 32 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

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 – JUDGMENT 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 33 Page 33 both the aforesaid reasons, this judgment therefore does not take Shri Kaul’s case any further.

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 JUDGMENT 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 34 Page 34 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

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 JUDGMENT 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 35 Page 35 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:-

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. JUDGMENT 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 36 Page 36 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

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 JUDGMENT 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 37 Page 37 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

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 JUDGMENT 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 38 Page 38 to be assessees-in-default and hence no question of interest therefore arises.

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