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.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.
Held by CIT (A) and ITAT
CIT (Appeals) vide his common order dated 28.11.2008 allowed the various appeals of the assessees holding that the assessees could not be treated as assessees-in-default under Section 201(1) of the Act for non-deduction of tax on tips collected by them and distributed to their employees. Appeals filed by the Revenue to the Income Tax Appellate Tribunal (ITAT) came to be dismissed by the Tribunal by relying upon its own order for assessment year 1986-1987 in the case of ITC and the case of Nehru Palace Hotels Limited. Against the said orders of the Tribunal, appeals were preferred by the Revenue to the High Court.
Held by High Court
High Court held, after considering Sections 15, 17 and 192 of the Income Tax Act, that tips would amount to ‘profit in addition to salary or wages’ and would fall under Section 15(b) read with Section 17(1)(iv) and 17(3)(ii). Even so, the High Court held that when tips are received by employees directly in cash, the employer has no role to play and would therefore be outside the purview of Section 192 of the Act. However, the moment a tip is included and paid by way of a credit card by a customer, since such tip goes into the account of the employer after which it is distributed to the employees, the receipt of such money from the employer would, according to the High Court, amount to “salary” within the extended definition contained in Section 17 of the Act. For arriving at this interpretation, the High Court relied upon the decision of this Court in Karamchari Union, Agra v. Union of India,  3 SCC 335, while distinguishing the judgments of this Court in Rambagh Palace Hotel v. Rajasthan Hotel Workers’ Union,  4 SCC 817 and Quality Inn Southern Star v. ESI Corpn.,  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.”
Since the assesses were, therefore, declared to be assessees-in-default under Section 201 of the Act, the High Court found that despite the fact that the assessees did not deduct the said amounts based on a bonafide belief and no dishonest intention could be attributed to any of them, yet the High Court held that levy of interest under Section 201(1A) would follow, as the payment of simple interest under the said provision is mandatory; and not being penal in nature, no question of bonafide belief would arise to absolve the assessees from any interest liability under the said provision.
Contention of the Assessee
Learned senior advocates Shri Vohra and Shri Syali, assailed the judgment of the High Court before us. They argued that tips are paid by customers out of their own volition as payments to the employees being waiters in a restaurant for the quality of service provided to them and for courteous behavior. Since this payment is gratuitous, and the assessees act as mere trustees in collecting the tips charged to the customers’ credit cards, and then pass over the same to the employees, it is clear that no amount by way of tip has any connection with the contract of employment between the employer and the employee. They further submitted that the tips received by the employees are not remuneration or reward for services rendered by the employees to the assessees. They argued that there was no vested right of an employee to claim any tip from a customer. It was further argued that the expression “employer” contained in Sections 15 and 17 is of crucial importance, and must be contrasted with the expression “any person” occurring in Section 17 (3)(iii). It was also argued, based on the Hotel Receipts Tax Act and a circular issued thereunder, that tips do not form any part of taxable receipts of the employers. Further, we were shown a publication in which guidelines were issued by the Australian Tax Office stating that voluntary tips are not consideration for the supply of food or service in a hotel or restaurant. The intervenor represented by Shri S. Ganesh also argued that Section 192 is attracted only when any person responsible for paying any income chargeable under the head “salary” is to deduct income tax on the amount payable. According to the learned counsel, since the income received from tips is not income chargeable under the head “salary”, so far as the employees are concerned, but income from other sources, Section 192 is not at all attracted. It was further agued by him that the machinery provision contained in Section 192 is not possible of compliance inasmuch as it is impossible for the employer to predicate how much each individual employee would get by way of income from tips, particularly when the schemes for distribution are many and varied and may include different sums being received by different employees based on various criteria. He also argued that no question of Section 201 would come into play in this case as it is only in consequence of failure to comply with Section 192 that Section 201 is at all attracted. It was also argued that since the High Court had found that the conduct of the assessees was bonafide, interest therefore could not have been charged from them under Section 201(1A). All the learned counsel have relied upon various judgments of this Court and other courts in support of their submissions.
Contention of the Revenue
Shri Neeraj K. Kaul, learned Additional Solicitor General, appearing on behalf of the Revenue, argued that Section 15(b) referred to salary that is “paid” or “allowed” to an employee by or on behalf of an employer, and stated that the expression “allowed” is an expression of wide import and would include amounts such as tips paid by employers to their employees. He also relied upon Section 17(3) (ii) to state that any payment received by an assessee from an employer would be regarded as ‘profit in lieu of salary’, and that since the amount of tips received by way of credit cards from the customer are first put into the employer’s account and thereafter received by the employees from the employer, that was sufficient to attract ‘profits in lieu of salary’ as defined. According to the learned counsel, the section makes no reference to the contract of employment, which is therefore a foreigner to the Section. The learned Additional Solicitor General for this proposition relied heavily upon Karamchari Union, Agra’s case (supra), to buttress this submission and stated that the High Court correctly relied upon the said decision. He went on to add that the judgments contained in Rambagh Palace Hotel and Quality Inn Southern Star were not directly on point and were rightly distinguished by the High Court. He also supported the finding of the High Court that bonafide belief would have no bearing on payability of interest under Section 201(1A). He referred to the provision of section 192(3) in order to buttress his submission that the machinery provisions contained in Section 192 could easily be worked out as monthly estimates of the tips that were received or receivable had to be made by the employer.
Held by Supreme Court
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 Webberv. CIT,  2 SCC 453, the Ballarpur Paper and Straw Board Mills wanted to set up a caustic soda/chlorine manufacturing plant at Ballarpur. For this purpose, it entered into two agreements with Krebs, a French concern, which in turn entered into an agreement with a Swiss concern for making available services of certain personnel. The assessee, Emil Webber, was a person engaged by the Swiss concern. The assessee came to India and worked in connection with the setting up of the said plant. The question that was posed before this Court was whether the tax component paid by Ballarpur of the assessee’s taxable income could be included within the income of the assessee. This Court, in answering the said question, specifically stated in paragraph 8, that the question arose as to under which head of income should the said income be placed. This Court held that inasmuch as the assessee is not an employee of Ballarpur, which made the payment, it cannot be brought within the purview of Section 17 of the Act. Thus, such income must necessarily be placed under Section 56(1) of the Act as ‘income from other sources’.
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.
Section 15 of the Act is in three parts. Sub-clause (a) refers to salary that is “due” from an employer or a former employer, whether paid or not. Under this sub-clause, salary is taxable upon accrual – it matters not whether payment is actually made or not. On the other hand, under sub-clause (b), with which we are directly concerned, any salary that is paid or allowed to an employee by or on behalf of an employer or former employer though not due, or before it becomes due, becomes taxable. Under this sub-clause, it matters not whether the salary is at all due. Payment made or allowance given to the employee by or on behalf of an employer or former employer is sufficient to bring such payment or allowance to tax under the said sub-clause. Under sub-clause (c) any arrears of salary paid or allowed to an employee by or on behalf of an employer or previous employer if not earlier charged to income tax in any previous year is also brought to tax.
It can be seen, on an analysis of Section 15, that for the said Section to apply, there should be a vested right in an employee to claim any salary from an employer or former employer, whether due or not if paid; or paid or allowed, though not due. In CIT v. L.W. Russel reported in 53 ITR 91 (SC), this Court dealt with the provisions of Section 7(1) of the 1922 Act, which preceded Sections 15 and 17 of the present Act. Holding that it is necessary for the employee to have a vested right to receive an amount from his employer before he could be brought to tax under the head “salaries”, this Court held:-
“Now let us look at the provisions of section 7(1) of the Act in order to ascertain whether such a contingent right is hit by the said provisions. The material part of the section reads:
“7.(1) -The tax shall be payable by an assessee under the head ‘salaries’ in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites, or profits in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, or are paid by or on behalf of ………….
Explanation I- For the purpose of this section, ‘perquisite’ includes-
(v) any sum payable by the employer, whether directly or through a fund to which the provisions of Chapters IXA and IXB do not apply, to effect an assurance on the life of the assessee or in respect of a contract of annuity on the life of the assessees.”
This section imposes a tax on the remuneration of an employee. It presupposes the existence of the relationship of employer and employee. The present case is sought to be brought under the head “perquisites in lieu of, or in addition to, any salary or wages, which are allowed to him by or are due to him, whether paid or not, from, or are paid by or on behalf of a company”. The expression “perquisites” is defined in the Oxford Dictionary as “casual emoluments, fee or profit attached to an office or position in addition to salary or wages”. Explanation 1 to Section 7(1) of the Act gives an inclusive definition. Clause (v) thereof includes within the meaning of “perquisites” any sum payable by the employer, whether directly or through a fund to which the provisions of Chapters IXA and IXB do not apply, to effect an assurance on the life of the assessee or in respect of a contract for an annuity on the life of the assessee. A combined reading of the substantive part of Section 7(1) and clause (v) of Explanation 1 thereto makes it clear that if a sum of money is allowed by the employee by or is due to him from or is paid to enable the latter to effect an insurance on his life, the said sum would be a perquisite within the meaning of section 7(1) of the Act and, therefore, would be eligible to tax. But before such sum becomes so exigible, it shall either be paid to the employee or allowed to him by or due to him from the employer. So far as the expression “paid” is concerned, there is no difficulty, for it takes in every receipt by the employee from the employer whether it was due to him or not. The expression “due” followed by the qualifying clause “whether paid or not” shows that there shall be an obligation on the part of the employer to pay that amount and a right on the employee to claim the same. The expression “allowed”, it is said, is of a wider connotation and any credit made in the employer’s account is covered thereby. The word “allowed” was introduced in the section by the Finance Act of 1955. The said expression in the legal terminology is equivalent to “fixed, taken into account, set apart, granted”. It takes in perquisites given in cash or in kind or in money or money’s worth and also amenities which are not convertible into money. It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein.”
On the facts of the present case, it is clear that there is no vested right in the employee to claim any amount of tip from his employer. Tips being purely voluntary amounts that may or may not be paid by customers for services rendered to them would not, therefore, fall within Section 15(b) at all. Also, it is clear that salary must be paid or allowed to an employee in the previous year “by or on behalf of” an employer. Even assuming that the expression “allowed” is an expression of width, the salary must be paid by or on behalf of an employer. It must first be noticed that the expression “employer” is different from the expression “person”. An “employer” is a person who employs another person under a contract of employment, express or implied, to perform work for the employer. Therefore, Section 15(b) necessarily has reference to the contract of employment between employer and employee, and salary paid or allowed must therefore have reference to such contract of employment. On the facts of the present case, it is clear that the amount of tip paid by the employer to the employees has no reference to the contract of employment at all. Tips are received by the employer in a fiduciary capacity as trustee for payments that are received from customers which they disburse to their employees for service rendered to the customer. There is, therefore, no reference to the contract of employment when these amounts are paid by the employer to the employee. Shri Kaul, however, argued that there is an indirect reference to the contract of employment inasmuch as but for such contract, tips to employees could not possibly have been paid at all. We are afraid that this argument must be rejected for the simple reason that the payments received by the employees have no reference whatsoever to the contract of employment and are received from the customer, the employer only being a conduit in a fiduciary capacity in between the two. Indeed, if Shri Kaul’s arguments were to be accepted, even the position accepted by the revenue and consequently the High Court that tips given in cash, which admittedly are not covered by Section 192, would also then be covered inasmuch as such tips also would not have been given but for the contract of employment between employer and employee. Clearly, therefore, such argument does not avail Revenue.
A great deal of argument was made by both sides on the nature of interest contained in Section 201(1A) of the Act. We find it unnecessary to go into this question for the simple reason that as held in Commissioner of Income Tax, New Delhi v. Eli Lilly and Company (India) Private Limited, (2009) 15 SCC 1 at paragraph 91, interest under section 201(1A) can only be levied when a person is declared as an assessee-in-default. Having found that the appellants in the present cases are outside Section 192 of the Act, the appellants cannot be stated to be assessees-in-default and hence no question of interest therefore arises.