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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)

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.

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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 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 assessees-  

in-default under Section 201(1) of the Act for non-deduction of  2

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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  

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?”

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  

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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, (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  

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to  deduct  taxes  at  source  from  such  payments  under Section 192 of the Act.”

8. 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.  

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  

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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  

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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.   

10. Shri Neeraj K. Kaul, learned Additional Solicitor General,  

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

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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  

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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.    

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 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 assessee under  this  head for that financial year.

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(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  

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deduction or  failure to deduct  during the financial  year.

201. Consequences 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 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  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  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.

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(1A)  Without  prejudice  to  the  provisions  of  sub- section (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 sub- section (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 credited to the account of a  resident  but  is not  deemed to be an assessee in  default under the first proviso to sub-section (1), the  interest under clause (i) shall be payable from the  date on which such tax was deductible to the date  of 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;

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(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 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,— (1)  "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), clause (10B), 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  

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under a Keyman insurance policy 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  

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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  

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’.  

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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  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  

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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,  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.....................  

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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  

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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.”

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  18

Page 19

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  

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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 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 17(3) itself uses two different expressions – “employer”  

in  sub-clause (ii)  and “person”  in  sub-clause (iii).   Obviously  

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“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.  

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  

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expressions in Section 15 as construed by us would exclude  

tips from 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 of tips 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.”

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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  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  

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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.

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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. 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 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  

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by or  obtained from the employer.  But  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 the box were kept in the actual  custody of the employer he would have no title to  the money: the position would be exactly the same  as if  the owner of some bank notes and coin put  them in a bag and handed it to some person to keep  for  him. When the tronc money is shared out the  waiters  are  dividing  up  their  own  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  

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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  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:-

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“In our view, even though there is much substance  in the contentions raised by the learned counsel for  the assessee yet it is to be stated that the Act is a  self-contained code and the taxability of the receipt  of any amount or allowance is to be determined on  the  basis  of  the  meaning  given  to  the  words  or  phrases in the Act. Section 2(24) of the Act gives a  wide  inclusive  definition  to  the  word  “income”.  Similarly,  for  levying  tax  on  salary  income,  an  exhaustive  definition  is  given  under  Section  17,  which  includes  perquisites  and  profits  in  lieu  of  salary.  The  only  exclusion  provided  under  sub- section (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 receipt of any payment  by the employee.

Applying the aforesaid general meaning of the word  “profits”  and  considering  the  dictionary  (sic statutory)  meaning  given  to  it  under  Sections  17(1)(iv) and (3)(ii), it can be said that “advantage”  in  terms  of  payment  of  money  received  by  the  employee  from  the  employer  in  relation  or  in  addition to any salary or wages would be covered  by  the  inclusive  definition  of  the  word  “salary”.  Because  of  the  inclusive  meaning  given  to  the  phrase “profits in lieu of salary” would 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  

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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  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  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]

25. All that was held by this Court in the aforesaid decision is  

that even if an amount is received by an employee which has  

no connection with the profits of the employer, it  may yet be  

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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 authority,  for what it  

decides, and not for what logically follows from it.     This case  

in no manner supports Shri Kaul’s submission on Section 17(3)

(ii) that the moment any amount is received from an employer  

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

in lieu of salary.  In the Karamchari Union judgment, 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  –  employee  relationship,  any  amount  

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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

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  

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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  

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 hands?  The King’s Bench Division held that  

such tips are assessable under Schedule E read with Rule 1 of  

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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  

Rule 1 indicates that emoluments may be received either from  

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 –  

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  

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both the aforesaid reasons, this judgment therefore does not  

take Shri Kaul’s case any further.  

31. Similarly,  the  judgment  in  Moorhouse  (Inspector  of  

Taxes)  v.  Dooland,  [1955]  2  W.L.R.  96,  also  arose  under  

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  

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  

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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  different  places.   The  

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  

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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  proviso to paragraph 1 of that Schedule….”

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.  

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  

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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  

the  House  of  Lords,  is  a  test  applicable  to  the  facts  of  the  

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  

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

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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  

were  separately  initiated  by  the  Assessing  Officer,  and  

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  

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  

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to be assessees-in-default  and hence no question of  interest  

therefore arises.

38. In the view we have taken it  is unnecessary to go into  

various other submissions made by counsel on both sides.  The  

appeals filed by the assessees are, therefore, allowed and civil  

appeals arising out of SLP (Civil) Nos.9587-9589 of 2012 filed  

by Revenue are dismissed.  The judgment of the High Court is  

set aside with no order as to costs.   

……………………J.

(Kurian Joseph)

……………………J.

New Delhi; (R.F. Nariman)

April 26, 2016

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