ITC Limited vs. CIT (Supreme Court)

The Supreme Court had to consider whether the payment of banquet and restaurant tips to the employees of the assessee in its capacity as employer were profits in lieu of salary within the meaning of Section 17 (3) (ii) of the Income Tax Act, 1961. The High Court (CIT (TDS) v. ITC Ltd. (2011) 338 ITR 598 (Del.)) reversed the order of the ITAT and decided the point against the assessee. On appeal by the assessee to the Supreme Court HELD reversing the High Court:

(i) First and foremost, under sub-section (1) of section 192, “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. Thus, such income must necessarily be placed under Section 56(1) of the Act as ‘income from other sources’. Following Emil Webber v. CIT, (1993) 2 SCC 453) 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;

(ii) 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 and held 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”;

(iii) 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. The argument 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.

(iv) We approve of the reasoning contained in Wrottesley v. Regent Street Florida Restaurant, [1951] 2 K.B. 277 and hold that payments of collected tips made in the manner indicated in Paras 7 and 9 above would not be payments made “by or on behalf of” an employer. We agree with the statement of law that there is no ground for saying that these tips ever became the property of the employers. Even if the box were kept in the actual custody of the employer he would have no title to the money as he would hold such money in a fiduciary capacity for and on behalf of his employees. In the said circumstances, it is clear that such payments would be outside the purview of Section 15(b) of the Act.

(v) It is well settled that a case is an authority, for what it decides, and not for what logically follows from it. Karamchari Union, Agra v. Union of India, (2000) 3 SCC 335 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 Karamchari Union, Agra v. Union of India, (2000) 3 SCC 335. , 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 received from the employer by an employee would become ‘salary’ under Section 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”.