Tips collected by hotel from customers and distributed to employees not salary for the purpose of TDS u/s 192-Supreme Court

The Supreme Court in its recent judgment has held that tips collected by the hotel from customers and distributed to employees are not salary for the purpose of TDS under Section 192.

Case Law Details:
Civil Appeal Nos. 4435-37 of 2016
ITC Limited Gurgaon (Appellant) versus Commissioner of IT (TDS) Delhi (Respondent)
Date of Judgment: 27/04/2016
Coram: Justice Kurian Joseph and Justice R.F. Nariman 

Important Case Laws referred:
Emil Webber v. CIT, (1993) 2 SCC 453,

Brief Facts of the Case:
Survey conducted at the business premises of the assessees hotel revealed that the assessees had been collecting tips from customers and distributing to their employees without deducting taxes (TDS) 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).

The CIT (Appeals) allowed appeals of the assessees holding that the assessees could not be treated as assessees in default for non-deduction of tax on tips collected by them and distributed to their employees. ITAT also disapproved the appeals of the revenue.

However, the High Court  in view of Sections 15, 17 and 192 of the Income Tax Act, held that tips would amount to ‘profit in addition to salary or wages’ u/s 15(b) read with Section 17(1)(iv) and 17(3)(ii). The High Court held that when tips were 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, if the tip tip paid by way of a credit card by a customer and because it goes into the account of the employer the receipt of such money would amount to “salary” within the extended definition contained in Section 17.

Held by Supreme Court:
The Apex Court held that as the income from tips was 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 was not attracted.

Excerpts from SC Judgment:

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 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…..

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. …… 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….

…. Section 17(3) itself uses two different expressions – “employer” in sub-clause (ii) and “person” in sub-clause (iii). Obviously “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. 

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