IMPORTANT POINT
Tips received from customers are not salary within the meaning of section 192, 15 and 17 of the Income Tax Act, 1996.

Headnote:(a) Income Tax Act, 1961 – Section 192 – Income from tips – Received from customers and not from the employer – Chargeable in the hands of the employees as income from other sources – Section 192 would not get attracted at all. (Para 13)
       (1993) 2 SCC 453 – Relied upon
       (b) Income Tax Act, 1961 – Section 15 – For section 15 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 – Instantly employees not having any vested right to receive tips from their employer – Tips therefore, would not fall within Section 15(b) – Employer keeping the tips received from customers in a fiduciary capacity as trustee for disbursing to their employees for service rendered to the customer – Payment of tips would be outside the purview of Section 15(b). (Para 15, 16, 23)
       53 ITR 91 (SC); [1951] 2 K.B. 277 – Relied upon
       (c) Income Tax Act, 1961 – Section 17 – Payments to be covered by section 17 must come from the employer – Tips coming from customers not having any contractual obligation to pay tips – cannot be taxed u/s 17. (Para 17)
       (1976) 4 SCC 817; (2008) 2 SCC 549 – Relied upon
       (2000) 8 SCC 249 – Referred
       (2000) 3 SCC 335; [1947] 1 KB 526; [1955] 2 W.L.R. 96; [1960] A.C. 376 – Distinguished
       (d) Section 192 and 201(1A) – Appellants outside scope of section 192 – Cannot be said to be assessees-in-default – No question of interest arises. (Para 37)
       85 ATC 4283 – Distinguished
       Facts of the case:
       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. 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.
       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 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.
       Appeals were preferred by the Revenue to the High Court.
       The High Court held 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.
       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 bona fide 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.
       Finding of the Court:
       Tips are not salary.
       Result: Appeals filed by the assessees allowed and civil appeals arising out of SLP (Civil) Nos. 9587-9589 of 2012 filed by Revenue dismissed.

JUDGMENT :

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.

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 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 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 assesses 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 Sect

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2016 Supreme(SC) 306

IMPORTANT POINTTips received from customers are not salary within the meaning of section 192, 15 and 17 of the Income Tax Act, 1996.

Cases Referred (5)

IMPORTANT POINT
Tips received from customers are not salary within the meaning of section 192, 15 and 17 of the Income Tax Act, 1996.