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. It was accordingly held that payments of collected tips would not be payments made “by or on behalf of” an employer and therefore section 192 of the IT Act is not attracted.
The assesses are engaged in the business of owning, operating, and managing hotels. Surveys conducted at the business premises of the assesses allegedly revealed that the assesses 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 assesses were liable to deduct tax at source from such payments under Section 192 of the Income Tax Act, 1961. The assesses were treated by the Assessing Officers as assesses-in-default under Section 201(1) of the Income Tax Act (Act).
The CIT (Appeals) vide his common order allowed appeals of the assesses holding that the assesses could not be treated as assesses-in-default under Section 201(1) of the Act for non-deduction of tax on tips collected by them and distributed to their employees. ITAT also dismissed the appeals filed by Revenue. Appeal thereafter was preferred before the High Court, which 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). It was further 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.
High Court found that despite the fact that the assesses did not deduct the said amounts based on a bonafide belief and no dishonest intention could be attributed to any of them, held that the 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 assesses from any interest liability under the said provision.
The High Court’s verdict was assailed on the ground 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 assesses 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. Tips received by the employees are not remuneration or reward for services rendered by the employees to the assesses. There was no vested right of an employee to claim any tip from a customer. It was further 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. 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.
As per Section 192 of the Income Tax Act, 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 was clear that the person who was responsible for paying the employee is not the employer at all, but a third person – namely, the customer. If an employee receives income chargeable under a head other than the head “salaries”, then Section 192 does not get attracted at all.
Further, clearly there is no vested right in the employee to claim any amount of tip from his employer. It was further observed and held 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.
It was accordingly held that payments of collected tips would not be payments made “by or on behalf of” an employer. Interest under section 201(1A) can only be levied when a person is declared as an assesse-in-default. Since they were outside Section 192 of the Act, they could not be stated to be assesses-in-default and hence there arises no question of charging interest.High Court’s impugned judgment was accordingly set aside.
[ITC Limited, Gurgaon vs. CIT (TDS), Delhi]
Civil Appeal Nos. 4435-37 of 2016