By TIOL News Service

NEW DELHI, APR 26, 2016: THE issue before the Bench is - Whether when a hotel employee earns some tips from customers, such income is also chargeable to tax under the head 'salaries' u/s 192. NO is the verdict.

Facts of the case

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. 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. The assessees were treated by the Assessing Officers as assessees-in-default under Section 201(1) of the Act.On appeal, the CIT(A) ruled against the Revenue. The ITAT also sided with the assessee. On appeal, the HC 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). The HC also 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 amount to “salary” within the extended definition contained in Section 17 of the Act. Though no dishonest intention could be attributed to the assessees, 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 was 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.

On appeal, the Supreme Court held that,

++ under sub-section (1), “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;++ as per settled laws, the 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;

++ it is clear in the present case 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 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.

(See 2016-TIOL-48-SC-IT)