2007 (7) TMI 646 - HC - Income Tax

Summary

Issues Involved:
1. Non-deduction of tax at source on tips paid to employees.
2. Limitation period for passing orders u/s 201(1) and 201(1A).

Summary:

Issue 1: Non-deduction of tax at source on tips paid to employees

The assessee challenged the decision of CIT(A) treating it in default for non-deduction of tax on tips paid by customers to employees and consequential charge of interest u/s 201(1A). The Assessing Officer (AO) observed that the assessee had not deducted tax at source on banquet tips and other outlet tips paid to casual workers and regular employees respectively. The AO held that these tips constituted taxable income under the head salary and thus, liable for deduction of tax at source. The CIT(A) upheld the AO's order, treating the assessee in default u/s 201(1) and upheld the charge of interest u/s 201(1A).

On appeal, the tribunal noted that the assessee received the tips in a fiduciary capacity on behalf of employees and acted as a conduit pipe for passing these amounts to the employees. The tribunal held that tips could not be considered as part of salary since they were not payments made by the employer. The tribunal also noted that it was reasonable for the employer to form a bona fide belief that tips were not part of salary, and thus, the assessee could not be treated in default for not deducting tax at source. The tribunal set aside the order of CIT(A) and allowed the claim of the assessee.

Issue 2: Limitation period for passing orders u/s 201(1) and 201(1A)

The assessee raised a legal issue that the orders passed by the AO for financial years 1998-99 and 1999-2000 were barred by limitation as they were passed after four years from the end of the relevant financial year. The tribunal noted that the orders were indeed passed after the expiry of four years and referred to the decision in Mitsubishi Corporation v. Dy. CIT, which held that orders passed after four years were barred by limitation. The tribunal quashed the orders passed by the AO u/s 201(1)/201(1A) for the financial years 1998-99 and 1999-2000.

Conclusion:

In the result, all the appeals filed by the assessee were allowed.