2011 (5) TMI 310 - HC - Income Tax

Assessees-in-default - TDS u/s 192 - whether tips paid by the customers for availing services in the restaurants of the assessees constitute salary within the meaning of Section 15 and Section 17 of the Act and whether the assessees are liable to deduct taxes at source on these payments under Section 192 of the Act - Held that the receipts of the tips constitute income of the recipients and is chargeable under the head salary under Section 15 of the Act and that it was obligatory upon the assessees to deduct taxes at source from such payments under Section 192 - While waiving the penalty it was held that there is no question of waiver of interest on the basis that the default was not intentional or on any other basis.

Summary

Issues Involved:
1. Whether the assessee was an "assessee in default" for not deducting tax at source on tips collected and paid to its employees.
2. Whether the payment of tips to employees constituted "profits in lieu of salary" under Section 17(3)(ii) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Assessee in Default for Non-Deduction of Tax at Source on Tips
The primary issue was whether the assessees were liable to deduct tax at source on tips paid to their employees, thus being "assessees in default" under Section 201(1) of the Income Tax Act, 1961. The Assessing Officers had treated the tips as "Salary" and held the assessees liable for not deducting taxes under Section 192. The CIT(A) and Tribunal had ruled in favor of the assessees, stating that the tips did not constitute salary and hence, no tax was required to be deducted.

Issue 2: Tips as "Profits in Lieu of Salary"
The second issue was whether the tips paid to employees should be considered "profits in lieu of salary" under Section 17(3)(ii) of the Act. The Tribunal had held that tips were not liable for TDS under Section 192 and thus, the assessees could not be treated as "assessees-in-default."

Court's Analysis and Judgment:

Interpretation of Sections 15 and 17
The Court examined whether tips paid by customers constituted salary under Sections 15 and 17 of the Act. Section 192 mandates tax deduction at source on payments chargeable under the head "Salaries." The Court noted that "salary" includes wages, annuity, pension, gratuity, fees, commissions, perquisites, and profits in lieu of or in addition to any salary or wages.

Nature of Tips
The Court observed that tips are paid by customers voluntarily and are not mandatory. They are collected by the employer and passed on to the employees. The assessees act as trustees or custodians in collecting and distributing tips, which are not part of the salary paid by the employer.

Employer's Role and Employee's Right
The Court noted that once tips are received by the employer, an obligation arises to disburse them to the employees, creating a vested right for the employees. This relationship between employer and employee implies that tips received by employees are income chargeable under the head "Salary."

Previous Case Law and Definitions
The Court referred to various cases, including Emil Webber (200 ITR 483), Ram Bagh Palace Hotel, and Quality Inn Southern Star, to analyze the nature of tips. The Court concluded that tips, whether collected directly by employees or through the employer, constitute income under Section 2(24) and are taxable under Section 15.

Bonafide Belief and Penalty
The assessees argued that they had a bonafide belief that tips were not part of salary and thus, did not deduct tax at source. The Court acknowledged this belief and noted that the Revenue had accepted this practice in the past. Citing cases like Gwalior Rayon Silk Co. Limited and CIT v. Nestle India Limited, the Court held that the assessees acted in good faith and could not be penalized under Section 201 for the periods in question.

Interest Under Section 201(1A)
However, the Court clarified that interest under Section 201(1A) is mandatory and not considered a penalty. Therefore, the assessees were liable to pay interest for the delay in tax deduction.

Conclusion
The Court concluded that tips constitute income under the head "Salary" and the assessees were obligated to deduct tax at source under Section 192. However, due to their bonafide belief, the assessees were not penalized under Section 201 for the periods in question but were liable to pay interest under Section 201(1A). The appeals were allowed without any order as to costs.