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TMI Blog2011 (5) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessees during which it was found that the assessees had been paying tips to its employees but not deducting taxes thereon. The Assessing Officers treated the amounts of tips under the head "Salary" in the hands of respective staff and held that the assessees were liable to deduct taxes at source from such payments under Section 192 of the Act. The assessees were treated by the Assessing Officers as "assessees-in-default" under Section 201(1) of the Act. The Assessing Officers worked out different amount of taxes to be paid by these assessees under Section 201(1) and also interest under Section 201(1A) of the Act for the aforementioned assessments years. 3. Aggrieved from the orders of the Assessing Officers, the assessees filed appeals before Commissioner of Income Tax (Appellate) [hereinafter referred to as "CIT(A)"]. The appeals in all the four cases were allowed by the CIT(A) by separate orders. The CIT(A) relied upon the decisions of the Tribunal in the case Nehru Place Hotels v. ITO, 173 Taxman 88, ITA No.4055-4060/DL/2005 and held that the assessees could not be treated assessees-in-default under Section 201(1) of the Act for non deduction of tax on tips collected b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. 7. There is no dispute with regard to the proposition that the obligation to deduct taxes at source under Section 192 of the Act in respect of a payment arises when an employee is responsible to make a payment, which is chargeable to tax under the head "Salary" in the hands of the recipient. It is for the purpose of deduction of tax at source from salary that Section 192 of the Act defines „salary as under :- (1) "any person responsible for paying any income chargeable under the head "salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax on the amount payable at the average rate of income tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year." 8. A plain reading of this Section would explain that the employer is required to deduct tax at source out of the income of the employees chargeable under the head „salary at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey submit that the tips received by the employees are not remuneration or reward/return for services rendered by the employees to the assessees (employer). But, the same represent reward given by the customers at their discretion pleased with the services rendered. The earning of the tips was entirely at the pleasure of the customers. They further submit that the tips vary from customer to customer and from bill to bill. Further, the employees cannot claim any vested right thereto, since the employer neither pays nor is bound to pay any amount to the employees as tips. The tips are not any dues from the employers payable to the employees nor are they allowed to be paid to them by the employer. The mere fact that an employee would not have earned the tips if he had not been deputed at the outlet, cannot lead to the inference that the payment of tips was flowing from the contract of employment. The fact that the employment was the cause without which the earnings of the tips would not have happened (causa sine qua non) does not ipso facto lead to inference that the same was in the nature of salary, since the contract of employment was not the immediate causa causana of such earnings. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duties are to serve their customers or the tips are being paid to the employees in lieu of rendering prompt services for their employers. Learned counsel, Ms.Rashmi Chopra, further submits that the assessees are now deducting TDS from the tips/service charges from the bills of banquets, but are not doing so in respect of tips collected from other outlets. She submits that the assessees cannot adopt double tax policies in distribution of tip amounts. The tip amounts may be charged in any shape or by any name, may be called as "service charges" or "tips", the meaning and purpose remains the same. The day the total bill towards food and beverages along with tip is paid by the customer to the assessee, the right to claim the tips in addition to salary accrues to the employee from the employer assessee. Similar to the salary, the tip receipts of the hotel employees are also sourced from the hotel bills paid by the customers. Therefore, as regard the source of tips and monthly salary of hotel employees, there is no fundamental difference. The proceeds collected from its customers come under the books of accounts of the assessees. 12. In support of her submissions, learned counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer on a former employer, if not charged to income-tax for any earlier previous year." 15. Section 17 extends the scope of meaning of Section 15, which reads as under: "17. "Salary", "Perquisite" and "profits in lieu of salary" defined - For the purposes of sections 15 and 16 and of this section, - (1) "salary" includes - (i) Wages, (ii) Any annuity or pension; (iii) Any gratuity; (iv) Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages; (v) Any advance of salary; (2) ................ (3) "profits in lieu of salary" includes - (i) The amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto; (ii) Any payment [other than any payment referred to in clause (10) [, clause (10A)] [, clause(10B)], cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only as defined under Section 17. 17. In fact, Section 17 defines "salary", "perquisites" and "profits in lieu of salary" only for the purposes of Section 15 and Section 16. Under sub-Section (1), "Salary" includes not only wages, pension, gratuity, etc., but under the sub-clause (iv), it includes any fees, commissions, perquisites, or profits „in lieu of or „in addition to salary or wages. The income of tips in all cases may not strictly fall within the "profits in lieu of salary", but in any case, it would be „profit in addition to salary or wages at the hands of the recipients. It is in this way that the meaning of "salary" under Section 15 as also under Section 16 is expanded by the inclusion of anything which is received by an employee in addition to salary or wages. The word "profits" here is used only to convey any "advantage" or "gain" by receipt of any payment by the employee. Applying this general meaning of the word "profits" and considering meaning given to it under Section 17(1)(iv) and Section 17(3)(ii) it can be said that "advantage" in terms of payment received by the employee from the employer in relation to or in addition to salary or wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should imply that the right is conferred on the employee in respect of the same. Once the tips are paid by the customers either in cash directly to the employees or by way of charge to the credit cards in the bills, the employees can be said to have gained additional income. When the tips are received by the employees directly in cash, the employer hardly has any role and it may not be even knowing the amounts of tips collected by the employees. That would outrightly be out of the purview of responsibility of the employer under Section 192 of the Act. But, however, when the tips are charged to the bill either by way of fixed percentage of amount, say 10% or so on the total bill, or where no percentage was specified and amount is indicated by the customer on the bill as a tip, the same goes into the receipt of the employer and is subsequently disbursed to the employees depending upon the nature of understanding and agreement between the employers and the employees. Different settings have different operating mechanisms with regard to collection and disbursement of the tips. Some of the outlets have in-built system of charging some percentage in the bills itself that may be either i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd there cannot be two opinions in view of the said judgment of the Supreme Court. 22. In the case of Ram Bagh Palace Hotel, Jaipur (supra), which was relied upon by the learned counsels for assessees, in support of their submission that the amounts of tips do not constitute salary of the employees paid by the employer under the contract of the employment, the context was entirely different. The Honble Supreme Court described the nature of tips at the hands of the employees as payments not paid by the management out of its pocket but a transfer of what was collected from the customers in the following manner: "2. We regret to be unable to agree with the counsel on this point. It is well-known that in important hotels in the country, the appellant is now a five star hotel-the customers are of the affluent variety and pay tips either to the waiters directly or in the shape of service charges or otherwise to the management along with the bill for the items consumed. In short, the true character of tips cannot be treated as any payment made by the management out of its pocket but a transfer of what is collected to the staff as it is intended by the payer to be so distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fide believed that the tips are paid by the customers and that though the employee is liable to pay tax in respect of the tips, the employer is not liable to include the same in the estimated salary for the purpose of bonafide deductions of tax at source under Section 192 of the Act. They submit that this practice was adopted since the commencement of the hotel business and the same was accepted by the Revenue by accepting the assessments in the form of annual returns in the past. They place reliance on the cases of Gwalior Rayon Silk Co. Limited v. CIT, 140 ITR 832 (Madhya Pradesh) and CIT v. Nestle India Limited, 243 ITR 435 (Delhi). 26. In the case of Gwalior Rayon Silk Co. Limited (supra), the Madhya Pradesh High Court observed as under:- "The provisions of s. 201 of the Act are attracted in the case of an employer only when that employer does not deduct or, after deducting, fails to pay the tax as required by the Act. We have already seen that the Act requires an employer to deduct and pay tax on the estimated income of his employee. A duty is cast on an employer to form an opinion about the tax liability of his employee in respect of the salary income. While f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in any event it was quite reasonable for the assessee to form a bonafide belief that the tips which were collected by it on behalf of the employees and subsequently distributed to its employees did not form part of the salary paid by them and, therefore, no deduction on account of tax at source was required to be made by the assessee. The Tribunal came to the conclusive finding that the assessee had such a bonafide belief and it is on account of this that the tax was not deducted at source. Consequently, we find that no substantial question of law arises for our consideration. The appeals are dismissed." 29. We have given our thoughtful consideration to the submissions of the learned counsels for the assessees based on bonafide belief and non deducting tax at source from the payments made to the employees on account of tips. Learned counsel appearing for the Revenue did not controvert that this practice has been accepted by the Revenue by accepting the assessments in the form of annual returns of the assessees in the past. Since the taxes were to be deducted from the amounts, which were the dues of the employees, no dishonest intentions could be attributed to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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