TDS cannot deducted from Tips recieved by Hotel employees, Holds Supreme Court
The Supreme Court today, in an appeal filed by the ITC Ltd Gurgaon against the Commissioner (Appeals), New Delhi, declared that the amount of received by the Restaurant Employees as tips cannot be considered as “salary” for the purpose of Income Tax.
The assessee-Company is engaged in the business of owning, operating and managing hotels. On a survey conducted by the Department, it was allegedly revealed that that the assessees had been paying tips to its employees but not deducting taxes thereon. The Assessing Officer treated such tips as “salary” to the employees and considered the assessee as assessee-in-default under Section 201(1) of the Income Tax Act. The Assessing Officers in various assessment orders worked out the different amounts of tax to be paid by all the aforesaid assessees under Section 201(1), as also interest under Section 201 (1A) of the said Act for assessment years 2003-2004, 2004-2005 and 2005-2006.
The CIT (Appeals) through his common order allowed the various appeals of the assessees holding that the assessees could not be treated as assesses in- default under Section 201(1) of the Income Tax Act for non-deduction of tax on tips collected by them and distributed to their employees. Appeals filed by the Revenue to the Income Tax Appellate Tribunal (ITAT) came to be dismissed by the Tribunal by relying upon its own order for the assessment year 1986-1987 in the case of ITC and the case of Nehru Palace Hotels Limited. Against the said orders of the Tribunal, appeals were preferred by the Revenue to the High Court.
The High Court delivered a decision in favor of the Department by declaring that that tips would amount to ‘profit in addition to salary or wages’ and would fall under Section15(b) read with Section 17(1)(iv) and 17(3)(ii) and the assessees were also declared to be assessees-in-default under Section 201 of the Income Tax Act. Therefore the assessee preferred an appeal before the Supreme Court.
The issued rose before the Supreme Court was that,
Whether the assessee is an assessee-in-default under the relevant provisions of the Income Tax Act?
Whether the payment of banquet and restaurant tips to the employees of the assessee in its capacity as employer were not profits in lieu of salary within the meaning of Section 17 (3) (ii) of the Income Tax Act, 1961?”
The Supreme Court in the lights of catena of decisions accepted the plea of the assessee and observed that tips would not amount to ‘profit in addition to salary or wages’ for the reason that in order to bring a particular income within the ambit of the term “salary” there must be an employer-employee relationship between the payer and the payee and such an element is absent in the instant case. Further, the appellants cannot be treated as assessee-in-default since they are outside the purview of section 192 of the Income Tax Act.
Read the full text of the Judgment here.
