Case Law Details
Since TIPS were received from the customers and not from the employer these would be chargeable in the hands of the employee as income from other sources and section 192 would not get attracted on the facts of the case.
On analysis of section 15 that it would be evident that for the said section to apply there should be a vested right in an employee to claim any salary from an employer or former employer whether due or not if paid; or paid or allowed, though not due.
Relevant Extract of the Judgment
All these appeals have been filed by the assessee assailing the correctness of the order dated 03.03.2015 of CIT(A)-41, New Delhi pertaining to 2004-05 to 2007-08 assessment years on identical issues accordingly all these appeals are being decided by a common order.
2. Ld.AR inviting attention to the grounds raised submitted that the assessee has been held to be in default for the short deduction of tax on account of credit tips recovered from the hotel guest to the employees. Inviting attention to the impugned order in 2004-05 AY which is identical to the consolidated order passed in 2005-06 AY it was submitted that the appeal of the assessee was dismissed by the CIT(A), relying upon the decision of Jurisdictional High Court order dated 11.05.2011 in the case of CIT vs ITC Ltd. and C.J. International Hotel Ltd. The said decision, it was submitted is no longer good law in view of the decision of the Apex Court in the case of ITC Ltd. vs CIT 286 CTR 126 (SC) which has been followed by the ITAT in the case of the assessee itself. Filing a copy of the aforesaid order dated 12.07.2016 in ITA No. 401/Del/201 5 for 2011-12 AY it was submitted the order of AO u/s 201(1)/201(1A) had been quashed by the ITAT. A prayer for a similar order in the present appeals was prayed for.
3. Considering the decision of the Apex Court in ITC Ltd. (cited supra), the Ld.Sr.DR relied upon the impugned order. No contrary decision either on fact or law was cited for the benefit of the Bench to take a contrary view. The facts and circumstances were stated to be identical in all these years.
4. We have heard the rival submissions and perused the material available on record. The relevant facts of the case are that the assessee company is engaged in the business of chain of hotels (The Oberoi Group). Survey operation u/s 133A of the Income Tax Act, 1961 was carried out at the business premises of the assessee company at Hotel -The Oberoi, Dr.Zakir Hussain Marg, New Delhi. During the survey proceedings, it was noticed that the assessee company was in receipt of extra amount known as “TIPS” paid by the guests in cash or through credit cards at the time of settlement of bills in appreciation of good services provided by the service staff. On disbursal of this amount to the employees by the hotel, no tax was deducted. The Assessing Officer required the assessee to explain why under the provision of Section 192 why TDS was not deducted. The assessee explained as per record that “the company in the business of running a chain of hotels (the Oberoi Group), has a non-executive staff of about 700 persons. The members of staff belong to different departments such as Kitchen, Sales, Housekeeping, Horticulture, Laundry, Systems, Training, Logistics, Materials/Stores, Communication, Bell dusk, Airport Management, finance, Front Office, Banquet, Pastry shop, Human resource, Security, ‘Therapists Technicians etc. The company does not interfere in the manner of tips sharing amongst its staff. Cash-tips, if any, received by staff of the company are pooled and shared amongst its staff; the company cannot interfere in this matter. When credit-tips are paid by the customers, the company is per necessity required to act as a collecting agent of credit-tips for and on behalf of its staff. The amounts of credit-tips are recorded in the Company’s books of account as “Cash Advance” representing the amounts payable to its employees.
The amount standing to the credit of this account is withdrawn from bank and given to the staff representatives of various departments for sharing amongst themselves in the manner they have decided. The Company cannot interfere in the manner of such tips-sharing amongst the employees. The system presently following by the company is to call the representatives of different departments and collectively pay back such tips for onward sharing, first amongst themselves (i.e. departments) and thereafter amongst the staff within each department. These representatives are nominated by the staff of the respective departments based on their mutual trust. The Company has no information on the quantum of tips that goes to respective groups and further to different employees in each such department. As the company has no obligation to pay the amount of tips and further as the amount of tips received by the staff is not flowing from the employer, the company has not deducted tax on the amount of tips distributed.” Reliance was placed on Sun-n-Shade Hotel P Ltd. v. State of Maharashtra (1969) 23 STC 507 (Bom); The Rambagh Palace Hotel vs The Rajasthan Hotel Worker’s Union (1976) 4 SCC 817 (SC); The Central Bank of India v. Their Workmen (I960) 47 AIR 12 (SC); Quality Inn Southern Star v The Regional Director, Employees State; Insurance Corporation [2008] 2 SCC 549; v) Nehru Place Hotels Ltd v Income Tax Officer, Ward 50(2), New Delhi 173 Taxman 88; HUDA and Anr v. Babeswar Kanhar and Anr I SCC 191; vii) CIT v Nestle India Ltd (2000) 243 ITR 435 (Del)”.
4.1. Not convinced with the explanation offered referring to section 15, 16 and 17 of the Income tax Act, 1961, the AO concluded that TIPS (which is an acronym and stands for “To Insure Prompt Services”) distribution etc. is merely a form of remuneration to the employee in this work. He was of the view that since TIPS are paid to the employees in lieu of rendering prompt services for their employer hence these accrued to the employees for services rendered as employees for their employer. He was of the view that the meaning itself clarified that they arose due to the relation of employer and employee and could be considered to be covered under clause (i), clause (iv) of sub-section (i) of section
17 of the Income Tax Act, 1961. He was also of the view that clause (ii) of section 17 (3) also encompasses the amounts received from the employer and thus squarely covered these amounts. The decisions in the case of The RamBagh Palace Hotel case and Quality Inn Southern Star (cited supra) were held to be distinguishable on facts and hence reliance on these decisions was held to be misplaced. Relying upon the decision of the Apex Court in the case of Karamchari Union vs Union of India and Others 243 ITR 143 (SC), it was held that the advantage of the Hotel employees in the form of monies received as tips would be covered by the inclusive definition of ‘salary’. Accordingly, the assessee was held to have failed to deduct tax as required u/s 201(1) of the Act for the years under consideration by separate orders for the years under consideration.
4.2. The issue was agitated unsuccessfully in appeal before the CIT(A). The specific reasoning taken by the CIT(A) is brought out from the following extracts of the said decision:-
4.10. “Before proceeding, further it would be relevant to understand whether ‘tips’ paid to employees by the appellant, constitutes salary within the meaning of sections 15 and 17 of the I.T. Act. As per the Webster Dictionary “tips” means, small gift of money for services rendered. Thus there exists no dispute on the fact that it is a payment made by the employer as a reward or remuneration for services rendered by employees. Section 17 of the I. T. Act extends the scope of section 15 and provides an inclusive definition to it by including perquisites and profit in lieu of salary also as part of salary. Thus the wider definition of salary given by section 17, includes any amount paid by an employer to its employee by virtue of his employment as the same would constitute income under the head salary.
4.11. In the modern time, it is a common practice particularly in service industries, that payment and receipt of tips is customary. It is also not necessarily true that the recipients of tips are persons have meagre income and not subject to tax. Hence by non deducting taxes on such ‘tips’or payments to employees and by not remitting it in the Govt. account the employer is not fulfilling its statutory responsibility of contributing to tax evasion. ‘Tips’ whether paid in cash or through card is in every way an additional income of the employee. The employee receives this income by virtue of employment. Hence the claim of the employer that it receives tips from customers in capacity is not correct presentation of facts.
4.12. The various case laws quoted by the appellant does not apply strictly to the present case as in the present appeal, it is evident that the hotel management is involved in collection and disbursement of tips. Thus the appellant is making payment over and above the quantum of salary, directly or indirectly to the employee by way of ‘Tips’. This would thus constitute salary or ‘in lieu thereof’ paid by the appellant to the employees.
4.13. It is relevant to reiterate that under the Income Tax Act, 1961, every person having taxable income, has to pay tax. The tax on total income is collected by different means. TDS is one of the methods of collection of Tax. In the given case since the tips constitute income in the hands of the recipients i.e. the employees, it is the liability of the employer i.e. the appellant to deduct TDS on the same and remit it in the Govt. account within a given time frame.
4.14. It is relevant to state that on similar issue the jurisdictional High Court in CIT Vs. ITC Ltd. and C.J. International Hotel Ltd. in order dated 11.05.2011 has held that the receipt of tips constitute income in the hands of the recipients and is chargeable to income tax under the head ‘salary’ u/s 15 of the Act. Hence it is an obligation on the part of the appellant to deduct tax at source from such payments u/s 1 92 of the Act.”
4.3. In the light of these facts, circumstances and position of law as canvassed before us, we find that the view taken by the tax authorities cannot be upheld. The facts as considered by the Hon’ble Apex Court in the case of ITC Ltd. vs CIT (TDS), Delhi [2016] 68 taxmann.com 323 (SC) would fully apply to the present case. Cognizance of the judicial precedence has already been taken by the Co-ordinate “SMC” Bench in its order dated 12.07.2016 in the case of the assessee itself. A perusal of the aforesaid decision of the Apex Court would show that in the facts of that case also the assessee was engaged in the business of owning, operating, and managing hotels. Surveys conducted at the business premises of the assessee allegedly revealed that the assessee had been paying tips to its employees but not deducting taxes thereon. The AO herein also treated the receipt of TIPS as income under the head “salary” in the hands of various employees and held the assessee liable to deduct tax at source of such payment u/s 192 of the Income Tax Act, 1961 and held to be in default u/s 201(1) on which interest u/s 201(1 A) was also held to be attracted. However, in the facts of that case, the assessee was successful in its appeal before the First Appellate Authority. The said order was upheld by the ITAT and in a further appeal filed by the Revenue. The Revenue succeeded in upsetting the order of the ITAT before the Hon’ble High Court.
4.3.1. The Hon’ble High Court held, after considering Sections 15, 17 and 192 of the Income-tax Act, that tips would amount to ‘profit in addition to salary or wages’ and would fall under Section 15(b) read with Section 17(l)(iv) and 17(3) (ii). The Hon’ble High Court further 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, according to the High Court, amount to “salary” within the extended definition contained in Section 17 of the Act. For arriving at this interpretation, the High Court relied upon the decision of this Court in Karamchari Union v. Union of India [2000] 243 1TR 143/1 09 Taxman 1 , while distinguishing the judgments of this Court in Rambagh Palace Hotel v. Rajasthan Hotel Workers’ Union [1976] 4 SCC 817 and Quality Inn Southern Starv. Regional Director, ESI Corpn. [2008] 2 SCC 549. After distinguishing the said judgments, the High Court concluded that the receipt of the tips constitute income at the hands of the recipients and was chargeable to the income tax under the head “salary” under Section 15 of the Act. Accordingly, it was held that it was obligatory upon the assessees to deduct taxes at source from such payments under Section 192 of the Act.
4.4. This decision was challenged in appeal before the Apex Court and considering the submissions of the assessee and the Revenue, the Hon’ble Apex Court was pleased to hold that since TIPS were received from the customers and not from the employer these would be chargeable in the hands of the employee as income from other sources and section 192 would not get attracted on the facts of the case.
4.4.1. The Hon’ble Apex Court observed that “section 15 of the Act is in three parts. Sub-clause (a) refers to salary that is “due” from an employer or a former employer, whether paid or not. Under this sub-clause, salary is taxable upon accrual – it matters not whether payment is actually made or not. On the other hand, under sub-clause (b), with which we are directly concerned, any salary that is paid or allowed to an employee by or on behalf of an employer or former employer though not due, or before it becomes due, becomes taxable. Under this sub-clause, it matters not whether the salary is at all due. Payment made or allowance given to the employee by or on behalf of an employer or former employer is sufficient to bring such payment or allowance to tax under the said sub-clause.
Under sub-clause (c) any arrears of salary paid or allowed to an employee by or on behalf of an employer or previous employer if not earlier charged to income tax in any previous year is also brought to tax.”
4.4.2. Thus, it was held by the Apex Court on analysis of section 15 that it would be evident that for the said section to apply there should be a vested right in an employee to claim any salary from an employer or former employer whether due or not if paid; or paid or allowed, though not due.
4.4.3. Considering the analogue provisions as considered in the case of CIT vs CW Russel (1964) 53 ITR 91 (SC) it was held that Section 7(1) of 1922 Act which preceded section 15 & 17 of the present Act it was necessary to have a vested right to receive an amount from his employer before it could be brought to tax under the head salaries. It was noted that the section pre-supposed the existence of relationship of employer and employee and on the facts of that case it was noted that there is no vested right in the employee to claim any amount of TIPS from his employer. The material facts in the facts of the present case also continue to remain identical. The TIPS being purely voluntary amounts it was noted may or may not be paid by the customer for services rendered to them and thus would not pass the requirement of section 15 as it is not contemplated in the contract of employment.
4.4.4. The reliance placed upon section 17(3)(ii) also, it was found could not be countenanced for the simple reason that section 17(3) it was held uses two different expressions employer in sub-clause (ii) and “persons” in sub-clause (iii). It was noted that obviously person is wider them employer but even in the said sub-clause “person” has a reference to either a future employer or a past employer. Therefore, it was noted the scheme u/s 17 must be by an employer whether future or past. When sub-clause (ii) it was noted uses the expression “employer” it used the expression in the same sense as used in section 15 as the opening line of Section 17 itself states that for the purpose of section 15 salary includes profits in lieu of salary. The word it was noted necessarily brings a contract of employment express or implied and thus on account of the said reasoning the arguments of the Revenue were found to be without merit.
4.4.5 The distinction drawn by the Revenue from the decisions of the Apex Court in the case of RamBagh Palace Hotel case and Quality Inn Southern Star (cited supra) that these were rendered considering the requirements of the Industrial Tribunal and in the context of Employees State Insurance Act, 1948 respectively were held to be not relevant as the precedent relied upon was not in the context of the specific Acts.
4.4.6. Referring to the statement of the Apex Court in the case of Rambagh Palace Hotel case it was noted that the true character of TIPS that it cannot be treated as any payment made by the management out of its pocket but only as a transfer of what is collected from the customer and paid to the staff. It was held that this statement is equally applicable to the facts of the present case also. Thus, though the statement was made by the Court in different contexts, it was held that it would apply on all fours to the facts of that case.
4.4.7. Considering the reliance placed by the Revenue on the decision of the Apex Court in the case of Karamchari Union (cited supra) where the Court was required to decide whether city compensation allowance and other allowance such as house rent allowance was a salary u/s 17. It was noted that the question posed before the Court was what does the expression “salary” signify Would it also include any payment received from the employer relatable to or out of the profits or could it to be understood as any pecuniary gain or advantage. The Apex Court in ITC held that all the Court decided in the aforesaid decision was that even “if an amount is received by an employee which has no connection with the profits of the employer, it may yet be salary as any advantage or gain by receipt of such payment would be included in the expression “profits in lieu of salary”. Hence, the court did not accede to the contention of learned counsel for the assessee that as the CCA amount is paid to meet additional expenditure as contemplated by statutory service rules, it cannot be said to be “profit”. It was noted that the Court in the said decision finally held that CCA and HRA would be taxable income in the hands of the employee as they directly arose from the employer and employee relationship and it was held that cannot be understood that dehorse the employer and employee relationship, any amount received from the employer by the employee would become salary u/s 17. Thus, since the contract of employment in the case of not being the proximate cause for the receipts of TIPS by the employee from a customer though even if collected in the fiduciary capacity by the employer, it was held would be outside the dragnet of sections 15 & 17 of the Act.
4.5. Accordingly in the afore-mentioned peculiar facts and circumstances wherein the material facts continue to remain the same the assessee in the facts as they stand cannot be said to be in default of the provisions of Section 192 of the income Tax Act, 1961 as there was no liability of the assessee to deduct TDS under the said provision on the tips recovered from the hotel guests. Thus, it cannot be held to be an assessee in default. Since interest u/s 201 (1A) can only be levied only a person who is declared as in assessee is default the question of interest does not arise. Accordingly in the face of the clear statement of law as settled by the Apex Court, the impugned order cannot be upheld. Accordingly, the orders of the AO u/s 201(1 )/201 (1A) in the respective years are quashed.
