TIPS TO EMPLOYEES: WHETHER FORM PART OF SALARY OR PERQUISITE AND PROFITS IN LIEU OF SALARY & LIABLE TO TDS?
Questions have arisen many a time regarding whether the particular payment/ receipt falls under the ambit of ‘salary’. Section 15 of the Income Tax Act, 1961(hereinafter referred to as the Act) deals with the changeability of salary and section 17 defines prerequisite and profits in lieu of salary.
There must be an employee-employer relationship to constitute a payment/receipt in question under the ambit of ‘salary’. There does not exist employer-employee relationship in a partnership firm with its partners. Also, section 28(v) of the Act, makes chargeable to income-tax under the head “Profits and gains of business or profession”, any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm.
Recently, in ITC Limited Gurgaon vs. C.I.T. (TDS) Delhi [Civil Appeal Nos. 4435-37 of 2016 With Civil Appeal Nos. 4438-40 of 2016, 4441 of 2016, 4442 of 2016, 4443-44 of 2016], the assessees were engaged in the business of owning, operating and managing hotels. Surveys conducted at the business premises of the assessees allegedly revealed that the assessees had been paying tips to its employees but not deducting taxes thereon.
The Assessing Officer(AO) treated the receipt of the tips as income under the head “salary” in the hands of the various employees and held that the assessees were liable to deduct tax at source from such payments under Section 192 of the Act. The assessees were treated by the AOs as assessees-in-default under Section 201(1) of the Act. The AOs 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 Act for A.Y.s 2003-2004, 2004-2005 and 2005-2006.
The CIT (Appeals) vide his common order dated 28.11.2008 allowed the various appeals of the assessees holding that the assessees could not be treated as assessees in- default under Section 201(1) of the 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 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(1)(iv) and 17(3)(ii). Even so, the High Court 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 Supreme Court in Karamchari Union, Agra vs. Union of India, (2000) 3 SCC 335, while distinguishing the judgments of this Court inRambagh Palace Hotel vs. Rajasthan Hotel Workers’ Union,(1976) 4 SCC 817 andQuality Inn Southern Star vs. ESICorpn.,(2008) 2 SCC 549. After distinguishing the said judgments, the High Court arrived at the following conclusion:-
“From the above discussion, we may conclude that the receipt of the tips constitute income at the hands of the recipients and is chargeable to the income tax under the head “salary” under Section 15 of the Act. That being so, it was obligatory upon the assessees to deduct taxes at source from such payments under Section 192 of the Act.”
Since the assessees were, therefore, declared to be assessees-in-default under Section 201 of the Act, the High Court found that despite the fact that the assessees did not deduct the said amounts based on a bonafide belief and no dishonest intention could be attributed to any of them, yet the High Court held that levy of interest under Section 201(1A) would follow, as the payment of simple interest under the said provision is mandatory; and not being penal in nature, no question of bonafide belief would arise to absolve the assessees from any interest liability under the said provision.
Learned senior advocates for the appellant, assailed the judgment of the High Court before SC with their submissions. They argued that tips were paid by customers out of their own volition as payments to the employees being waiters in a restaurant for the quality of service provided to them and for courteous behaviour. Since this payment is gratuitous, and the assessees act as mere trustees in collecting the tips charged to the customers’ credit cards and then pass over the same to the employees, it is clear that no amount by way of the tip has any connection with the contract of employment between the employer and the employee. They further submitted that the tips received by the employees are not remuneration or reward for services rendered by the employees to the assessees. They argued that there was no vested right of an employee to claim any tip from a customer.
The Supreme Court held that income from tips would be chargeable in the hands of the employees as income from other sources, such tips being received from customers and not from the employer, Section 192 of the Act would not get attracted at all on the facts of the present case.
The learned judges of the Supreme Court observed that section 15 of the Act is in three parts. Sub-clause (a) refers to the 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. It can be seen, on an analysis of Section 15, 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. In CIT vs. L.W. Russel 53 ITR 91 (SC), Supreme Court dealt with the provisions of Section 7(1) of the 1922 Act(which preceded Sections 15 and 17 of the Act), it was held that it is necessary for the employee to have a vested right to receive an amount from his employer before he could be brought to tax under the head “salaries”.
The Supreme Court held that it is clear in this case that there is no vested right in the employee to claim any amount of tip from his employer. Tips being purely voluntary amounts that may or may not be paid by customers for services rendered to them would not, therefore, fall within Section 15(b) at all. Also, it is clear that salary must be paid or allowed to an employee in the previous year “by or on behalf of” an employer. Even assuming that the expression “allowed” is an expression of width, the salary must be paid by or on behalf of an employer. It must first be noticed that the expression “employer” is different from the expression “person”. An “employer” is a person who employs another person under a contract of employment, express or implied, to perform work for the employer. Therefore, Section 15(b) necessarily has reference to the contract of employment between employer and employee, and salary paid or allowed must, therefore, have reference to such contract of employment. On the facts of the case, it is clear that the amount of tip paid by the employer to the employees has no reference to the contract of employment at all. Tips are received by the employer in a fiduciary capacity as trustee for payments that are received from customers which they disburse to their employees for service rendered to the customer. There is, therefore, no reference to the contract of employment when these amounts are paid by the employer to the employee.
It is well settled that a case is an authority, for what it decides, and not for what logically follows from it. This case in no manner comes on Section 17(3) (ii) that the moment any amount is received from an employer by an employee, without more, such amount becomes a profit in lieu of salary. In theKaramchari Union judgment(supra), CCA and HRA arose directly from the employer – employee relationship. The question the Court had to answer was whether a pecuniary advantage in the form of CCA and HRA would be covered by Section 17, which the Court answered in the affirmative. Supreme Court’s decision cannot be understood to mean that even de hors the employer – employee relationship, any amount received from the employer by an employee would become ‘salary’ under Section 17. The learned judges did not subscribe to the High Court’s view in understanding this decision to mean that so long as the employer pays an amount to an employee, even in a fiduciary capacity and de hors the employer – employee relationship, the amount so paid would come within the head “salary”.
In respect of the nature of interest contained in Section 201(1A) of the Act. The learned judges held that we find it unnecessary to go into this question for the simple reason that as held in CIT, New Delhi vs. Eli Lilly and Company (India) Private Limited, (2009) 15SCC 1 at paragraph 91, interest under section 201(1A) can only be levied when a person is declared as an assessee-in-default.Having found that the appellants in these cases are outside Section 192 of the Act, the appellants cannot be stated to be assessees-in-default and hence no question of interest therefore arises.
The ruling of Apex Court in ITC Ltd.(supra) has well elucidated the employer-employee relationship concept to charge a particular income as salary or a profit in lieu of salary in reference to Indian Income Tax Act. This shall be also useful in TDS on Salary matters.