ITC Ltd. vs. CIT. (2016) 384 ITR 14 (SC) The assessees are engaged in the business of owning, operating, and managing hotels. Surveys conducted at the business premises of the assesses allegedly revealed that the assessees had been paying tips to its employees but not deducting taxes thereon. The Assessing Officer 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 payment u/s. 192 of the Income tax Act, 1961. The assessees were treated by the Assessing Officer as assessees-in-default under section 201(1) of the Act. The Assessing Officers in various assessment orders worked out the different amounts of tax to be paid by all the aforesaid assessees u/s. 201(1), as also interest u/s. 201(1A) of the said Act for the assessment years 2003-04, 2004-05 and 2005-06.
The Commissioner of Income –tax (Appeals) vide his common order dated November 28, 2008 allowed the various appeals of the assessees holding that the assessees could not be treated as assesses-in-default u/s. 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 came to be dismissed by the Tribunal by relying upon its own order for the assessment year 1986-87 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 u/s. 15(b) read with section 17(1)(iv) and 17(3)(ii). Even so, the High Court held that when tips are received by employee 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. The High Court concluded that the receipt of the tips constituted income at the hands of the recipients and were chargeable to the income-tax under the head “Salary” u/s. 15 of the Act. That being so it was obligatory upon the assessees to deduct taxes at source from such payment u/s. 192 of the Act.
Further, since the assessees were declared to be assessees-in-default u/s. 201 of the Act, the High Court found that despite the fact that the assessees did not deduct the said amount based on a bone fide belief and no dishonest intention could be attributed to any of them, yet the High Court held that levy of interest u/s. 201(1A) would follow, as the payment of simple interest under the said provision was mandatory.
The Supreme Court, on appeal by the assessees, observed that on the facts of the present case, it was clear that there was no vested right in the employee to claim any amount of tips from his employers. Tips being purely voluntary amounts that may or 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 was 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. 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 present case, it was clear that the amount of tips paid by the employer to the employees had no reference to the contract of employment at all. Tips were received by the employer in a fiduciary capacity as trustee for payment that were received from customer. There was, therefore, no reference to the contract of employment when these amount were paid by the employer to the employee.
The Supreme Court noted that it was nobody’s case that the amount of tips received by the employees in the present cases were not taxable in their hands. The learned counsel for the assessees had stated that they were so taxable as income from other sources. The question that it had to determine was therefore somewhat different, namely whether the person responsible for paying salary income to his employee is liable to deduct the tax of the employee and pay it over on an estimated basis u/s. 192 of the Income-tax Act.
The Supreme Court held that contract of employment in the present cases, not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act.
The Supreme court further held that interest u/s. 201(1A) could only be levied when a person is declared as an assessee-in-default. Having found that the appellants in the present cases were outside section 192 of the Act, the appellant could not be stated to be assessees-in-default and hence no question of interest therefore arose.
