TIPS COLLECTED BY HOTEL AND DISBURSED BY EMPLOYEES AMOUNT TO SALARY AND TAX IS LIABLE TO BE DEDUCTED AT SOURCE

[DR.MARIAPPAN GOVINDARAJAN]

The meaning for the word ‘tip’ as per the Webster Comprehensive Dictionary is a small gift for service given, to a servant, waiter, porter or alike. As per the Oxford English Dictionary ‘tip’ means a small present of money given especially for a service rendered or accepted.  Tips may be received by the employees directly from the customers.  The tips may not be uniform. It may differ from customer to customer and also the amount involved and service involved.  In some cases the tips are collected by the employer and distributed to the employees periodically.  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. The employer, in such cases, hardly has any role and it may not even know the amounts of tips collected by the employees.  That would outrightly be out of the purview of the responsibility of the employer under Section 192 of the Act.  The issue to be discussed in this article is whether ‘tips’ received by the employees from the employees who collected the tips from the customers, amounts to ‘salary’ and liable to the provisions of TDS with decided case law.

In ‘Nehru Place Hotels Limited v. Income Tax Officer’ – it was held that the assesses cannot be treated as ‘assessees in default’ under Section 201(1) of the Act for non-deduction of tax on tips collected by it and distributed among their employees on the ground of bona fide belief that no taxes were deductible at source along with the fact that the assessee had started deducting the TDS and depositing tax on the particular payments.

In ‘Commissioner of Income Tax (TDS) V. ITC Limited  and another’ – (2011) 338 ITR 598 (Delhi) the assessees are engaged in the business of owning, operating and managing hotels.   The Income Tax Department made a survey under Section 133A of the Act at the business premises of the assessees.  During the survey the Department found that the assessees paid tips to its employees but not deducting taxes thereon.  The Assessing Officers treated the said amount as ‘salary’ in the hands of the respective staff and held that the assessees were liable to deduct tax at source from such payments under Section 192 of the Act.  The Department treated the assessees as ‘assessees in  default’ under Section 201(1) of the Act.  The Assessing Officers calculated the tax for such default and confirmed the demand along with the interest under Section 201(1A) of the Act. 

The assessees filed appeal before Commissioner of Income Tax (Appeals) set aside the decision taken by the lower authorities.   The Tribunal, in appeal filed by the Department’ held that the payments of tips paid by the assessees to its employees are not liable for TDS under Section 192 of the Act and thus the assessees could not treated as ‘assessees in default’ under Section 201 and consequently, not liable for any interest under Section 201(1A) of the Act.  Against the order of the Tribunal the Department filed appeal before the High Court.

The main question considered by the High Court is, as to whether the tips paid by the customers for availing of services in the restaurants of the assessee constitute salary within the meaning of Section 15 and section 17 of the Act and whether the assessees are liable to deduct tax at source on these payments under Section 192 of the Act.  The Department contended that the assessees are in default on account of their failure to deduct tax at source under Section 192 of the Act on the tips which constitute income of the employees chargeable under the head ‘Salary; under sections 15 and 17 of the Act.   The assessees submitted the following arguments before the High Court:

 

• Since the tips are not ‘salaries’ or ‘in lieu thereof’ paid by the assessees to the employees, the same were not income and thus not taxable under the head ‘salary’ under Section 15 and consequently no tax was required to be deducted under Section 192 of the Act;
• The tips are paid by the customs out of their own volition and discretion.   They are in the nature of gratuitous payment made by the customers directly to the waiters/staff, as reward in appreciation of services rendered to them;
• Neither the payment of the tips by the customers nor the quantum of tips is mandatory;
• The tips are received by the employees from the customers.   The assessees act as mere trustees/custodian in collecting the tips charged to the customers credit cards and then pass over the same to the employees/waiters for whom these are meant;
• The above said activity will not construed as the amount of tips flowing under the contract of employment becoming part of the salary paid by the assessees to the employees;
• No part of the tips is retained by the assessees;
• The tips received by the employees are not remuneration or reward/return for services rendered by the employees to the assessees;
• The employees cannot claim any vested rights, thereto, since the employer neither pays nor is bound to pay any amount to the employees as tips;
• The essential pre-condition of Section 15 are not met, since the amount of tips is neither due from the employer not would it constitute as a salary paid or allowed to be paid by or on behalf of the employer. 

In reply to the submissions of the assessees the Department put forth the following arguments:

• The outlet/restaurant tips are routed through the bills as service charges and being a part of bills are mandatorily to be paid on clearance of the bill;
• Amounts of service charges added to the bill vary as per policy of the employer as to the amount of benefit to be given to its employees;
• Addition of services charges in the bills cannot be terms as gratuitous or even voluntary and discretionary, but are compulsory;
• The assessees have been persistently following a well laid procedure to charge a fixed amount, say 10% or so as service charges from its customers at the time service is rendered by the staff at the banquets and they are further regularly collecting the other outlet tips;
• About 50% of the amounts so earned from banquet towards the service charges are retained by the assessees before distribution of the balance to the staff;
• The tips collected from the other outlets are also being disbursed to the employees on monthly or fortnight basis;
• As and when it is disbursed by the assessees, the employees earned the same only on account of rendering services to the employer;
• Thus there was an employer and employee relationship that existed at all times;
• The assessees are not deducting TDS from the tips/service charges from the bills of banquet, but not being done so in respect of tips collected from their outlets;
• 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;
• As regard the source of tips and monthly salary, there is no fundamental difference;
• The proceeds collected from the customers come under the books of account of the assessees.

The High Court analyzed the provisions of Sec. 15 and Sec. 17 of the Act.  From the definitions contained in the above section we may see that the salary is not merely defined to mean the compensation of services rendered, but, by providing an inclusive definition under Section17 the scope of the provision of Section 15 gets widened. Thus the legislation under Section 15 does not confine salary within the narrow limit of compensation for services rendered during the subsistence of a relationship of employer and employee but even includes the benefits which may become available at the end of that relationship. The word ‘includes’ has an extending force, it adds towards the phrase a meaning which does not naturally belong to it.  Scope of inclusive definition cannot be restricted to those words only which occur in such definition, but inclusive definition will extend to so many other things, which are not talked of in the section. 

The income of tips in all cases may not strictly fall within the ‘profits in lie 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 section16 is expanded by the inclusion of anything which is received by an employee in addition to salary or wages. The submissions that since the tips were received by the employee from the customers and not the employer, such receipts would not constitute income would be in fact not the correct interpretation.   If it was so intended by the legislature that the tips so received by an employee were to constitute income under Section15, there was no need of Section 17 in the Act. 

The High Court further held that the advantage to the hotel employees in the form of monies received as banquet tips or other outlet tips would be covered by the inclusive definition of ‘salary’.  That being so it was obligatory upon the assessees to deduct tax at source from such payments under Section 192 of the Act. 

The High Court also considered the submissions of the assessees based on the bona fide belief and non deducting tax at source from the payments made to the employees on account of tips.  The High Court was of the view the above submissions appears to be sufficient being adequate, reliable and sound.  Based on this reasoning the High Court did not make them liable for levy of penalty as envisaged under Section 201 of the Act.  However levy of interest under Section 201(1A) is never treated as penalty.  Therefore, there is no question of waiver of interest.