However, gratitudes at the hands of employees would be chargeable as “income from other sources”
In a major relief to the hospitality industry, the Supreme Court has held that tips paid by customers to staff for availing services in restaurants do not constitute salary, and therefore, the employer is not liable to deduct tax at source on such payments under income-tax laws. But it said that such tips at the hands of employees would be chargeable as “income from other sources”.
The Supreme Court, in a batch of petitions led by the ITC Ltd vs Commissioner of IT case, set aside the Delhi High Court’s May 2011 judgment, which held that the receipt of such tips constitutes income at the hands of the recipient and is chargeable to income tax under the head “salary” under Section 15 of the Income-Tax Act.
“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,” the Supreme Court said.
It went on to say that the true character of tips cannot be treated as any payment made by the management, but only as a transfer of what is collected from the customer and paid to the staff.
On the contrary, the Delhi High Court had ruled that when a tip is paid by way of a credit card by a customer—since such a tip goes into the account of the employer, after which it is distributed to employees—the receipt of such money from the employer would amount to “salary” within the extended definition contained in Section 17 of the Act. However, the High Court had also 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.
Challenging the High Court judgment before the Supreme Court, ITC and others had argued that tips by customers are paid out of their own volition and discretion, and are in the nature of gratuitous payment made directly to the waiters/staff as a reward in appreciation of services rendered to them. Neither payment of tips by customers nor the quantum of tips is mandatory, they said, adding that the assessees act as mere trustees/custodians in collecting tips charged to customers’ credit cards and then pass over the same to employees/waiters for whom these are meant. Mere collection and passing on tips to their employees cannot be construed as the amount flowing under the contract of employment and becoming part of salary, the hotel companies had argued.
ITC further added that employees cannot claim any vested right thereto, since the employer neither pays nor is bound to pay any amount to the employee as a tip.
However, additional solicitor general Neeraj K Kaul, appearing for the Revenue, argued that Section 15(b) referred to salary that is “paid” or “allowed” to an employee by or on behalf of an employer, and the expression “allowed” is an expression of wide import and would include amounts such as tips paid by employers to their employees.
He further contended that any payment received by an assessee from an employer would be regarded as “profit in lieu of salary”, and that since the amount of tips received by way of credit cards from the customer are first put into the employer’s account and thereafter received by the employee from the employer, that was sufficient to attract “profits in lieu of salary” as defined.
The department had treated ITC and other hotels as assessees in default on the ground that tips were routed through bills as service charges and were mandatorily to be paid on clearance of bills. However, both the Commissioner of Income Tax and the Income Tax Appellate Tribunal ruled in favour of the assessee.
According to senior counsel Ajay Vohra, tips received by employees are not remuneration or reward for services rendered by employees to assessees, and there was no vested right of an employee to claim any tip from a customer.
“The importance of this decision is not restricted to the relief to employers imposing a vicarious liability, but will also effect its taxation in the hands of recipients who, in the first instance, may or may not be otherwise taxable. Secondly, the claim of deduction of expenses will no more be restricted to the standard deduction available, if it was taxable as salary,” senior counsel MS Syali said.
Supporting them, senior counsel S Ganesh also felt that Section 192 is attracted only when any person responsible for paying any income chargeable under the head “salary” is to deduct income tax on the amount payable. “The machinery provision contained in Section 192 is not possible of compliance as it is impossible for the employer to predicate how much each individual employee would get by way of income from tips, particularly when the schemes for distribution are many and varied, and may include different sums being received by different employees based on various criteria,” he added.