TDS on Salary u/s 192
Payments received by the employees have no reference whatsoever to the contract of employment and are received from the customer, the employer only being a conduit in a fiduciary capacity in between the two.
1. The assessees are 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
2. The assessees are 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
3. The assessees were treated by the Assessing Officers 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 under Section 201(1), as also interest under Section 201 (1A) of the said Act for assessment years 2003-2004, 2004-2005 and 2005-2006
4. 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 assesseesin-default under Section 201(1) of the Act for non-deduction of tax on tips collected by them and distributed to their employees
5. 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 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
6. 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)
7. Since the assesses 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
8. Assessee moved to Supreme Court
9. Honb. Supreme Court decided the issue in favour of the Assessee
....it is clear that as 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 would not get attracted at all on the facts of the present case.
On the facts of the present case, it is clear 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 present 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. Shri Kaul, however, argued that there is an indirect reference to the contract of employment inasmuch as but for such contract, tips to employees could not possibly have been paid at all. We are afraid that this argument must be rejected for the simple reason that the payments received by the employees have no reference whatsoever to the contract of employment and are received from the customer, the employer only being a conduit in a fiduciary capacity in between the two.
Therefore, it is clear that under the scheme of Section 17, payment must be by an employer, whether such employer is a future employer or a past employer of the employee in question. When sub-clause (ii) uses the expression “employer”, it uses the said expression in the same sense as is used in Section 15, as the opening line of Section 17 itself states that “for the purposes of Section 15” salary includes profits in lieu of salary. We have already held that the word “employer” in Section 15 necessarily brings in a contract of employment, express or implied, and for this reason also we are afraid we are not able to accept Shri Kaul’s argument.
In the view we have taken it is unnecessary to go into various other submissions made by counsel on both sides. The appeals filed by the assessees are, therefore, allowed and civil appeals arising out of SLP (Civil) Nos.9587-9589 of 2012 filed by Revenue are dismissed. The judgment of the High Court is set aside with no order as to costs.
Cases referred to