Whether tips distributed to employees charged under the head salary and consequently whether tax is required to be deducted under section 192?

Question

Whether tips distributed to employees charged under the head salary and consequently whether tax is required to be deducted under section 192?

Answer

ITC Ltd v. CIT, the Delhi High Court (HC) held that the tips or service charges distributed to employees are to be treated as part of salary and tax is required to be withheld under section 192 of the Income-tax Act from the same.

Reasoning

o    The tips are routed through the bills as service charges and have to be paid, since they are a part of the bill. Addition of service charges in the bills cannot be considered gratuitous or even voluntary and discretionary, but is compulsory.

o    The assessees have been charging service charges to customers for services rendered at banquets. Service charges collected are distributed to the employees on a regular basis.

o    The tips collected from other outlets are also distributed to the employees on a regular basis.

o    The employees earned the tips only by rendering services to the employer, thus establishing an employer – employee relationship. Accordingly, tips are chargeable as ‘salary’ under sections 15 and 17 of the Act.

o    The assessees are now withholding tax from tips/service charges from the bills of banquets, but not from tips collected from other outlets. The assessee cannot adopt two different tax policies in their distribution of tips.

o    Once bills including tips are paid by the customer, employees gain the right to claim the tips in addition to their salary;

o    In the same way as their salary, tips received by employees are sourced from the hotel bills paid by the customers.

High Court ruling

o    The inclusive definition of ‘salary’ in section 17 of the Act widens the scope.

o    The scope of inclusive definition cannot be restricted to those words which occur in the definition but will extend to many other things which are not talked of in the section.

o    Under section 17(1)(iv) of the Act, ‘salary’ includes profits in addition to salary or wages. The word ‘profits’ is used to convey any ‘advantage’ or ‘gain’ received by the employee. Therefore salary can also be termed as any advantage which is received by the employee from the employer in addition to salary or wages. Accordingly, the receipt of tips by an employee from his employer would be taxable as salary.