This is the time of the year when all leading hotels and clubs celebrate Christmas and New Year on a grand scale throwing parties throughout the night. Hotel servers, bearers, waiters, stewards, valets, and other employees eagerly await the New Year bashes. They will be amply rewarded for courtesy extended when the hotel management collects tips from customers and distributes the same to the employees. How many hotels and clubs are aware of the tax obligation arising in the matter of collection and distribution of tips to employees?
TAX OBLIGATIONS
Income Tax department conducted surveys at certain hotels in Delhi and found that the hotels were paying tips to employees without deducting taxes thereon.
In the assessment of the ITC hotels Ltd., the Assessing Officer treated the amounts of tips as salaries in the hands of the staff. The management was held liable to deduct taxes at source from such payments under Section 192 of the IT Act 1961. The hotels were treated as ‘assesses-in-default' under Section 201(1). Interest was also levied under Section 201 (1A). The hotel filed appeals and the Tribunal decided the matter in favour of the hotel holding that the hotel cannot be treated as asseee-in-default under Section 201 for failure to deduct tax on tips collected by it and distributed among the employees.
Revenue took up the matter in appeal before the Delhi High Court. The question for consideration was whether tips paid by customers for availing services in the restaurants constituted salary within the meaning of Section 15 and Section 17 of the Act and if so, whether the hotel was liable to deduct tax at source on these payments.
The hotel management argued that tips are paid by customers out of their own volition and discretion and was in the nature of gratuitous payments made by customers directly to waiters and staff as reward for appreciation of services rendered to them. Neither the payment of tips by the customers nor the quantum was mandatory.
The management only acted as trustee or custodian in collecting the tips charged to the customer's credit card and then passed over the same to the employees for whom they were meant. The tips did not flow under the contract of employment and did not become part of the salary. The hotel management was only acting as a conduit.
No part of the tips is retained by the hotel. The hotel acted in a fiduciary capacity in the matter of collection and distribution of tips. There was no contractual obligation to pay any tips. The tips did not form part of salary.
The earning of tips was entirely at the pleasure of customers and varied from bill to bill. The employees cannot claim any vested right thereto.
Revenue countered arguing that the tips are routed through bills as service charges and formed part of bills mandatorily to be paid on clearance. They have different names like service charges, tips etc.
The Ruling
The High Court pointed to Section 17 which defines profits in view of salary. The employer, by virtue of employment, allows the employee to receive tips from customers and in case the employer himself collects, that is also disbursed by the employer to the employees.
The term ‘paid' included every receipt by the employee from the employer whether it was due to him or not. Tips represented additional income to the employees.
When they are charged to the bill, it goes into the receipt of the employer only to be disbursed subsequently among the employees.
Such distribution may be taking place on weekly, quarterly or monthly basis. They represented income for the employees and ensured to the advantage of the employees in the form of money received as banquet tips. The management transfers the collection of tips to the staff as intended by the customer.
Section 192 and 201
It was submitted on behalf of the hotel management that there was a bona fide belief that tips did not form part of salary and therefore tax was not deducted at source.
This was a long accepted practice in the past. The High Court accepted the explanation. In respect of the assessment years in question, the High Court opined that sufficient cause was shown for non-deduction of tax at source on tips. There may not be need for penalty under Section 201. However, levy of interest under 201 (1A) is mandatory and not penal. There can be no question of waiver of such interest on the ground of bona fide belief. An Authoritative Ruling has been handed down about the interpretation of salary and tips. Failure to deduct tax at source on tips will henceforth lead to even the levy of penalty. This Ruling has to be taken note of by all employers.
(The author is a former Chief Commissioner of Income-Tax.)