Delhi High Court
The Commissioner Of Income Tax ... vs C J International Hotels Ltd. on 11 May, 2011
Author: M. L. Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITAs No.475/2010, 476/2010, 860/2010
Reserved On: 23.03.2011
%
Date of Decision: 11.05.2011
The Commissioner of Income Tax - .... APPELLANT
TDS
Through: Ms.Rashmi Chopra, Sr. Standing Counsel
Versus
ITC Ltd. .... RESPONDENT
Through: Mr.Ajay Vohra with Ms.Kavita Jha and
Mr.Somhanth Shukla, Advcoates
AND
+ ITA No.445/2011
Reserved On: 23.03.2011
%
Date of Decision: 11.05.2011
The Commissioner of Income Tax - .... APPELLANT
TDS
Through: Ms.Prem Lata Bansal, Sr. Advocate with
Mr.Deepak Anand, Jr. Standing Counsel.
Versus
C J International Hotels Ltd. .... RESPONDENT
Through: Mr.M.S. Syali, Sr. Advocate with
Ms.Madhavi Swaroop and Ms.Husnal
Syali, Advocates
CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA
ITAs No.475/2010, 476/2010, 870/2010 & 445/2011 Page 1 of 28
1. Whether reporters of Local papers be Yes
allowed to see the judgment?
2. To be referred to the reporter or not? Yes
3. Whether the judgment should be Yes
reported in the Digest?
M.L. MEHTA, J.
*
1. These four appeals are being disposed of by this common order
as the questions of law arising in these appeals are common.
ITAs No.475/2010, 476/2010 and 860/2010 relate to assessee/ITC
Ltd. (hereinafter referred to as the "assessee/ITC") for the
assessment years 2005-06, 2004-05 and 2003-04 respectively.
ITA No.445/2011 relates to assessee, C.J. International Hotels
Ltd. (hereinafter referred to as the "assessee/CJ") for the
assessment year 2004-04.
2. The assessees are engaged in the business of owning, operating
and managing hotels. Surveys were conducted under Section
133A of the Income Tax Act, 1961 (hereinafter referred to as
"the Act") at the business premises of the assessees during
which it was found that the assessees had been paying tips to its
employees but not deducting taxes thereon. The Assessing
Officers treated the amounts of tips under the head "Salary" in
the hands of respective staff and held that the assessees were
liable to deduct taxes at source from such payments under
Section 192 of the Act. The assessees were treated by the
Assessing Officers as "assessees-in-default" under Section
201(1) of the Act. The Assessing Officers worked out different
amount of taxes to be paid by these assessees under Section
201(1) and also interest under Section 201(1A) of the Act for the
aforementioned assessments years.
3. Aggrieved from the orders of the Assessing Officers, the
assessees filed appeals before Commissioner of Income Tax
(Appellate) [hereinafter referred to as "CIT(A)"]. The appeals in
all the four cases were allowed by the CIT(A) by separate orders.
The CIT(A) relied upon the decisions of the Tribunal in the case
Nehru Place Hotels v. ITO, 173 Taxman 88, ITA No.4055-
4060/DL/2005 and held that the assessees could not be treated
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. Consequently, the CIT(A) in all the four appeals
held that no interest was to be charged under Section 201(1A) of
the Act.
4. Aggrieved from the orders of the CIT(A), the Revenue filed
appeals before the Income Tax Appellate Tribunal (hereinafter
referred to as "the Tribunal"). All the appeals came to be
dismissed by the Tribunal relying upon its own order for the
assessment year 1986-87 (in the case of assessee/ITC) and also
on the case of Nehru Place Hotels Limited. V. ITO (supra)]. A
common order was passed by the Tribunal in the cases relating
to ITAs No.475/2010 and 476/2010 of the assessee/ITC. The
case relating to the assessee/ITC (ITA No.860/2010) for the
assessment year 2003-2004 came to be disposed by the Tribunal
vide separate order dated 30th October, 2009. The case relating
to the assessee/CJ for the assessment year 2005-2006 came to
be disposed by the Tribunal vide its order dated 17th December,
2009. In all the cases, the Tribunal 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
be treated assessees-in-default under Section 201 and
consequently not liable for any interest under Section 201(1A) of
the Act. It is against these orders of the Tribunal that the
present appeals have been preferred by the Revenue.
5. The appeals have been admitted on the common questions of
law as under:-
"(a) Whether on the facts and in the
circumstances of the case, the Ld. ITAT
erred in law and on merits holding that the
assessee was not an „assessee in default‟ for
short/non deduction of tax at source on
account of banquet and restaurant tips
collected and paid by it to its employees?
(b) Whether on the facts and in the
circumstances of the case, the Ld. ITAT
erred in law and on merits in holding that
the payment of banquet and restaurant tips
to the employees of the assessee in its
capacity as employer were not profits in lieu
of salary within the meaning of Section 17
(3) (ii) of the Income Tax Act, 1961?"
6. We have heard the learned counsel for the parties and perused
the record. The common question that arises for consideration
is, as to whether tips paid by the customers for availing services
in the restaurants of the assessees constitute salary within the
meaning of Section 15 and Section 17 of the Act and whether the
assessees are liable to deduct taxes at source on these
payments under Section 192 of the Act.
7. There is no dispute with regard to the proposition that the
obligation to deduct taxes at source under Section 192 of the Act
in respect of a payment arises when an employee is responsible
to make a payment, which is chargeable to tax under the head
"Salary" in the hands of the recipient. It is for the purpose of
deduction of tax at source from salary that Section 192 of the Act
defines „salary‟ as under :-
(1) "any person responsible for paying any income
chargeable under the head "salaries" shall, at the
time of payment, deduct income-tax on the amount
payable at the average rate of income-tax on the
amount payable at the average rate of income tax
computed on the basis of the rates in force for the
financial year in which the payment is made, on the
estimated income of the assessee under this head
for that financial year."
8. A plain reading of this Section would explain that the employer is
required to deduct tax at source out of the income of the
employees chargeable under the head „salary‟ at the time of
payment on the basis of estimated income of the recipient.
9. Learned counsel for the Revenue submits 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. On the other hand, learned senior
counsel, Mr.Syali, and Mr.Vohra, for the assessees, contend
otherwise. They submit that since the tips are not „salaries‟ or
„in lieu thereof‟ paid by the assesses 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.
10. The counsel for the Revenue as well as assessees on their part
explain the mechanism and nature of payment of tips by the
customers and their payment/distribution by the assessees.
Learned counsels for the assessees submit that the tips are paid
by the customers 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. Merely because
the assessees in the aforesaid circumstances, collect the amount
of tips, in the first instance, and pass on to the employees, it
cannot be construed as the amount of tips flowing under the
contract of employment and becoming part of the salary paid by
the assessees to the employees. The assessees only act as a
conduit for passing the tips onto the employees. No part of tips
is retained by the assessees. Learned counsels for the
assessees submit that the assessees act in fiduciary capacity in
the matter of collection and distribution of the tips. They are
neither contractually nor compulsorily bound to pay any tips to
the staff. The tips amount collected from the customers and
distributed among the staff cannot, by any stretch of
imagination, be said to be salary due/payable or paid by the
assessees. They submit that the tips received by the employees
are not remuneration or reward/return for services rendered by
the employees to the assessees (employer). But, the same
represent reward given by the customers at their discretion
pleased with the services rendered. The earning of the tips was
entirely at the pleasure of the customers. They further submit
that the tips vary from customer to customer and from bill to bill.
Further, the employees cannot claim any vested right thereto,
since the employer neither pays nor is bound to pay any amount
to the employees as tips. The tips are not any dues from the
employers payable to the employees nor are they allowed to be
paid to them by the employer. The mere fact that an employee
would not have earned the tips if he had not been deputed at the
outlet, cannot lead to the inference that the payment of tips was
flowing from the contract of employment. The fact that the
employment was the cause without which the earnings of the
tips would not have happened (causa sine qua non) does not ipso
facto lead to inference that the same was in the nature of salary,
since the contract of employment was not the immediate causa
causana of such earnings. Learned counsels submit that the
essential pre-condition of Section 15 are not met, since the
amount of tips is neither due from any employer nor it would
constitute as a salary paid or allowed to be paid by or on behalf
of the employer. Learned counsel refers to the case of Emil
Webber : 200 ITR 483 @ 487 (SC). Learned senior counsel,
Mr.Syali, also submits that the payments should flow from the
employer to the employee or else it is income from other source
and not as part of salary. To bolster the above submissions,
learned counsels of the assessees, Mr.Vohra and Mr.Sayali, rely
upon the cases of The Ram Bagh Palace Hotel, Jaipur v. The
Rajathan Hotel Workers' Union, Jaipur, AIR 1976 SC 2303;
Quality Inn Southern Star v. The Regional Director,
Employees' State Insurance Corporation, Civil Appeal
No.1250/2001 decided by the Supreme Court on 3rd December,
2007 and Nehru Place Hotels v. ITO, 173 Taxman 88.
11. Learned counsel for the Revenue, Ms.Rashmi Chopra, on the
other hand submits that 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 service charges in the bills cannot be
termed as gratuitous or even voluntary and discretionary, but
are compulsory. She submits that the assessees have been
persistently following a well-laid procedure to charge a fix
amount of 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 banquets 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
fortnightly basis. She submits that it is immaterial how the same
is collected and how the amount is paid to it employees. But 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 business activities of the assessees
are pursued from its employees, whose duties are to serve their
customers or the tips are being paid to the employees in lieu of
rendering prompt services for their employers. Learned counsel,
Ms.Rashmi Chopra, further submits that the assessees are now
deducting TDS from the tips/service charges from the bills of
banquets, but are not doing so in respect of tips collected from
other outlets. She submits that the assessees cannot adopt
double tax policies in distribution of tip amounts. 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. The day the total bill towards food and
beverages along with tip is paid by the customer to the assessee,
the right to claim the tips in addition to salary accrues to the
employee from the employer assessee. Similar to the salary,
the tip receipts of the hotel employees are also sourced from the
hotel bills paid by the customers. Therefore, as regard the
source of tips and monthly salary of hotel employees, there is no
fundamental difference. The proceeds collected from its
customers come under the books of accounts of the assessees.
12. In support of her submissions, learned counsel, Mr.Chopra, relies
upon the case of Karamchari Union v. Union of India and
others, 243 ITRS 143.
13. In view of the above submissions of learned counsel for the
parties, we need to see as to whether the tips paid to the
employees by the assessees would constitute salary within the
meaning of Sections 15 and 17 of the Act, as alleged by the
Revenue or it would not be so as submitted by the assessees.
As per the Webster Comprehensive Dictionary, „tip‟ means small
gift of money for service given, to a servant, waiter, porter or
alike. There is no dispute that it is not a payment made by the
employer as a reward or remuneration for services rendered by
the employee. As per the Oxford English Dictionary, „tip‟ means
a small present of money given especially for a service rendered
or accepted. Under Section 2(24) „income‟ has been defined to
include several items which have been enumerated thereunder
and we are concerned here with item No.1 which is profits and
gains. In the words of Halsbury, the word „profit‟ has to be
understood in its natural and proper sense, i.e., in a sense in
which no commercial man would misunderstand. (see Gresham
Life Assurance Society v. Styles (1892) 3 TC 185. The
concept of „salary‟ goes back to the days of Roman Empire. The
soldiers were given „Sal (Salt)‟ as a regard for their services.
With the passage of time, the mode has changed from salt to
money. However, „salary‟, in its conceptual and legal sense,
remains a reward for the services rendered. The word „salary‟ is
derived from the word „salarium‟. In a nutshell, it means
compensation for „rendition of some sort of service‟. The salary
is paid usually as a reward for the performance of one‟s duties.
It is paid at the stated intervals.
14. To make the assessees responsible to deduct tax at source, it
would be essential to see, as to whether tips form part of the
salary within the meanings scribed to it under the Act. For the
purpose of income to be chargeable under the head „salary‟,
Section 15 defines salary as under:
"15. Salaries. - The following income shall be
chargeable to income-tax under the head "Salaries" -
(a) any salary due from an employer or a former
employer to an assessee in the previous year,
whether paid or not;
(b) any salary paid or allowed to him in the previous
year by or on behalf of an employer or a former
employer though not due or before it became due
to him;
(c) any arrears of salary paid or allowed to him in the
previous year by or on behalf of an employer on a
former employer, if not charged to income-tax for
any earlier previous year."
15. Section 17 extends the scope of meaning of Section 15, which
reads as under:
"17. "Salary", "Perquisite" and "profits in lieu of
salary" defined - For the purposes of sections 15 and
16 and of this section, -
(1) "salary" includes -
(i) Wages,
(ii) Any annuity or pension;
(iii) Any gratuity;
(iv) Any fees, commissions, perquisites or profits
in lieu of or in addition to any salary or
wages;
(v) Any advance of salary;
(2) ................
(3) "profits in lieu of salary" includes -
(i) The amount of any compensation due to or
received by an assessee from his employer
or former employer at or in connection with
the termination of his employment or the
modification of the terms and conditions
relating thereto;
(ii) Any payment [other than any payment
referred to in clause (10) [, clause (10A)] [,
clause(10B)], clause (11), [clause (12) [,
clause 13] or clause (13A)] of section 10),
due to or received by an assessee from an
employer or a former employer or from a
provident or other fund, [***] to the extent
to which it does not consist of contributions
by the assessee or [interest on such
contributions or any sum received under a
Keyman insurance policy including the sum
allocated by way of bonus on such policy:"
16. Under the provisions of Sections 15 and 17 as reproduced above,
we may see that the salary is not merely defined to mean the
compensation of services rendered, but, by providing an
inclusive definition under Section 17, the scope of provision of
Section 15 gets widened. Though we are not concerned, we note
that even the pension and gratuity, which ordinarily do not come
within the definition of "salary", are included within the term
„salary‟ by virtue of Section 17(1). 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‟ is generally used as word of
extension, but the meaning of a word or phrase is extended
when it is said to include things that would not properly fall
within its ordinary connotation. Thus, where „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 - {All India
Defence accounts Association v. Union of India, [1989] 175
ITR 494 (Allahabad)}. In sub-clause (iv) of Section 17(1), it has
been provided that even fees, commissions, perquisites or profits
which are paid to a person „in lieu of or in addition to any salary
or wages‟ shall be included in income, taxable under Section 15
of the Act. As per CIT v. Gopal Krishna Suri, [2000] 113
Taxman 707 (Bombay), the word „salary‟ under Section 17(1) is
very wide and an inclusive definition. Further as per CIT v.
Ram Rattan Lal Verma, [2005] 145 Taxman 256 (Allahabad),
the expression „salary‟ for the purpose of computing income for
charging purpose will mean only as defined under Section 17.
17. In fact, Section 17 defines "salary", "perquisites" and "profits in
lieu of salary" only for the purposes of Section 15 and Section 16.
Under sub-Section (1), "Salary" includes not only wages,
pension, gratuity, etc., but under the sub-clause (iv), it includes
any fees, commissions, perquisites, or profits „in lieu of‟ or „in
addition to salary or wages‟. The income of tips in all cases may
not strictly fall within the "profits in lieu 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 Section 16 is expanded
by the inclusion of anything which is received by an employee in
addition to salary or wages. The word "profits" here is used only
to convey any "advantage" or "gain" by receipt of any payment
by the employee. Applying this general meaning of the word
"profits" and considering meaning given to it under Section
17(1)(iv) and Section 17(3)(ii) it can be said that "advantage" in
terms of payment received by the employee from the employer
in relation to or in addition to salary or wages would be covered
by the inclusive definition of the word "salary". Because of the
inclusive meaning given to this, phrase "profits in lieu of salary"
would include any payment due to or received by an employee
from an employer, even though it has no connection with the
profits of the employer. Likewise, the inclusive meaning given to
the phrase "profits in addition to salary or wages" would include
any payment due to or received by an employee from an
employer even though it has no connection with the profits of the
employer. Under Section 15 clause (b), any salary paid or
allowed to an employee by or on behalf of his employer was to
constitute income chargeable to tax under the head "salary". In
the expanded definition of "salary", as noted above, by virtue of
Section 17, any amount paid by an employer to his employee by
virtue of his employment or "allowed to him" by or on behalf of
the employer would constitute income under Section 15 of the
Act. That being the plain interpretation of Section 15 and
Section 17, the receipt of tips by an employee from his employer
would fall within clause (b) of Section 15.
18. The submissions that since the tips were received by the
employee from the customers and not the employer, such
receipts would not constitute income under clause (b), would be
in fact not the correct interpretation of clause (b) of Section 15.
If it was so intended by the Legislature that the tips so received
by an employee were not to constitute income under Section 15,
there was no need of Section 17 in the Act. Section 17
prescribes various kinds of gains received in addition to salary as
being income for the purposes of Section 15. The employer, by
virtue of employment, allows the employee to receive tips from
the customers and in case the employer himself collects, that is
also disbursed by the employer to the employees. As per CIT v.
L.W. Russel, 53 ITR 91, in order that any payment can be
construed as a nature of "salary", the same must have reference
to the employment, where under the employee acquires vested
right, enforceable in law to receive the amount. In this case, it
was also held that the expression "paid" includes every receipt
by the employee from the employer whether it was due to him or
not and the expression "allowed" is of wider connotation and any
credit made in the employee‟s account is covered thereby and it
should imply that the right is conferred on the employee in
respect of the same. 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. When the tips are received by the
employees directly in cash, the employer hardly has any role and
it may not be even knowing the amounts of tips collected by the
employees. That would outrightly be out of the purview of
responsibility of the employer under Section 192 of the Act.
But, however, when the tips are charged to the bill either by way
of fixed percentage of amount, say 10% or so on the total bill, or
where no percentage was specified and amount is indicated by
the customer on the bill as a tip, the same goes into the receipt
of the employer and is subsequently disbursed to the employees
depending upon the nature of understanding and agreement
between the employers and the employees. Different settings
have different operating mechanisms with regard to collection
and disbursement of the tips. Some of the outlets have in-built
system of charging some percentage in the bills itself that may
be either in the shape of "service charges" or "tips" or may be
by any other name. Others leave it to the customers to indicate
some amount either on percentage basis or in lumpsum as tips.
In either case, these payments go to the receipts of the employer
and are distributed either on weekly, quarterly or monthly basis.
Such receipts at the hands of employees are nothing but their
income for the purpose of Section 15. The system has been
continuing and a large amount of income at the hands of the
recipients generated through this channel of tips is escaping
assessment. What is worse is that it is happening with the full
knowledge of the employers, who are admittedly collecting and
distributing this part of the income to the employees without
evening knowing as to whether the same was being accounted
for by them for the purposes of taxation or not. As soon as
such amounts are received by the employer, an obligation arises
on him to disburse the same to the rightful persons, namely, the
employees. Simultaneously, a right accrues to the employees to
claim the same from the employer. By virtue of his relationship
of an employer and employee, a vested right accrues to the
employee to claim the same.
19. From the above interpretation of the provisions of Section 2(24),
Section 15 and Section 17, we may see that the tips would
constitute income within the meaning of Section 2(24) and thus
taxable under Section 15.
20. In case of Karamchari Union v. Union of India and others,
243 ITRS 143, the Supreme Court has held as under:
"Applying the aforesaid general meaning of the word
„Profits‟ and considering the dictionary meaning given to
under Section 17(1)(iv) and (3)(ii), it can be said that
„advantage‟ in terms of payment of money received by
the employee from the employer in relation to or in
addition to any salary or wages would be covered by the
inclusive definition of the word „salary‟. Because of the
inclusive meaning given to the phrase "profits in lieu of
salary" would include „any payment‟ due to or received by
an assessee from an employer, even though it has no
connection with the profit of the employer."
21. Applying the above ratio of the Apex Court, 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‟ and there cannot be two opinions in view of the said
judgment of the Supreme Court.
22. In the case of Ram Bagh Palace Hotel, Jaipur (supra), which was
relied upon by the learned counsels for assessees, in support of
their submission that the amounts of tips do not constitute salary
of the employees paid by the employer under the contract of the
employment, the context was entirely different. The Hon‟ble
Supreme Court described the nature of tips at the hands of the
employees as payments not paid by the management out of its
pocket but a transfer of what was collected from the customers
in the following manner:
"2. We regret to be unable to agree with the counsel on this
point. It is well-known that in important hotels in the country,
the appellant is now a five star hotel-the customers are of the
affluent variety and pay tips either to the waiters directly or in
the shape of service charges or otherwise to the management
along with the bill for the items consumed. In short, the true
character of tips cannot be treated as any payment made by the
management out of its pocket but a transfer of what is collected
to the staff as it is intended by the payer to be so distributed. It
may also happen that more money comes in by the way of tips
into the pockets of the management than distributed by it. We
cannot therefore consider the receipt of tips by the staff as
anything like a payment made by the management to its
employees warranting consideration by the tribunal to depress
the award of dearness allowance."
23. The case of Quality Inn Southern Star (supra) relied upon by the
learned counsels for assesses is also distinguishable. It was in
the context of wages under Section 2(22) of the Employees‟
State Insurance Act, 1948 that it was held by the Apex court that
amount of service charges collected from the customers and
disbursed among the employees does not amount to wages
under Section 2(22) of this Act. It was held that "the amount
received by the employees were not in the nature of "wages" as
they were not given to the employees under the terms of
contract of employment, either express or implied. The
appointment letters expressly state that employees are not
entitled to any other remuneration. Thus, the distribution of
service charges is expressly excluded from the wages."
24. From the above discussion, we may conclude that the receipt of
the tips constitute income at the hands of the recipients and is
chargeable to the income tax under the head "salary" under
Section 15 of the Act. That being so, it was obligatory upon the
assessees to deduct taxes at source from such payments under
Section 192 of the Act.
25. Mr.Syali, learned senior counsel for the assessee/CJ, and also
Mr.Vohra, the learned counsel for the assessee/ITC, submit that
the obligation cast on the assessees under Section 192 is to
make an honest and bonafide estimate of income of the
employees chargeable to the tax under the head "salaries", but
this obligation does not extend beyond to precisely compute
such income at the hands of the employees. They submit that if
in assessment of the employee it was found that there was a
short deduction of tax by the employer out of the income of the
employee chargeable under the head "salary" on account of
bonafide difference of opinion, regarding inter alia treatment of
any amount/receipt, then the employer/assessee cannot be held
liable as „assessee-in-default‟ under Section 201 of the Act and
subjected to the penal consequences of the alleged failure.
They submit that the assessees‟ bonafide believed that the tips
are paid by the customers and that though the employee is liable
to pay tax in respect of the tips, the employer is not liable to
include the same in the estimated salary for the purpose of
bonafide deductions of tax at source under Section 192 of the
Act. They submit that this practice was adopted since the
commencement of the hotel business and the same was
accepted by the Revenue by accepting the assessments in the
form of annual returns in the past. They place reliance on the
cases of Gwalior Rayon Silk Co. Limited v. CIT, 140 ITR 832
(Madhya Pradesh) and CIT v. Nestle India Limited, 243 ITR
435 (Delhi).
26. In the case of Gwalior Rayon Silk Co. Limited (supra), the Madhya
Pradesh High Court observed as under:-
"The provisions of s. 201 of the Act are attracted in the case of
an employer only when that employer does not deduct or, after
deducting, fails to pay the tax as required by the Act. We have
already seen that the Act requires an employer to deduct and
pay tax on the estimated income of his employee. A duty is cast
on an employer to form an opinion about the tax liability of his
employee in respect of the salary income. While forming this
opinion, the employer is undoubtedly expected to act honestly
and fairly. But if it is found that the estimate made by the
employer is incorrect, this fact alone, without anything more,
would not inevitably lead to the inference that the employer has
not acted honestly and fairly. Unless that inference can be
reasonably raised against an employer, no fault can be found
with him. It cannot be held that he has not deducted tax on the
estimated income of the employee."
27. In the case of CIT v. Nestle India Limited (supra), the High Court
of Delhi while upholding the order of the Tribunal quashing the
order under Section 201 of the Act observed as follows:-
"The conclusion arrived at by the Tribunal is a pure finding of
fact, which does not give rise to any question of law. The
Tribunal has not examined, and rightly so, the question as to
whether the said allowance would be exempt under Section
10(14) of the Act or not because that question has to be
adjusted at the time of assessment of the employee receiving
the said allowance and he cannot be bound by the stand of his
employer about the taxability or otherwise of a particular
allowance. Deduction of income-tax is subject to regular
assessment in the hands of the payee/recipient. "
28. Reliance is also placed on the order of the Tribunal in the case of
Nehru Place Hotels Limited (supra) wherein the Tribunal held the
assessees to be not in default on the ground of bonafide belief
that no taxes were deductable at source along with the fact that
the assessee (Nehru Place Hotel) had started deducting the TDS
and depositing tax on this particular payments for the financial
year 2004-2005. Reliance is also placed on the decision of this
Court in ITAs No.778/2008 etc. dated 21.07.2008. In the order
dated 21.07.2008 rendered in ITA No.778/2008 and others, the
Division Bench of this Court observed as under:
"ITA Nos. 778/2008, 779/2008, 780/2008, 814/2008 and
816/2008
These appeals pertaining to assessment years 1999-2000 to
2004-05 have been preferred by the revenue against the
common order of the Income Tax Appellate Tribunal dated
27.7.2007.
The issue before the Tribunal was whether the assessee could
be termed as an assessee in default within the parameters of
Section 201(1)/201(IA) of the Income Tax Act, 1961. The
Tribunal has inter alia come to the conclusion that in any event
it was quite reasonable for the assessee to form a bonafide
belief that the tips which were collected by it on behalf of the
employees and subsequently distributed to its employees did
not form part of the salary paid by them and, therefore, no
deduction on account of tax at source was required to be made
by the assessee. The Tribunal came to the conclusive finding
that the assessee had such a bonafide belief and it is on account
of this that the tax was not deducted at source. Consequently,
we find that no substantial question of law arises for our
consideration. The appeals are dismissed."
29. We have given our thoughtful consideration to the submissions
of the learned counsels for the assessees based on bonafide
belief and non deducting tax at source from the payments made
to the employees on account of tips. Learned counsel appearing
for the Revenue did not controvert that this practice has been
accepted by the Revenue by accepting the assessments in the
form of annual returns of the assessees in the past. Since the
taxes were to be deducted from the amounts, which were the
dues of the employees, no dishonest intentions could be
attributed to the assessees. In this regard, we find no reasons
to disagree with the reasoning of Madhya Pradesh High Court
and Delhi High Court in the cases of Gwalior Rayon Silk Co.
Limited (supra) and CIT v. Nestle India Limited (supra)
respectively.
30. Thus, while reiterating our conclusion that the receipts of the tips
constitute „income‟ of the recipients and is chargeable under the
head „salary‟ under Section 15 of the Act and that it was
obligatory upon the assessees to deduct taxes at source from
such payments under Section 192 of the Act, we, in the given
circumstances, are inclined to give the benefit of bonafide belief
to the assessees for the periods upto the assessment years. In
the given circumstances, we are of the view that the cause of
non-deduction of taxes as submitted appears to be sufficient
being adequate, reliable and sound. Based on this reasoning, we
cannot make them liable for levy of penalty as envisaged under
Section 201 of the Act. {See CIT v. Majestic Hotel Ltd. [2006]
155 Taxman 447 (Delhi). However, levy of interest under Section
201(1A) is neither treated as penalty nor has the said provision
been included in Section 273B to make „reasonableness of the
cause‟ for the failure to deduct, a relevant consideration.
Section 201(1A) makes the payment of simple interest
mandatory. The payment of interest under that provision is not
penal. There is, therefore, no question of waiver of such interest
on the basis that the default was not intentional or on any other
basis. (See Bennet Coleman & Co. Ltd. v. V.P. Damle, Third
ITO, [1986] 157 ITR 812 (Bom.) and CIT v. Prem Nath Motors
(P.) Ltd., [2002] 120 Taxman 584 (Delhi).
31. In view of our discussions, we thus answer the questions
accordingly as indicated above. The appeals are allowed
without any order as to costs.
M.L.MEHTA
(JUDGE)
A.K. SIKRI
May 11, 2011 (JUDGE)
„Dev‟
