Tips are not Salary Income, Still Taxable

The Supreme Court, granting a major relief to the industry of hospitality, has held that tips paid by customers to staff for getting services in restaurants do not form salary, and thus, the employer is not liable to substract tax at source on such payments under income tax laws.

The court, however, opined that such tips at hands of employee would be chargeable as “income from other sources”. By delivering this judgement the Supreme Court has sidelined the Delhi High Court’s May 2011 judgement that held that the receipt of such tips forms income at the hands of the recipient and is chargeable to income tax under the Lead “Salary” under Section 15 of the Income Tax Act.

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Background

In 2011, the Delhi High Court had ruled that when a tip is paid by way of a credit card by a customer, the receipt of such money from the employer would amount to “salary” within the stretched definition contained in the Section 17 of the Income Tax Act because such a tip goes into account of the employer, after which it is distributed to employees.

The High Court, however, had also opined that when tips are received by employees directly in cash, the employer does not have any role to play and would, therefore, be outside the ambit of Section 192 of this Act.

ITC and others, challenging the judgement of the High Court before the Supreme Court, had argued that tips are paid by customers out of their own violation and discretion and are in the nature of gratuitous payment that are made directly to the waiters / staff as a reward in appreciation of services given to them. ICC further annexed that employee cannot claim any vested right there to, because the employer neither pays nor is bound to pay any amount as a tip to the employee.

The Current Proposition of the Court

In the opinion of the Court, the employer merely acts in a trustful capacity as a trustee for payments that are obtained from customers, which they expend to their employees for services catered to the customer. The employer, therefore, has two obligation to deduct tax on such payments made to employee; it hardly matters whether the tips are obtained directly in cash or collected through credit card by employer, and subsequently spended to employees.

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