Assesses who collect and distribute tips/service charges are liable to deduct TDS on the payments forwarded to its employees: Delhi High Court

Commissioner of Income Tax v. ITC Ltd. decided on 11 May, 2011

Lead matter: ITAs No.475/2010

Assessment Year: 2003-04, 2004-05, 2005-06

Relevant Facts:

1. Surveys were carried out u/s 133A in the premises of the assesses. It was found that tips were being paid to the employees but no TDS was being deducted from such tips.

2. The Assessee was treated as an Assessee-in-default in terms of the provisions of section 201(1) and interest was charged against such defaults of deducting TDS u/s 201(1A).

3. The CIT (A) allowed the matter in favour of the assessee. Similarly, the Tribunal also held in favour of the assessee that tips paid by the assessees to its employees are not liable for TDS under Section 192 of the Income Tax Act, 1961 (“the Act”)?.

Questions of law:

1. Whether the amount of tips collected and paid by the assessee to its employees is salary within the meaning of section 15 and Section 17 of the Act?

2. Whether the assessee is liable to deduct tax u/s 192 against the amounts collected and paid to its employees?

Upholding the appeal of the department, the Hon’ble Court held that:

(i) The definition of salary as it appears in section 15 has been expanded by section 17. Thus, such salary would also include tips/service charges collected by the assessee.

(ii) The assessee may be in bonafide belief that no tax has to be deducted. Therefore, the assessee was not treated as an assessee in default

The decision is available here.