(2016) 384 ITR 14 (SC)
Salaries — charging section; definition of salary and profits in lieu of salary; TDS on salaries
No. Tips are payments voluntarily made by customers, not by the employer, and do not arise from the contract of employment. They are not salary, so the withholding obligation on salary is not attracted. The employer acts only as a conduit.
Where a hotel collects tips from customers on credit card bills and disburses them to its staff, is the employer obliged to deduct tax at source as though the tips were salary?
ITC Ltd operated hotels at which customers frequently added a tip when settling their bills by credit card. Because the amount reached the hotel through the card settlement rather than the customer's hand, the hotel collected those sums and later distributed them among its staff. The Revenue treated the disbursements as salary paid by the employer, held the hotel to be an assessee in default for failing to deduct tax at source on them under Section 192, and raised demands for tax and interest across several years. The same pattern arose for a number of hotel companies and the appeals were heard together.
The Assessing Officer's orders were confirmed in part through the appellate stages, and the Delhi High Court decided against the hotels, holding the tips to be income under the head salary in the employees' hands with a consequent obligation to withhold. The hotels appealed to the Supreme Court.
For the assessee
The tips were paid by customers, not by the employer, out of their own volition and in recognition of service. They form no part of the contract of employment, the employee has no enforceable right against the employer to receive them, and the hotel merely collects and passes them on. Since the sums are not paid by the employer as salary, the obligation to deduct under Section 192 cannot arise. At most the receipt is income in the employee's hands from another source, on which the employee is assessable.
For the Revenue
The money reached the employees through the employer, who determined how it was apportioned and disbursed it with the wages. The definition of salary is wide and includes profits in lieu of salary and any payment received from an employer in connection with employment. Once the amounts pass through the employer's hands to the employee, the withholding obligation attaches.
The Court examined the source and character of the payment rather than the route it travelled. It held that a tip is a voluntary payment by a customer, made out of the customer's own satisfaction with the service, and is in no sense a payment by the employer. The contract of employment creates no right in the employee to receive tips and imposes no obligation on the employer to pay them; whether any tip is received at all depends entirely on the customer. The employer, in collecting amounts settled by credit card and distributing them, performs the function of a conduit or trustee for money that was never its own. Since the charge under the head of salary, and the corresponding withholding obligation, rest on a payment made by the employer to the employee arising out of the employment relationship, neither was attracted. The Court was careful to add that its conclusion did not place the receipt outside the tax net altogether: the tips remain income in the hands of the employees, chargeable under the appropriate head, and the employees are assessable on them in the ordinary way. What fails is the attempt to cast the collection burden on the employer. The orders treating the hotels as assessees in default were accordingly set aside.
The leading authority on service charges, tips and similar customer-funded payments routed through an employer, now falling under Sections 15 to 18 for the charge and Section 392 for salary withholding under the IT Act 2025. It is directly relevant to hotels, restaurants, salons and delivery platforms wherever customer gratuities are pooled and distributed. Note the distinction the case turns on: a mandatory service charge levied by the establishment and paid to staff out of its own funds stands on a different footing from a voluntary tip, and this decision should not be read as covering it.