Tips Taxed: Court Upholds TDS on Employee Gratuities in Hotel Industry

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Case Name

Asian Hotels (North) Ltd. vs CIT-I (High Court of Delhi)

ITA 395/2012

Date: 25th July 2012

Key Takeaways

1. Tips paid to hotel employees are subject to TDS under Section 192 of the Income Tax Act.

2. Employers are responsible for deducting tax on tips, even if distributed directly to employees.

3. Failure to deduct TDS makes the employer an "assessee in default," liable for the tax amount and interest.

4. Bona fide actions may protect against penalties but not from the obligation to pay the tax and interest.

Issue

Is the amount paid as tips to employees subject to Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act?

Facts

- Asian Hotels (North) Ltd., a hotel company, appealed against the application of TDS on tips paid to employees.

- The case was heard by the Delhi High Court.

- Previous judgments had established that tips are subject to TDS.

- The appellant (Asian Hotels) did not dispute this position but argued they shouldn't be treated as defaulters.

Arguments

Appellant (Asian Hotels):

- Argued that they should not be treated as defaulters for not deducting TDS on tips.

Revenue Department:

- Cited the judgment in Commissioner of Income Tax (TDS) v. M/s American Express Bank Ltd., stating that failure to deduct tax results in recovery along with interest under Section 201(1A) of the Act.

Key Legal Precedents

1. CIT v. ITC Ltd. (2011) 338 ITR 598 (Delhi) 

2. CIT v. C.J. International Hotels Ltd., 2011-TIOL-287-H.C.-DEL-IT 

3. Commissioner of Income Tax (TDS) v. M/s American Express Bank Ltd., ITA 74/2003 dated 21st December, 2011 

4. CIT v Adidas India Marketing P. Ltd : (2007) 288 ITR 379 (Del) 

5. CIT v Trans Bharat Aviation (P) Ltd : (2010) 320 ITR 671 (Del) 

These precedents established that Section 192 applies to tips, and employers are responsible for TDS.

Judgement

1. The court dismissed the appeal, upholding that tips are subject to TDS under Section 192 of the Income Tax Act.

2. The court clarified that even if an assessee acted in good faith, they could still be considered an "assessee in default" for short deduction of tax.

3. While good faith may prevent penalties under Section 221, it doesn't absolve the assessee from paying the tax and interest under Section 201(1A).

4. The court emphasized that if employees have already paid taxes on tips in their individual returns, the employer wouldn't be liable for that tax amount but would still be responsible for interest under Section 201(1A).

FAQs

Q1: What does this judgment mean for hotels and restaurants?

A: Hotels and restaurants must deduct TDS on tips paid to employees, even if distributed directly. Failure to do so makes them liable for the tax amount and interest.

Q2: Can employers avoid being treated as defaulters if they acted in good faith?

A: While good faith may protect against penalties, it doesn't exempt employers from being considered "assessees in default" or from paying the tax and interest.

Q3: What if employees have already paid taxes on their tips?

A: If employees have paid taxes on tips in their individual returns, the employer won't be liable for that tax amount. However, they may still be responsible for interest under Section 201(1A) for the period between when the tax should have been deducted and when it was actually paid.

Q4: Does this ruling apply to all types of gratuities or just those in the hotel industry?

A: While this case specifically deals with the hotel industry, the principle could potentially apply to other industries where employees receive tips. However, it's best to consult with a tax professional for specific situations.

Q5: Can employers recover the TDS amount from employees' tips?

A: The judgment doesn't specifically address this. Employers should consult with legal and tax professionals to determine the best approach for their situation.

1. The question sought to be raised in this appeal by the assessee is whether the amount paid as tip to the employees is to be subjected to the TDS in terms of Section 192 of the Income Tax Act.

2. In CIT v. ITC Ltd., now reported in (2011) 338 ITR 598 (Delhi) and CIT v. C.J. International Hotels Ltd., 2011-TIOL-287-H.C.-DEL- IT, it has been held that Section 192 applies and tax should have been deducted by the employer-hotel and this position is not disputed by learned counsel for the appellant.

3. In view of the above decision, the appeal is dismissed in terms of the judgment reported in (2011) 338 ITR 598 (Delhi).

4. However, learned counsel submitted that the assessee cannot be treated as defaulter. Counsel for the revenue relied upon the judgment report as Commissioner of Income Tax (TDS) v. M/s American Express Bank Ltd., ITA 74/2003 dated 21st December, 2011. The said judgment has clarified that if the assessee fails to deduct the tax, it has to be recovered along with interest under Section 201 (1A) of the Act.

5. In M/s American Express Bank Ltd., the Court had observed as follows:-

“9. While we are not inclined to disturb the finding of the Income Tax Appellate Tribunal that the assessee had acted in a bona fide manner, we do not agree with the conclusion of the Income Tax Appellate Tribunal that the assessee cannot be regarded as being as an “assessee in default” in respect of the short deduction. It is important to remember that the question of “good and sufficient reasons” only arises when one considers the proviso to Section 201(1) of the said Act. That proviso has been specifically introduced to negate the possibility of imposition of penalty under Section 221 if the Assessing Officer is satisfied that the person liable had good and sufficient reasons to not deduct and pay the tax in question. Thus, the proviso is to be applied only to the question of penalty. It would not absolve the assessee insofar as his being considered as an assessee in default for the purposes of Section 201(1) of the said Act. Therefore, this finding of the Tribunal is set aside. Consequently, question no.1 is decided in favour of the Revenue and against the assessee.

11. We would like to reiterate that although the questions have been decided in favour of the Revenue, it must be remembered that the finding of the Tribunal that the assessee acted in a bona fide manner, has to be kept in mind and, therefore, no penalty can be imposed on the assessee under Section 221 because of the specific stipulation in the proviso to Section 201(1) of the said Act. We also note that the exact quantum of the default needs to be computed. It would, therefore, be necessary to remand the matter to the assessing officer for the limited purpose of computing the exact quantum of default and the interest payable under Section 201(1A) of the said Act. We make it clear that in case the employees of the assessee have paid the taxes as per their individual returns/assessments, then no amount towards tax would be payable to that extent by the assessee, however, the assessee would continue to be liable for interest under Section 201(1A) but only for the period commencing „from the date on which such tax was deductible to the date on which the tax is actually paid‟ [see: CIT v Adidas India Marketing P. Ltd : (2007) 288 ITR 379 (Del) and CIT v Trans Bharat Aviation (P) Ltd : (2010) 320 ITR 671 (Del)]. The assessing officer shall give full opportunity to the assessee to produce documents in this regard. The appeals are allowed to the extent indicated above”

6. In view of the above rulings, no substantial question of law arises for consideration. The appeal is dismissed.

S. RAVINDRA BHAT, J

R.V.EASWAR, J

JULY 25, 2012