A clear concept on salary and tax deduction at source is explained in this article. The concept of various types of income is explained along with the TDS attached to the same.
The High Court (CIT (TDS) v. ITC Ltd. (2011) 338 ITR 598 (Del.)) faced a complete overturn when Supreme Court intervened to re-judge the case regarding restaurant tips and other allied tips paid to the employers. It was stated as per the High Court order that such ‘tips’, being ‘profits in lieu of salary’ are taxable under Section 192 and penalized the assessee for not deducting TDS from its employers. The same was however ruled out later by supreme Court with proper explanation of the concept of ‘salary’ along with TDS, segregating them from the ‘tips’ received and finally coming to the verdict. Continue reading, here is a clear concept about salary and tax deduction at source.
Digging deeper: In the process of explaining the given verdict, the following points came into consideration that have thrown light upon the whole matter and cleared the concepts of ‘salary’ and tax deduction at source by differentiating it from ‘income from other sources’.
- Why salary is separate from ‘tips’?: Section 192 (sub-section 1) cannot come into picture at all in this case as it applies to only ‘salaries’, which are paid by persons ‘responsible for paying any income under the head of ‘salaries’’, or in other words, the employer. Here, the person or persons, who are giving tips to the employees in the hotels and restaurants, are not the employer and hence, the income received from the tips cannot be regarded as ‘salary under Section 192. The ‘tips’ can rather come under Section 56(1) of the Income Tax Act, which is the head called ‘income from other sources’.
- “Tips” are ‘voluntary’: In CIT v. L.W. Russel reported in 53 ITR 91 (SC), the main point that followed and supported the above argument was “vested right in an employee to claim any salary from an employer or former employer, whether due or not if paid; or paid or allowed, though not due”. While analyzing Section 15 in this case therefore, it was clear that the same couldn’t be considered here as appropriate, as the employee is not having any ‘vested right to receive an amount from his employer before he could be brought to tax under the head “salaries”’. As ‘tips’ are completely ‘voluntary amounts’ paid for the services given by the employers in the hotels, etc. that always have an uncertainty in arrival from the customers, therefore, they cannot come under Section 15 as well.
- The ‘contract of employment’ concept: There is always a ‘contract of employment, express or implied’ involved between the employer and the employee, where the employer or somebody on behalf of the employer pays salary to the employees in return for the work performed. Hence, it is evident from here that the ‘tips’ in question here has no relation to any such kind of contract of employment that is mandatory in an employer-employee relationship and in turn to bring the concept of ‘tips’ under the head of ‘salaries’. The same concept has also played a part in approving of the Wrottesley v. Regent Street Florida Restaurant, [1951] 2 K.B. 277 case that went on to describe the fact that the employer is just holding the money received from ‘tips’ as a “fiduciary capacity for and on behalf of the employees”. Therefore, Section 15 cannot cover the money received from ‘tips’.
Keeping in view the above-mentioned points, the appeal of the assessee to the Supreme Court gained weight along with some other cases such as the Karamchari Union, Agra v. Union of India, (2000) 3 SCC 335, all of which were able to come to a common conclusion by adequate explanation of ‘salary’ or ‘profits in lieu of salary’. Finally, the Supreme Court was bound to consider the points mentioned by them too.