Employers are liable to deduct TDS from the salary paid to their employees on payment. More often than not, the question of what constitutes salaries arises. One such example is tips collected from customers by a hotel and distributed to employees. Through interesting case law, we will understand whether tips distributed by hotels to employees constitute salary or not and whether TDS is to be deducted from such transactions.

M/S. CJ International Hotels Ltd v/s DCIT

The Income Tax Appellate Tribunal, Delhi bench passed the judgement on 3rd May 2018.

TDS on Salary - Provisions under the Income Tax Act

• TDS for salary is to be deducted as per slab rates
• It is to be deducted on payment of salary to employees.
• If TDS under any section is not deducted as per the provisions of the act, the assessee is deemed to be the assessee in default.
• When an assessee is deemed as assessee in default, the assessee is liable to pay a penalty as the assessing officer deems fit
• In addition to the penalty, the assessee is liable to pay interest at the rate of 1% per month from the date on which the assessee is supposed to deduct TDS to the date of deduction of TDS.
• Therefore, on failure to deduct TDS under relavant sections of the act, the assessee is liable to pay the TDS amount, interest amount and penalty amount as per the provisions of the act.

Facts of the Case

• The assessee is in the business of running a hotel. The customers of the hotel pay tips to the employees of the hotel in 3 ways:
  • It gets added to their bill (or)
  • It gets added to their credit card (or)
  • Direct cash payments made by customers to employees.
• During his assessment, the assessing officer contended that since the hotel pays the amount to the employees, it should be subject to TDS under section 192, salary.
• Since the hotel has not deducted TDS for tips distributed, the assessee was deemed as an assessee in default under section 201(1). Penalty was also levied under section 201(1A).

Decision of the Tribunal

• The amount of tips paid to employees is not related to the contract of employment. Therefore the amount paid cannot be categorized as salary.
• In a way, the hotel acted as an intermediary between customers and the employees. They collected the amount from the customers and distributed it to employees.
• Therefore, the person who actually paid by the customers and not employers. Therefore employer is not liable to deduct TDS in the amount actually paid by the customer.
• Therefore, since the assessee (the hotel) is not required to deduct TDS for the amount of tips distributed to employees. Therefore, he cannot be termed as assessee in default and the penalty levied is dismissed.

Final Word

Through this case law, we can infer that in substance, TDS is to be deducted by the actual payers, not by persons who act as an intermediary in the distribution or settlement of the amount, except under exceptional circumstances. Also, TDS under respective sections can be deducted only for the amount paid in the nature specified in that section. For example in this case, since the amount distributed does not even come under salary, a deduction under section 192 is not applicable. This is a simple and straightforward case law which provides great clarity on who should deduct TDS, and on what amount TDS shall be deducted.