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ITC Limited, Gurgaon v. Commissioner of Income Tax (TDS), Delhi

Civil Appeal · Neutral citation not assigned (Civil Appeal Nos. 4435-37 of 2016)Decided 26 Apr 2016
Civil Appeal Nos. 4435-37 of 2016
Justice Kurian Joseph · Justice Rohinton Fali Nariman

Background

Hotel companies such as ITC Limited collected tips paid by customers (often via credit card, which routed the money through the hotel's accounts before distribution to staff) and distributed these tips to their employees without deducting tax at source. The Income Tax Department treated the hotels as "assessees-in-default" for failing to deduct TDS on these tips under Section 192 of the Income Tax Act, and the Delhi High Court had held the hotels liable, reasoning that credit-card tips became "salary" once they passed through the employer's hands.

Decision Breakdown

The Supreme Court held that tips are voluntary payments made by customers out of their own choice as a reward for service, and the hotel merely acts as a trustee/collection conduit in passing credit-card tips on to employees: the money never becomes the hotel's own income nor part of the employment contract's consideration. Since the employment contract was not the "proximate cause" (not the causa causans) of the employee receiving the tip, the payment did not qualify as "salary" or "profit in lieu of salary" under Sections 15 and 17 of the Income Tax Act, so Section 192's TDS obligation never arose. Because the hotels were therefore not "assessees-in-default," no interest under Section 201(1A) could be levied either. The Court allowed the hotels' appeals, dismissed the Revenue's cross-appeals, and set aside the High Court's judgment in full with no order as to costs.

Lesson Learnt

A payment made voluntarily by a third party (like a customer's tip) does not automatically become "salary" subject to TDS merely because it is routed through an employer before reaching the employee: what matters is whether the employment relationship itself is the real source of the payment.

Official source (sci.gov.in)View Judgment (PDF)

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