Tips are not salary income, still taxable: SC

In a major relief to the hospitality industry, the Supreme Court has held that tips paid by customers to staff for availing services in restaurants do not constitute salary, and therefore, the employer is not liable to deduct tax at source on such payments under income-tax laws.

However, the court observed that such tips at the hands of employees would be chargeable as ''income from other sources''.

With this, the Supreme Court has set aside the Delhi High Court's May 2011 judgment, which held that the receipt of such tips constitutes income at the hands of the recipient and is chargeable to income tax under the head 'salary' under Section 15 of the Income-Tax Act.

What else the Court said?

According to the court, the employer merely acts in a fiduciary capacity as a trustee for payments that are received from customers, which they disburse to their employees for services rendered to the customer. The employer, therefore, has no obligation to withhold tax on such payments made to employees, regardless of whether the tips are received directly in cash, or collected through credit card by employer, and subsequently disbursed to employees.

Background:

The Delhi High Court in 2011 had ruled that when a tip is paid by way of a credit card by a customer—since such a tip goes into the account of the employer, after which it is distributed to employees—the receipt of such money from the employer would amount to ''salary'' within the extended definition contained in Section 17 of the Act. However, the High Court had also held that when tips are received by employees directly in cash, the employer has no role to play and would therefore be outside the purview of Section 192 of the Act.

Challenging the High Court judgment before the Supreme Court, ITC and others had argued that tips by customers are paid out of their own volition and discretion, and are in the nature of gratuitous payment made directly to the waiters/staff as a reward in appreciation of services rendered to them. ITC further added that employees cannot claim any vested right thereto, since the employer neither pays nor is bound to pay any amount to the employee as a tip.