Supreme Court: Tips not salary for tax. Assessees not default. Appeals allowed, Revenue's dismissed.

The Supreme Court held that tips received by employees from customers do not constitute salary, and the employer is not liable to deduct tax at source under Section 192. Consequently, the assessees were not considered "assessees in default" and were not liable to pay interest under Section 201(1A). The appeals filed by the assessees were allowed, setting aside the High Court's judgment, while the Revenue's appeals were dismissed.

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Issues Involved:
1. Whether the assessees were "assessees in default" for not deducting tax at source on tips collected and paid to employees.
2. Whether the payment of tips to employees constitutes "profits in lieu of salary" under Section 17(3)(ii) of the Income Tax Act, 1961.
3. The applicability of Section 192 of the Income Tax Act to the tips collected and distributed by the employer.
4. The liability of the assessees to pay interest under Section 201(1A) of the Income Tax Act for non-deduction of tax on tips.

Detailed Analysis:

1. Assessees in Default for Non-Deduction of Tax on Tips:
The High Court held that tips collected by the employer and paid to employees should be treated as income under the head "salary" and thus, the employer was liable to deduct tax at source under Section 192. The Supreme Court, however, found that tips received from customers do not constitute salary as they are not paid by the employer but by third parties (customers). The Court emphasized that the employer acts merely as a conduit in transferring tips from customers to employees, and thus, the employer cannot be considered responsible for paying salary in this context. Consequently, the assessees cannot be treated as "assessees in default" under Section 201(1).

2. Tips as "Profits in Lieu of Salary":
The High Court interpreted tips as "profits in lieu of salary" under Section 17(3)(ii), arguing that since tips collected via credit cards are first received by the employer and then paid to employees, they fall under the definition of salary. The Supreme Court disagreed, clarifying that Section 17(3)(ii) uses the term "employer" in the same context as Section 15, implying a direct employer-employee relationship. Since tips are not paid by the employer but are voluntary payments from customers, they do not fit within the definition of "profits in lieu of salary."

3. Applicability of Section 192:
Section 192 mandates tax deduction at source on income chargeable under the head "salaries." The Supreme Court held that since tips are received from customers and not from the employer, they do not fall under the head "salaries" but rather "income from other sources." Therefore, Section 192 does not apply to tips, and the employer is not liable to deduct tax at source on such payments.

4. Liability to Pay Interest under Section 201(1A):
The High Court had ruled that interest under Section 201(1A) is mandatory for non-deduction of tax, regardless of the employer's bona fide belief. The Supreme Court, however, stated that interest under Section 201(1A) can only be levied if the employer is declared an "assessee-in-default." Since the assessees were found not to be "assessees in default" under Section 192, no interest liability arises under Section 201(1A).

Conclusion:
The Supreme Court allowed the appeals filed by the assessees, setting aside the High Court's judgment. It concluded that tips received by employees from customers do not constitute salary and are not subject to tax deduction at source under Section 192. Consequently, the assessees were not "assessees in default" and were not liable to pay interest under Section 201(1A). The appeals filed by the Revenue were dismissed.

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