2024 (11) TMI 1508 - AT - Income Tax

Surcharge included in MMR only if Finance Act prescribes it for highest tax slab; assessee's appeal dismissed

Clestra Foundation Versus ITO Ward-4 (2) (3) Bangalore

ITAT BANGALORE - AT held that the MMR should be computed using the rate of income tax and any surcharge specified for the highest slab in the relevant ... Calculation of Maximum marginal rate (MMR) - ADDL/JCIT(A) is of the opinion that the rate of MMR has to be calculated as per the provisions of section 2(29C) of IT Act r.w.s. 164 or 167B - ADDL/JCIT(A) held that the MMR for this AY 2023-24 will be 42.74% which is to be applied irrespective of the total income of the assessee - assessee has vehemently submitted that since its income from dividends is way below of Rs. 50 lakhs and hence the surcharge is not at all applicable to the assessee. Whether MMR includes surcharge in relation to highest slab also even though the income of the assessee is way below the 50 Lakhs? - HELD THAT:- We agree with the view taken by the ld. CIT(A) that Finance Act of every year is only relevant to know the highest slab of rate of tax and surcharge. The word “if any” in the section 2(29C) of the Act is relevant, if the surcharge to the highest slab of income is mentioned in the relevant Finance Act and it will be applicable for a particular assessment year. Here the word “surcharge, if any” has relevance to levy of surcharge, if mentioned in the Finance Act. If surcharge of highest slab is mentioned in the Finance Act, then surcharge will be included in the tax and MMR will be calculated accordingly. If no surcharge is mentioned in the schedule of Finance Act, then no surcharge will be included in the tax quantum for calculating the MMR. This word does not remedially suggest to include surcharge in MMR as per different slab rates of income. We are of the opinion that the information that is enclosed with a pair of brackets can be removed from a sentence and still make sense as they are mostly just extra information. Therefore, if surcharge is not specified in the Finance Act, then it will not be a part of maximum marginal rate and only rate of income tax in relation to the highest slab of income will be considered. Assessee has highly relied on the decision of Tayal Sales Corporation [2001 (2) TMI 877 - ITAT HYDERABAD] as well as Sriram Trust, Hyderabad [2024 (6) TMI 1406 - ITAT HYDERABAD], in our opinion, the recent judgement of Anant Bajaj Trust cited [2024 (8) TMI 1551 - ITAT MUMBAI] has also considered the judgment in the case of Tayal Sales Corporation cited (supra) & therefore binding precedent. Accordingly, we respectfully following the decision in the case of Anant Bajaj Trust cited (supra) as well as Aaradhya Jain Trust [2024 (10) TMI 481 - ITAT MUMBAI] we confirm the order of ld. CIT(A) holding that Maximum Marginal Rate is correctly computed by the CPC taking the rate of income tax and surcharge applicable in relation to the highest slab of income in case of individual/AOP/BOI for the assessment year under consideration. Assessee appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the 'maximum marginal rate' (MMR) under section 2(29C) of the Income-tax Act includes the surcharge applicable to the highest slab of income for individuals/AOPs/BOIs even where the assessee's actual total income is below the threshold for levy of surcharge under the Finance Act. 2. Whether surcharge forming part of the MMR must be computed at the highest slab rate prescribed by the Finance Act or at the slab-specific surcharge applicable to the assessee's actual income level. 3. Whether the Central Processing Cell (CPC) is empowered, while processing a return under section 143(1), to compute and levy the correct surcharge and thereby vary tax liability by applying MMR including surcharge. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Inclusion of surcharge within 'maximum marginal rate' under section 2(29C) Legal framework: Section 2(29C) defines 'maximum marginal rate' as the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual/AOP/BOI as specified in the Finance Act for the relevant year. Precedent treatment: The Tribunal considered and relied on recent coordinate-bench rulings holding that MMR is to be determined by aggregating the highest slab tax rate and the highest slab surcharge (Anant Bajaj Trust; Aaradhya Jain Trust), as well as authoritative High Court and Supreme Court pronouncements recognizing the policy of charging trusts at the MMR to discourage discretionary trusts (C.V. Divakaran Family Trust; Gosar Family Trust; CIT v. J K Holdings). Earlier contrary coordinate-bench authority (Tayal Sales Corporation) was noted but treated as considered by the subsequent Mumbai benches. Interpretation and reasoning: A plain reading of section 2(29C) shows the phrase 'including surcharge on income-tax, if any' is bracketed/conditional; the bracketed phrase applies only if a surcharge in relation to the highest slab is specified in the Finance Act for that assessment year. The Finance Act is the source for both the highest slab tax rate and the surcharge (if any) applicable to that slab. The purposive intent of the MMR provision and the anti-avoidance objective of taxing discretionary trusts at the MMR support reading 'including surcharge' to mean inclusion of the highest slab surcharge where the Finance Act prescribes such a surcharge for the highest slab - i.e., the surcharge component of MMR is determined with reference to the highest slab rates in the Finance Act, not by the assessee's actual income slab. Ratio vs. Obiter: Ratio - MMR includes surcharge to the extent that the Finance Act specifies a surcharge for the highest slab; the MMR must be computed by reference to the highest slab tax rate and the highest slab surcharge as specified in the Finance Act for the relevant year. Obiter - observations on bracketed grammatical construction supporting conditionality of 'if any' where no surcharge is specified. Conclusion: MMR includes the surcharge component at the highest slab rate prescribed in the Finance Act for the relevant year; therefore, where a private discretionary trust/AOP is chargeable at MMR, the surcharge applicable in MMR is the highest slab surcharge even if the assessee's actual income is below the Finance Act threshold for slab-wise surcharge computation. Issue 2 - Whether surcharge in MMR should be at the highest slab rate or slab-specific to assessee's income Legal framework: Section 2(29C) expressly references the 'highest slab of income' as specified in the Finance Act and includes the phrase 'including surcharge on income-tax, if any'. The Finance Act prescribes slab-wise rates and corresponding surcharges. Precedent treatment: Coordinate-bench precedents (Anant Bajaj Trust; Aaradhya Jain Trust) and decisions of higher courts (Kerala High Court in C.V. Divakaran; Supreme Court in Gosar Family Trust; Bombay High Court in J K Holdings) were relied upon in support of applying the highest slab surcharge as part of MMR. Earlier tribunal decisions favoring slab-specific surcharge for the assessee (Tayal Sales Corporation and similar benches) were considered but not followed, being distinguished on the basis that subsequent benches and higher courts' authorities favour the highest-slab aggregation approach. Interpretation and reasoning: If the statute intended the surcharge component of MMR to be determined by reference to the assessee's actual income slab, there would have been no need to include the word 'surcharge' in section 2(29C) - the Finance Act would govern slab-wise levy inherently. Inclusion of 'surcharge' in the definition indicates Parliament's intent that MMR be the composite of the maximum rate of income-tax and the maximum rate of surcharge applicable to individuals (or AOP/BOI) as per the Finance Act's highest slab. Further, the anti-avoidance policy underlying MMR for trusts supports a construction that prevents differential treatment by allowing a lower surcharge rate because the trust's actual income is below the threshold. Ratio vs. Obiter: Ratio - surcharge in MMR must be taken at the highest slab rate as specified in the Finance Act; slab-specific surcharge applicable to the assessee's lower income cannot be used to dilute the MMR applicable to trusts/AOPs/BOIs. Obiter - policy considerations reiterating anti-avoidance purpose. Conclusion: Surcharge component of MMR must be the highest slab surcharge as set out in the Finance Act; applying a lower, slab-specific surcharge for a trust taxed at MMR would defeat the statutory design and is not permissible. Issue 3 - Power of CPC under section 143(1) to compute and apply surcharge/MRM while processing returns Legal framework: Section 143(1)(b) and (c) empower CPC to compute the correct amount of tax and sum payable when processing returns. Precedent treatment: Recent coordinate-bench decisions accepted CPC's authority to compute correct tax liability, including surcharge, during processing under section 143(1). Interpretation and reasoning: CPC, while processing a return under section 143(1), is obliged and empowered to compute the correct tax, including surcharge, in accordance with statutory provisions. There is no restriction preventing CPC from applying the appropriate MMR calculations (including highest slab surcharge) if the assessee's status (e.g., private discretionary trust/AOP) triggers MMR liability. Ratio vs. Obiter: Ratio - CPC may compute and levy surcharge correctly under section 143(1) by applying the statutory MMR; Obiter - procedural observations regarding when such adjustments are open to challenge. Conclusion: CPC had the power to compute and apply the surcharge component of the MMR when processing the return under section 143(1); its application of the highest slab surcharge as part of MMR was within its statutory authority. Overall Disposition and Holding The Court holds that (i) 'maximum marginal rate' under section 2(29C) includes surcharge to the extent the Finance Act specifies a surcharge for the highest slab; (ii) the surcharge component of MMR must be taken at the highest slab rate prescribed for individuals/AOPs/BOIs in the Finance Act for the relevant year (not at a lower slab-specific rate applicable to the assessee's actual income); and (iii) the CPC, while processing returns under section 143(1), is empowered to compute and levy the correct MMR (including the highest slab surcharge) on a private discretionary trust/AOP, and its computation in the case under consideration was upheld. Treatment of Precedents The Court follows coordinate-bench decisions adopting the highest-slab aggregation approach (e.g., Anant Bajaj Trust; Aaradhya Jain Trust) and relies on High Court and Supreme Court authorities emphasizing the anti-avoidance policy of charging trusts at MMR. Earlier tribunal decisions adopting an opposing view (e.g., Tayal Sales Corporation) are distinguished and not followed to the extent inconsistent with the holdings summarized above.