2025 (5) TMI 1583 - AT - Income Tax

Private Discretionary Trust surcharge calculated at applicable slab rate not maximum marginal rate under Finance Act

ITAT Mumbai ruled in favor of appellant regarding surcharge computation on total income liability. The case involved determining whether maximum marginal ... Levy surcharge on total liability based on the total income of the appellant - @10%/15% OR 37% - whether the maximum marginal rate (MMR) is to be applied at the highest rate of 37%, or at the slab rate applicable to the assessee, i.e.15%? - HELD THAT:- Hon’ble Special Bench in the case of Aradhya Jain Trust [2025 (4) TMI 648 - ITAT MUMBAI] has adjudicated the matter in favour of the assessee. The assessee is a “Private Discretionary Trust,” whose income is ordinarily chargeable to tax at the maximum marginal rate. Computation of surcharge on the income-tax must be determined with reference to the applicable slab rates as prescribed in the Finance Act under the heading “Surcharge on Income” appearing in Paragraph 11, Part I of the First Schedule, relevant to the concerned assessment year. Thus, we find that the said ruling is squarely applicable to the assessee's case. Appeal filed by the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Tribunal was whether, for a Private Discretionary Trust whose income is chargeable to tax at the maximum marginal rate (MMR) under section 164(1) of the Income Tax Act, 1961, the surcharge on income tax should be computed at the highest surcharge rate of 37% applicable to the highest income slab, or at the slab-specific surcharge rate applicable to the assessee's total income as prescribed under the Finance Act for the relevant assessment year. Specifically, the issue was whether the definition of MMR under section 2(29C) mandates surcharge calculation at the highest possible rate irrespective of the actual income slab, or whether surcharge must be computed according to the applicable slab rates for the relevant income bracket.2. ISSUE-WISE DETAILED ANALYSISIssue: Applicability of Maximum Marginal Rate (MMR) and proper computation of surcharge on income tax for Private Discretionary Trusts under section 164(1) of the Income Tax Act.Relevant Legal Framework and Precedents: The Income Tax Act, 1961, particularly section 164(1), governs the taxation of Private Discretionary Trusts where the share of beneficiaries is not known. Such trusts are taxed at the MMR. Section 2(29C) defines MMR as 'the rate of income-tax including surcharge on income-tax, if any applicable in relation to the higher slab of income in case of individuals.' The Finance Act prescribes slab-wise rates of surcharge on income tax applicable for different income brackets. The dispute centers on whether the surcharge component of MMR should always be computed at the highest rate (37%), or in accordance with the income slab-specific rates (10%, 15%, etc.).Judicial precedents included the Special Bench decision in Aradhya Jain Trust vs. Ward 22(1)(6), ITA No. 4272/Mum/2024, pronounced on 09.04.2025, which analyzed the interpretation of MMR and surcharge computation. Other decisions referenced were Anant Bajaj Trust vs. DDIT and Kapur Family Trust vs. ITO, with the former's decision being recalled and the latter losing relevance due to the recall.Court's Interpretation and Reasoning: The Tribunal relied heavily on the Special Bench ruling in Aradhya Jain Trust, which held that interpreting the definition of MMR to require surcharge at the highest rate of 37% regardless of income slab would render the detailed surcharge slab rates prescribed under the Finance Act meaningless and lead to absurdity. The Tribunal reasoned that the expression 'including surcharge on income-tax, if any' in section 2(29C) must be read in conjunction with the Finance Act's prescribed surcharge rates applicable for the relevant income slab.The Tribunal emphasized that the surcharge is a statutory levy authorized by Parliament under Article 271 of the Constitution of India and must be imposed strictly as per the law. The phrase 'if any' in section 2(29C) was interpreted to mean that surcharge is included only if the Finance Act prescribes it for the relevant year and income slab, not that the highest surcharge rate must always apply.The Tribunal also addressed the Revenue's argument that surcharge should always be computed at the highest rate, finding it unworkable and discriminatory. It noted that the object of surcharge is to augment Union revenue by asking higher income brackets to contribute more, which supports slab-wise application rather than a flat highest rate.Key Evidence and Findings: The assessee's total income was Rs. 33,68,30,120/-, including capital gains, dividend income, and other income. The CPC computed surcharge at 37%, the highest slab rate, whereas the assessee computed surcharge at 10% or 15% as per the applicable slab rates under the Finance Act, 2023. The Tribunal found the assessee's approach consistent with the Finance Act's provisions and the Special Bench ruling.Application of Law to Facts: Applying the legal framework and the Special Bench precedent, the Tribunal held that the surcharge on income tax for the Private Discretionary Trust must be computed at the slab-specific rates prescribed by the Finance Act, not at the highest surcharge rate. This interpretation avoids rendering the detailed surcharge slabs meaningless and ensures equitable treatment.Treatment of Competing Arguments: The Tribunal considered the Revenue's reliance on coordinate bench decisions and arguments about the definition of MMR and surcharge computation. It found that the issue of whether surcharge must be computed at the highest rate was not directly addressed in prior High Court decisions relied upon by the Revenue. The Tribunal distinguished those cases and affirmed the correctness of the Special Bench's reasoning.Conclusions: The Tribunal concluded that for Private Discretionary Trusts, surcharge must be computed on income tax with reference to the slab rates prescribed in the Finance Act applicable to the relevant assessment year. The appeal was allowed accordingly.3. SIGNIFICANT HOLDINGSThe Tribunal preserved and endorsed the following crucial legal reasoning from the Special Bench decision in Aradhya Jain Trust:'If we accept the contention of the Revenue that, irrespective of the nature or quantum of income, as per the definition of maximum marginal rate u/s. 2(29C) of the Act, surcharge has to be computed at the highest rate of 37% applicable to the highest income bracket of Rs. 5 crores and above, then the exception provided under the first proviso under the heading 'Surcharge on income-tax' would become otiose. Even, the different rates of surcharge on income-tax provided under clause (a) to (e) applicable to the different slabs of income would become meaningless so far as discretionary trusts are concerned. In our view, such an interpretation would lead to absurdity, hence, is unworkable.''Thus, in our view, the expression 'if any' used in section 2(29C) has to be read not de hors but in conjunction with the computation mechanism provided under the heading 'surcharge on income tax' provided in section 2 of Finance Act. This view of ours is further fortified by the object for which levy of surcharge was introduced to the Finance Act - to augment the Revenue of the Union for developmental work by asking persons in the highest income bracket to contribute little more than the other citizens, for nation building.'Core principles established include:The MMR under section 2(29C) includes surcharge computed according to the Finance Act's prescribed slab rates, not a fixed highest surcharge rate.Surcharge must be computed in accordance with the statutory scheme and cannot be arbitrarily fixed at the highest rate irrespective of income slab.Interpretation of tax statutes must avoid absurdity and preserve the efficacy of detailed legislative provisions.Private Discretionary Trusts taxed at MMR are entitled to surcharge computation based on applicable slab rates.Final determinations on the issue were that the surcharge on income tax for the assessee, a Private Discretionary Trust, must be computed at the slab-specific rates as prescribed in the Finance Act relevant to the assessment year, and not at the maximum surcharge rate of 37%. The appeals were allowed accordingly.