Surcharge on discretionary trust income must follow slab rates, with dividend and capital gains income capped at 15%.

For a private discretionary trust assessed at the maximum marginal rate, surcharge is not automatically payable at the highest rate on the entire income. The Tribunal applied the Special Bench view that surcharge must be computed in accordance with the slab-wise rates under the relevant Finance Act, and that income by way of dividend and capital gains under sections 111A, 112 and 112A cannot suffer surcharge above 15%. As a substantial part of the trust income fell within that capped category, the levy of surcharge at 37% on the whole income was unsustainable, and surcharge was restricted to 15%.

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Issues: Whether, in the case of a private discretionary trust whose income is chargeable at the maximum marginal rate, surcharge is to be levied at the highest rate applicable to the entire income or in accordance with the slab-wise surcharge rates prescribed under the relevant Finance Act.

Analysis: The Tribunal followed the Special Bench ruling that for a private discretionary trust assessed at the maximum marginal rate, surcharge is not automatically to be levied at the highest slab merely because the tax is computed at MMR. The surcharge has to be computed with reference to the slab rates prescribed in the relevant Finance Act, and for income by way of dividend and capital gains referred to in sections 111A, 112 and 112A, the surcharge cannot exceed 15%. On the facts, a substantial part of the trust income fell within the category attracting the capped surcharge rate, and the rectification order had already granted partial relief by applying 15% surcharge to that component.

Conclusion: The levy of surcharge at 37% on the entire income was not sustainable. The assessee was entitled to surcharge at 15% in accordance with the applicable slab provisions, and the appeal succeeded.

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