2025 (10) TMI 910 - AT - Income Tax

Discretionary trust taxed at maximum rate gets surcharge calculated using Finance Act slab rates, not highest percentage

ITAT RAJKOT - AT held that for a private discretionary trust taxed at the maximum marginal rate, surcharge must be computed by applying the slab rates in ... Applicable rate of surcharge - highest rate of surcharge @37% or based on income threshold - Assessment of 'Private Discretionary Trust' Computing tax at “maximum marginal rate” (MMR) - As argued if the income is less than Rs. 50 lakhs then the surcharge is not applicable, hence, the addition made by the Ld. CIT(A) should be deleted - whether rate of surcharge would also be at the highest rate while computing tax at maximum marginal rate? - HELD THAT:- We note that the issue under consideration is covered by the judgment of Araadhya Jain Trust [2025 (4) TMI 648 - ITAT MUMBAI] wherein it was held as follows in case of Private Discretionary Trusts, whose income is chargeable to tax at maximum marginal rate, surcharge has to be computed on the income tax having reference to the slab rales prescribed in die Finance Act under the heading 'surcharge on income tax' appearing in Paragraph A. Part I, First Schedule, applicable to the relevant assessment year. Hence, reference is decided in favour of the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether, in the case of a private discretionary trust whose income is chargeable to tax at the 'maximum marginal rate' under sections 164/167B of the Income-tax Act, surcharge must be computed at the highest rate applicable to the topmost income slab (i.e., 37%) irrespective of the trust's actual total income, or whether the rate/threshold mechanism for surcharge in the Finance Act (First Schedule, Paragraph A, Part I) applies so that surcharge is levied only when the trust's total income exceeds the statutory thresholds (e.g., Rs. 50 lakh). 2. Whether the definition of 'maximum marginal rate' in section 2(29C) (which refers to income-tax 'including surcharge on income-tax, if any') should be read so as to import a fixed highest surcharge rate for discretionary trusts or read in conjunction with the Finance Act's surcharge slab mechanism. 3. Whether the interpretation which treats the 'if any' qualifier in section 2(29C) as superfluous or limiting is tenable; and whether a harmonious construction with constitutional and statutory principles (e.g., Articles empowering surcharge) affects the proper construction of sections 164/167B read with section 2(29C) and the Finance Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability and computation of surcharge for private discretionary trusts taxed at maximum marginal rate Legal framework: Sections 164/167B prescribe that tax on total income of certain trusts/AOPs/BOIs is to be determined at the 'maximum marginal rate.' Section 2(29C) defines 'maximum marginal rate' as the rate of income-tax (including surcharge on income-tax, if any) applicable to the highest slab of income of an individual/AOP/BOI as specified in the Finance Act. The Finance Act (First Schedule, Paragraph A, Part I) prescribes income-tax rates and, separately, the surcharge on income-tax with specified thresholds (e.g., surcharge applies only where total income exceeds Rs. 50 lakh and rates vary by slab up to 37% for incomes above Rs. 5 crore). Precedent treatment: The Tribunal followed a coordinate-bench decision (Araadhya Jain Trust) which held that surcharge for discretionary trusts must be computed with reference to the Finance Act's surcharge slabs; earlier divergent coordinate-bench decisions and some High Court decisions were considered but found not to have directly decided the precise question whether surcharge must always be at the highest rate for maximum marginal rate assessments. Interpretation and reasoning: A plain reading of the Finance Act shows that surcharge is a separate, slab-dependent increment to income-tax and is expressly tied to income thresholds. The definition of 'maximum marginal rate' in section 2(29C) refers to income-tax 'including surcharge on income-tax, if any,' but does not itself fix a fixed highest surcharge irrespective of income. Reading section 2(29C) in isolation to impose the highest surcharge on all discretionary trusts would render the Finance Act's graduated surcharge framework otiose and produce absurd, unworkable, and discriminatory consequences. Constitutional principles (Article 271 empowers the Union to impose surcharge; Article 265 requires legal authority for taxation) underline that surcharge must be levied in accordance with the law enacted by Parliament, i.e., the Finance Act; the 'if any' qualifier must therefore be read in conjunction with the Finance Act's surcharge computation mechanism rather than as permitting a blanket highest-rate surcharge for all trusts governed by maximum marginal rate. Ratio vs. Obiter: The holding that surcharge for private discretionary trusts is to be computed by reference to the Finance Act's surcharge slabs (and that no surcharge applies if total income is below the statutory threshold of Rs. 50 lakh) is the ratio of the decision. Observations on the legislative purpose of surcharge and the constitutional background serve as supporting ratio and statutory-construction reasoning rather than mere obiter. Conclusions: For private discretionary trusts taxed at maximum marginal rate, surcharge is not automatically leviable at the highest rate; the applicable surcharge (if any) must be determined with reference to the Finance Act's surcharge slab provisions applicable to the trust's actual total income. Consequently, where total income is below the surcharge threshold (e.g., Rs. 50 lakh for AY in question), no surcharge is leviable. Issue 2 - Construction of 'maximum marginal rate' in section 2(29C) and the meaning of 'including surcharge on income-tax, if any' Legal framework: Section 2(29C) defines 'maximum marginal rate' by reference to rates set out in the Finance Act; the Finance Act (section 2 and First Schedule, Paragraph A, Part I) prescribes applicable income-tax rates and separately prescribes surcharge computation under explicit thresholds and varying rates. Precedent treatment: The Tribunal relied on the coordinate-bench analysis that emphasized returning to the Finance Act to determine both the income-tax component and the surcharge component of the 'maximum marginal rate.' Decisions cited by Revenue that purported to apply surcharge at the highest rate irrespective of trust income were distinguished on the ground that the specific question of surcharge at the highest rate had not been directly considered by higher courts in those cases. Interpretation and reasoning: The phrase 'including surcharge on income-tax, if any' must be read in contextual harmony with the Finance Act's detailed surcharge mechanism. The words 'if any' acknowledge that surcharge may or may not be applicable depending on whether the Finance Act prescribes such levy for the particular total income; they do not authorize treating discretionary trusts as automatically subject to the highest surcharge irrespective of their income. A construction that imports an unconditional highest surcharge conflicts with the statutory scheme and would nullify graduated surcharge rules; such a result must be avoided by harmonious construction principles. Ratio vs. Obiter: The determination that the 'if any' phrase requires conjunctive reading with the Finance Act and that surcharge must be applied according to Finance Act slabs is a binding part of the decision (ratio). The policy observations on the object and purpose of surcharge are ancillary but support the principal ratio. Conclusions: The definition of 'maximum marginal rate' in section 2(29C) incorporates surcharge only to the extent and subject to conditions laid down by the Finance Act; consequently, surcharge is to be computed in accordance with the Finance Act's slab/threshold mechanism and not as a fixed highest percentage applied universally to discretionary trusts. Issue 3 - Precedential effect and applicability of coordinate-bench decisions Legal framework: Tribunal decisions by coordinate benches are binding unless distinguished on facts or law; prior decisions must be applied when squarely on point and there is no change in law or facts. Precedent treatment: The Tribunal recognized a recent coordinate-bench decision that directly addressed the surcharge question and adopted its reasoning. Other coordinate-bench decisions relied upon by Revenue were examined and either distinguished (for not having considered the precise surcharge issue) or noted as having lost relevance where subsequent recalls/reconsiderations occurred. Interpretation and reasoning: Where a coordinate-bench decision has directly considered and decided the specific issue (surcharge computation for discretionary trusts), subsequent benches dealing with identical facts and law should follow that precedent unless there is contrary binding authority or materially different facts. The Tribunal found the Araadhya Jain Trust decision directly on point and correctly reasoned; no effective rebuttal or distinguishing circumstances were advanced by Revenue. Ratio vs. Obiter: The reliance on and followance of the coordinate-bench precedent is operative ratio for the outcome of the appeal; discussion of other decisions and their status is explanatory to distinguish competing lines. Conclusions: The binding coordinate-bench precedent that surcharge must be computed with reference to the Finance Act's surcharge slabs governs the present appeal and supports allowing the appeal where the trust's total income is below the surcharge threshold. Overall Disposition Where the trust's total income is below the statutory surcharge threshold prescribed in the Finance Act for the relevant assessment year (e.g., Rs. 50 lakh), no surcharge is leviable notwithstanding that tax is computed at the 'maximum marginal rate' under sections 164/167B; surcharge must be determined by reference to the Finance Act's slab-based surcharge provisions, and the 'including surcharge on income-tax, if any' phrase in section 2(29C) is to be read conjunctively with those provisions. The appeal is allowed on that basis.