Discretionary trust surcharge must follow slab-based Finance Act rates, not the highest rate automatically, under maximum marginal rate taxation.

For a private discretionary trust taxed at the maximum marginal rate, surcharge must be determined under the slab-based surcharge provisions of the relevant Finance Act rather than imposed automatically at the highest rate. The definition of maximum marginal rate includes surcharge, if any, applicable to the highest slab, but the surcharge schedule itself applies graded rates with a threshold below which no surcharge is payable. On a harmonious reading, the trust could not be subjected to the highest surcharge rate merely because of its status, and relief followed in the refund computation.

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Issues: Whether a private discretionary trust with total income below fifty lakh rupees was liable to surcharge at the highest rate while computing tax at the maximum marginal rate, and the consequential refund computation.

Analysis: The governing scheme for discretionary trusts requires tax to be computed at the maximum marginal rate, but the rate of surcharge is to be gathered from the surcharge provisions in the relevant Finance Act. The definition of maximum marginal rate in the Income-tax Act refers to the rate of income-tax, including surcharge, if any, applicable to the highest slab as specified for the relevant year. The surcharge schedule in the Finance Act provides graded surcharge rates with a threshold of fifty lakh rupees, below which no surcharge applies. Reading the provisions harmoniously, surcharge cannot be mechanically imposed at the highest rate merely because the assessee is a discretionary trust. Such an interpretation would nullify the graded surcharge structure and produce an unworkable result. The applicable surcharge must therefore follow the slab-based rate prescribed for the relevant assessment year.

Conclusion: The surcharge could not be levied at 37% on the assessee's income of less than fifty lakh rupees, and the assessee was entitled to relief on that basis.

Ratio Decidendi: In the case of a private discretionary trust taxed at the maximum marginal rate, surcharge must be computed according to the slab-wise surcharge provisions of the relevant Finance Act and not at the highest surcharge rate irrespective of income.

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