2025 (11) TMI 161 - AT - Income Tax

Surcharge must follow Finance Act rates; AOP under new regime with income over Rs.5 crore faces 15% surcharge

ITAT DELHI - AT held that surcharge must be computed as per the Finance Act rates and applies to income slabs (not to tax or surcharge), so the previously ... Levy of surcharge - Surcharge @ 37% levied by AO on income (excluding dividend income) as against the admitted surcharge @ 15% - HELD THAT:- As in the case of Araadhya Jain [2025 (4) TMI 648 - ITAT MUMBAI] has held that the surcharge has to be computed over and above the quantum of income tax depending on either the rate provided in the Finance Act for that year or as per the relevant provisions of the Act. Also 'slab' refers to income and not 'tax' and not the surcharge. In terms of sections 164 and 167B read with section 2(29C) of the Act, tax as per Maximum Marginal Rate (‘MMR’) would mean 'the rate of tax applicable to the highest slab of income' under the item (1) of Paragraph A, Part (I) of First Schedule to the Finance Act, and not highest slab of surcharge. In the present case, there is no dispute on rate of tax. A conjoint reading of sections 164 and 167B of the Act does not mention the rate of surcharge. Section 2(29C) of the Act does not itself prescribe the rate of surcharge; instead, it refers to the rates specified in the relevant year's Finance Act. Initially, the tax was levied @ 30% on entire income in this case. However, the appellant assessee, in first appellate proceedings before the Ld. CIT(A), succeeded on the issue of rate of tax. The rate of surcharge has to be levied depending on the type of assessee, quantum and category of income. Here, the appellant assessee is an AOP having total income exceeding Rs. 5 Crores including dividend income. It has opted new tax regime. We have considered the facts of the case in entirety and are of the considered view that the assessee fulfills all the conditions laid down in the Finance Act for applicability of surcharge @ 15% on income and thus, we direct the AO to levy surcharge @ 15% on income. The assessee gets consequential relief. ISSUES PRESENTED AND CONSIDERED 1. Whether surcharge at the rate of 37% levied by the Assessing Officer on the non-dividend portion of returned income (Rs. 34,07,065) is justified where total returned income includes substantial dividend income, and the assessee is an association of persons (AOP) opting for the new tax regime. 2. Whether the proviso to Paragraph A, Part I of the First Schedule to the Finance Act, 2023 (limiting surcharge on tax attributable to dividend/section 111A/112/112A income to 15%) requires a differential application of surcharge rates across components of total income and thereby affects the applicable surcharge slab for the remaining income. 3. The proper legal test for determining applicable surcharge rates: whether the 'slab' for surcharge refers to income or to tax, and whether statutory provisions (sections 164, 167B and section 2(29C) read with the First Schedule) mandate applying Finance Act slabs by reference to income slabs or to tax slabs/Marginal Maximum Rate (MMR). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of levy of surcharge @ 37% on non-dividend returned income of Rs. 34,07,065 Legal framework: Paragraph A, Part I of the First Schedule to the Finance Act, 2023 prescribes surcharge rates tied to categories and quantum of total income; the first proviso limits the rate of surcharge on the amount of income-tax computed in respect of dividend (and specified) income to not exceed 15%. Sections 164 and 167B and definition in section 2(29C) of the Income-tax Act are relevant for interpretation of tax computed under MMR and surcharge application. Precedent treatment: The Tribunal (Special Bench) in Araadhya Jain Trust held that the 'slab' refers to income (not tax) and that surcharge must be computed over and above quantum of income-tax according to either the Finance Act rates or the Act's provisions; MMR refers to rate of tax applicable to highest slab of income under the First Schedule, not to the highest slab of surcharge. Interpretation and reasoning: The Tribunal reasoned that the Finance Act prescribes surcharge rates tied to income slabs and to categories of income/assessee; the proviso carves out that tax attributable to dividend (and specified incomes) cannot attract surcharge exceeding 15%, and where total income exceeds specified thresholds, the remainder of income (non-dividend) must be assessed for surcharge in accordance with applicable slab rates. The AO's initial application of 37% on entire returned income was corrected in part (dividend portion to 15%) but the AO retained 37% on the residual income. The Tribunal examined whether the residual income falls within conditions warranting only 15% surcharge and concluded it does. Ratio vs. Obiter: Ratio - The proper application of Finance Act surcharge provisions requires (a) treating 'slab' as income-based, (b) applying the proviso to limit surcharge on dividend/specified income to 15%, and (c) applying applicable surcharge rate to remaining income consistent with the Finance Act and the Special Bench ratio. Obiter - Commentary on the AO's procedural steps and rectification sequence that do not alter statutory interpretation. Conclusions: The surcharge @ 37% on the non-dividend returned income of Rs. 34,07,065 is not justified. The Tribunal directs levy of surcharge @ 15% on that non-dividend income, finding the assessee satisfies conditions in the Finance Act for 15% surcharge on that component. Issue 2 - Effect of proviso limiting surcharge on dividend and specified incomes on determination of overall applicable surcharge rate Legal framework: First proviso to Paragraph A, Part I of the First Schedule to the Finance Act, 2023 provides that where total income includes dividend or income under sections 111A/112/112A, the rate of surcharge on the amount of income-tax computed in respect of that part of income shall not exceed 15%. Items (a)-(e) of Paragraph A set out surcharge rates depending on category of taxpayer and income thresholds (including clauses covering exclusion/inclusion of dividend in measuring thresholds). Precedent treatment: Reliance on Tribunal decisions (including Araadhya Jain Trust and other Tribunal decisions cited by the assessee) which interpret the proviso as requiring granular computation of surcharge - i.e., isolating tax attributable to dividend/specifed incomes and capping surcharge on that tax at 15%, while assessing applicable surcharge on remaining income by reference to income slabs. Interpretation and reasoning: The Tribunal read the proviso as a ceiling that applies to the surcharge on the tax computed in respect of dividend/specified income, and not as a rule that automatically fixes the surcharge for all other income at higher or lower rates. Given that the assessee's total income exceeded Rs.5 crore only by inclusion of dividend income, the non-dividend portion fell into a lower quantum that attracts lower surcharge under the First Schedule. Therefore, after limiting the surcharge on dividend income to 15%, the remaining income must be assessed for surcharge consistent with the applicable category/slab - which on facts warrants 15% rather than 37%. Ratio vs. Obiter: Ratio - The proviso requires segregated computation and capping of surcharge on dividend/specified income; this segregation may change the effective surcharge applicable to the non-dividend income. Obiter - Observations about policy intent or equitable considerations underlying the proviso. Conclusions: The proviso mandates differential treatment of dividend/specifed income (capped at 15% surcharge) and does not preclude the operation of income slabs to result in a lower effective surcharge on non-dividend income where statutory conditions are met; on facts, surcharge on the residual income must be 15%. Issue 3 - Whether 'slab' for surcharge refers to income (not tax) and role of MMR/sections 164, 167B, 2(29C) Legal framework: Sections 164 and 167B (and definition via section 2(29C)) address tax computation at maximum marginal rate (MMR) and interplay with First Schedule rates. The Finance Act First Schedule ties surcharge rates to income thresholds and categories. Precedent treatment: Tribunal (Special Bench) in Araadhya Jain Trust held that the 'slab' is income-based (referring to income slabs) and MMR should be read as the tax rate applicable to the highest slab of income under the First Schedule, not as a reference to the highest slab of surcharge. Interpretation and reasoning: The Tribunal observed that sections referenced do not themselves prescribe surcharge rates; instead they interact with Finance Act rates. The 'slab' language in the Schedule must be understood contextually to mean income thresholds; consequently, surcharge calculation uses income slabs - this informs how MMR and surcharge operate conjointly. Application of this interpretive approach led to rejection of the argument that surcharge slabs should be applied with reference to tax rather than income. Ratio vs. Obiter: Ratio - The correct legal test is that surcharge slabs are income-based; MMR is the highest rate of tax applicable to the highest income slab under the First Schedule, not the highest surcharge slab. Obiter - Ancillary remarks on the theoretical interaction of MMR and surcharge in atypical fact patterns. Conclusions: The Tribunal adopts the Special Bench ratio that 'slab' denotes income slab; therefore, the applicable surcharge must be determined by reference to income thresholds in the First Schedule, leading to application of 15% surcharge on the non-dividend income on the facts before the Tribunal. Cross-references and Result Cross-reference to Issue 2: The interpretation of the proviso (Issue 2) is applied together with the income-based slab interpretation (Issue 3) to resolve Issue 1. Applying the combined legal framework and Special Bench precedent, the Tribunal directs the Assessing Officer to compute surcharge on the non-dividend returned income at 15%, allowing the appeal accordingly.