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Income Tax Appellate Tribunal, MUMBAI “B” BENCH : MUMBAI
Before: SHRI VIKRAM SINGH YADAV & MS. KAVITHA RAJAGOPAL
For Assessee : Shri Anant N. Pai, CA For Revenue : Shri Leyaqat Ali Aafaqui Date of Hearing : 24-06-2025 Date of Pronouncement : 27-06-2025 O R D E R PER BENCH :
These are three appeals filed by the assessee against the order(s) of the Addl/JCIT(A)-3, Hyderabad [„Ld.CIT(A)‟], pertaining to Assessment Years (AYs.) 2021-22, 2022-23 & 2023-24. Since the facts and issues involved in all these appeals are common and identical, except for the amounts mentioned therein, all these appeals were heard together and are being disposed-off by way of this common order.
At the outset, it is noted that there is a delay of 123 days in filing these appeals as pointed out by the Registry. It was also noticed that the 3129 & 3130/Mum/2025 assessee had filed condonation petitions, wherein the assessee has requested the Bench to condone the delay attributing the reason for delay in filing the appeals on account of medical reasons and the affidavit and the medical certificate has been placed on record. The Ld.DR has been heard who has objected to the condonation application on account of substantial delay. After hearing both the parties and perusing the facts placed on record, we find that there was reasonable cause for the delay in filing these appeals and hence, the delay is hereby condoned and all the appeals are admitted for adjudication.
With the consent of both the parties, the appeal in (AY. 2021-22) was taken as the lead case for the sake of convenience and discussion wherein the assessee has taken the following ground of appeal: “On facts and circumstances of the case and in law, the learned Joint Commissioner (Appeals) erred in sustaining the action of the learned Assessing Officer in levying the highest rate of surcharge of 37% on the marginal rate of tax applicable u/s 167B in assessing the Appellant's income in intimation u/s 143 (1) instead of 10%. The rate of surcharge @ 10% is correct and may please be restored in appeal.”
4. Briefly the facts of the case are that the assessee is an Association of Persons (AOP) and filed its return of income on 09-10-2021, declaring total income of Rs. 64,02,500/- under the head „income from house property‟. In the return of income, the assessee has determined total tax payable at Rs. 19,20,751/- by applying 30% tax rate and surcharge was determined at Rs. 1,92,075/- @ 10% of total tax payable and thereafter health and education cess has been determined at Rs. 84,513/- @4% thereby determining total tax liability at Rs. 21,97,339/-. The return was processed by the CPC, Bengaluru and in terms of intimation issued u/s. 143(1) of the Income Tax Act, 1961 („the Act‟), dt. 13-10-2022, the CPC 3129 & 3130/Mum/2025 determined the total income at Rs. 64,02,500/- and tax liability at Rs. 19,20,751/-. However, the surcharge was determined at Rs. 7,10,678/- being 37% of the total tax payable and thereafter, health and education cess @4% has been determined at Rs. 1,05,257/-, determining total tax liability at Rs. 27,36,686/-. The assessee thereafter filed rectification application u/s. 154 which was also disposed-off by the CPC vide order dt. 26-02-2024, confirming the levy of surcharge at Rs. 7,10,678/- as against Rs. 1,92,075/- computed by the assessee in its return of income. The assessee thereafter carried the matter in appeal before the Ld.CIT(A), who has sustained the computation so done by the CPC u/s. 143(1) of the Act and against the said findings, the assessee is in appeal before us.
During the course of hearing, the Ld.AR submitted that the limited dispute in present appeal related to determining of rate of surcharge as part of the total tax payable by the assessee. It was submitted that since Members of the AOP are having income more than Rs. 10 lakhs individually, the tax liability of the AOP has been computed at the highest slab rate of 30% and there is no dispute as far as the determination of the tax payable by the assessee and as computed by the CPC; wherein the CPC has accepted the tax liability at Rs. 19,20,751/-. It was submitted that the limited dispute relates to determination of the rate of surcharge wherein the assessee has computed rate of surcharge @10% of the income tax as per the first schedule to the Finance Act, 2020 applicable for the instant assessment year; wherein the CPC has computed rate of surcharge @37%. It was submitted that dispute has arisen on account of definition of the maximum marginal rate as provided u/s. 2(29C) of the Act.
It was further submitted that the Special Bench of the Tribunal has since decided the matter in the case of Araadhya Jain Trust vs. ITO in ITA 3129 & 3130/Mum/2025 No. 4272/Mum/2024, vide order dt. 09-04-2025 and, therefore, the matter is squarely covered by the decision of the Special Bench of the Tribunal. It was submitted that the said decision has been pronounced after the passing of the impugned order by the Ld.CIT(A) i.e., on 22-10-2024 and, therefore, the same could not be brought to the notice of the Ld.CIT(A). It was accordingly submitted that the necessary relief be provided to the assessee by directing the computation of surcharge @10% as against 37% done by the CPC and which has been upheld by the Ld.CIT(A).
Per contra, the Ld. DR submitted that Section 167B(1) of the Income Tax Act, 1961, provides that where the individual shares of the members of an AOP are indeterminate or unknown, the total income of the AOP shall be taxed at the maximum marginal rate (MMR). The Department asserts that the shares of the members in Bhagirathi Enterprise's income were not clearly defined in the return of income, thereby triggering Section 167B(1). It was submitted that the MMR is defined under Section 2(29C) as the rate of income tax, including surcharge, applicable to the highest slab of income for an individual, AOP, or body of individuals (BOI), as specified in the Finance Act of the relevant year. For the AY.2021-22, the Finance Act, 2020, stipulates that the highest income slab (above Rs. 5 crores) is taxed at 30% income tax plus a 37% surcharge, with an additional 4% health and education cess, resulting in an effective MMR of 42.744%. In this connection, the Ld.DR drawn our reference to the following table:
Income Slab (Rs.) Tax Rate Surcharge Rate Effective Rate (with 4% Cess) >50 Lakhs to 1 Crore 30% 10% 31.20% >1 Crore to 2 Crore 30% 15% 31.98% >2 Crore to 5 Crore 30% 25% 33.54% >5 Crore 30% 37% 42.744% 3129 & 3130/Mum/2025 8. It was further submitted that when an AOP is taxed at MMR under Section 167B(1), the tax computation must include the 37% surcharge applicable to the highest income slab, irrespective of the AOP's actual total income and submitted that the assessee may argue that the surcharge should be 10% based on their total income. However, this applies only when the AOP is taxed at normal rates with determinate shares and argued that the Department maintains that the shares were indeterminate, and even if determinate, Section 167B(2) would apply due to members' incomes exceeding Rs. 2.5 lakhs, leading to the same MMR outcome.
The Ld. DR finally submitted that the 37% surcharge imposed on Bhagirathi Enterprise's tax liability for AYs. 2021-22, 2022-23 & 2023-24 is legally valid under Section 167B(1) of the Income Tax Act, 1961, as the AOP's member shares were indeterminate, necessitating taxation at the MMR. The MMR, as defined under Section 2(290), includes a 37% surcharge as per the Finance Act, 2020, irrespective of the AOP's actual income. Judicial precedents from ITAT Bangalore and Mumbai affirm this interpretation. Hence, he argued that the assessee's grounds of appeal are not tenable, as they misinterpret the application of MMR and the relevance of income source and urged to dismiss the appeal and uphold the CPC's intimation and the order of the First Appellate Authority.
10. Further reliance was placed on the decision of the Ld.CIT(A) and the relevant findings therein read as under:
“8.2 Ground Nos.3 to 6: Ground no 6 is general in nature and therefore required no adjudication. Grounds 3 to 5 are related to charging of surcharge @ 37% and therefore being adjudicated as one ground, I have carefully gone through the Intimation and submissions of the appellant. The submissions of the appellant, dated 19-04-2024 is reproduced as under:
3129 & 3130/Mum/2025 We have Filed Return of Income for the Assessment Year 2021-22, Declaring Taxable Income of Rs. 64,02,500/- From Income From House Property (Copy of Computation And Balance Sheet Attached). Since, Members are having Income More than 10 Lakhs - Individually & we fall Under Higher Slab Rate of Income Tax (Under Old Regime) at 30% Plus Surcharge Plus Education Cess as Applicable. Hence, we had Pald Income Tax on AOP at Higher Rate i.e. 30%. Since AOP's Income is Between 50 Lakhs To 1 Corer, Surcharge is Applicable At 10% Plus Education Cess as applicable. We have Paid Income Tax @ 30% Rs. 19,20,751/- + Surcharge @ 10% Rs. 1,92,075/- And Education cess 4% Rs. 84,513/-. As per the above submissions of the appellant the members of the appellant AOP are having income more than 10 lakhs individually and fall under higher slab rate of Income Tax at 30% plus Surcharge plus Education Cess as applicable. 8.3 The appellant has claimed that since the members shares are fixed and determined the provisions of section 167B of the Income Tax Act, 1961 is not applicable to the appellant AOP It is not doubted that the member shares of the appellant AOP are fixed and determined, however, the provisions of section 167B of the Income Tax Act, 1961 particularly provisions of Clause (i) of sub-section (2) of section 167B of the Income Tax Act, 1961 are clearly applicable to the facts of the appellant AOP. 8.4 The provisions of sub-section (2) of section 167B of the Income Tax Act, 1961 are reproduced below for clear understanding: (2) Where, in the case of an association of persons or body of individuals as aforesaid [not being a case falling under sub-section (1)].- 1. the total income of any member thereof for the previous year (excluding his share from such association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member under the Finance Act of the relevant year, tax shall be charged on the total income of the association or body at the maximum marginal rate; 8.5 In view of above provisions clause (i) of sub-section (2) of section 1678 of the Income Tax Act, 1961 it is clear that in cases of AOP where the members shares are fixed and determined and total income of any member of the AOP exceeds maximum amount chargeable to tax then tax shall be charged on total income of AOP at the maximum marginal rate. Therefore, in the case of appellant AOP as the members of the appellate AOP are having income more than 10 lakhs individually the tax shall be charged at the maximum marginal rate as per provisions clause (i) of sub-section (2) of section 167B of the Income Tax Act, 1961. 9.0 The maximum marginal rate (MMR) as defined under the Income Tax Act, 1961 is discussed in the ensuing paras.
9.1 Maximum marginal rate (MMR) is defined as per provisions of Section 2(290) of the Income Tax Act, 1961 as under: "Maximum marginal rate" means the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year: Thus, for calculating the MMR the rate of income-tax, surcharge and the highest slab of income as specified in the Finance Act of the relevant year are the main basis. Further, the rate of income-tax and surcharge are in relation to the highest slab of income as specified in the Finance Act of the relevant year. Therefore, the main criteria for calculating MMR is to ascertain that what is the highest slab of income as specified in the Finance Act. 9.2 In the Finance Act, 2020 applicable for financial year 2020-21, the rates and slabs of income have been specified. From the same it can be seen that for association of persons (AOPs) the rates of income tax specified are as under: THE FIRST SCHEDULE (See section 2) PART I INCOME-TAX Paragraph A (i) In the case of every individual other than the individual referred to in items (ii) and (iii) of this Paragraph or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial judicial person referred to in sub-clause (vii) of clause (31) of section 2 of the Income Tax Act, not being the case to which any other Paragraph of this Part applies,-
Surcharge on income-tax The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 or section 112A or the provisions of section 115BAC of the Income-tax Act, shall be increased by a surcharge for the purpose of the Union, calculated, in the case of every individual, Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial judicial person referred to in sub-clause (vii) of clause (31) of section 2 of the Income Tax Act- 1. having a total income (including the income by way of dividend or income under the provisions of section 111A or section 112 or section 112A of the Income-tax Act) exceeding fifty lakh rupees but not exceeding one crore rupees, at the rate of ten per cent of such income-tax; 1. having a total income (including the income by way of dividend or income under the provisions of section 111A or section 112 or section 112A of the Income-tax Act) exceeding one crore rupees but not exceeding two crore rupees, at the rate of fifteen per cent of such income-tax; 1. having a total income (excluding the income by way of dividend or income under the provisions of section 111A or section 112 or section 112A of the Income-tax Act) exceeding two crore rupees but not exceeding five crore rupees, at the rate of twenty-five per cent of such income-tax; 1. having a total income (excluding the income by way of dividend or income under the provisions of section 111A or section 112 or section 112A of the Income-tax Act) exceeding five crore rupees, at the rate of thirty-seven per cent of such income-tax; 2. having a total income (including the income by way of dividend or income under the provisions of section 111A or section 112 or section 112A of the Income-tax Act) exceeding two crore rupees but is not covered under clauses (c) and (d), shall be applicable at the rate of fifteen per cent of such income-tax; Provided that in case where the total income includes any income by way of dividend or income under the provisions of section 111A or section 112 or section 112A of the Income-tax Act, the rate of surcharge on the amount of income-tax computed in respect of that part of income shall not exceed fifteen per cent: Provided further that in the case of persons mentioned above having total income exceeding, - (a) fifty lakh rupees but not exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of fifty lakh rupees by more than the amount of income that exceeds fifty lakh rupees; 3129 & 3130/Mum/2025 (b) one crore rupees but does not exceed two crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees; (c) two crore rupees but does not exceed five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of two crore rupees by more than the amount of income that exceeds two crore rupees; (d) five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of five crore rupees by more than the amount of income that exceeds five crore rupees. 9.3 Now, as per provisions of section 2(29C) of the Income Tax Act, 1961 the maximum marginal rate (MMR) is to be calculated based on the highest slab of income as specified in Finance Act. From a combined reading of the provisions of rates of income tax and surcharge on income tax it can be seen that the highest slab of income is five crore rupees which is clearly specified in the Finance Act and the slab of total income exceeding Rs. 10,00,000/- is not the highest slab of income. The rate of income tax on highest slab of income exceeding five crore rupees is 30% and surcharge on the income tax on highest slab of income exceeding five crore rupees is 37% as specified in the Finance Act, 2020. In addition to above there is Health and Education Cess of 4% applicable for FY 2020-21. 9.4 Therefore, the maximum marginal rate (MMR) applicable for FY 2020-21 for AOPs would be calculated as under: Rate of income-tax applicable on highest slab of income – 30% : 30% Surcharge on income-tax applicable on highest slab of income-37%: 11.1% (37% of 30%) ---------------- Total : 41.1% Health and Education Cess applicable-4% (4% of 41.1%) : 1.644% Maximum Marginal Rate (MMR) for the F.Y 2020-21 (41.1% +1.644%): 42.744% Accordingly, as per provisions of section 2(29C) of the Income Tax Act, 1961 the Maximum Marginal Rate (MMR) is 42.744% for the financial year 2020-21 based on the rate of income tax, surcharge on income tax and health & education cess as specified in the Finance Act, 2020 in relation to the highest slab of income. It is pertinent to observe here that once the MMR is applicable then the relevance to the 3129 & 3130/Mum/2025 different slabs of income does not remain and all including the surcharge is subsumed in the MMR. 9.5 As discussed earlier the Maximum Marginal Rate is calculated after taking into account the highest slab of income and surcharge applicable and therefore there is no relevance to the different slabs of income and surcharge applicable on these different slabs. The tax rate on different slabs of income and different rate of surcharge thereon are relevant only when tax is calculated on AOP or BOI to whom standard provisions of the Income Tax Act, 1961 applies and the same are not applicable to AOP or BOI covered under the provisions of section 167B of the Income Tax Act, 1961. 9.6 Thus, the tax calculated on the basis of MMR of 42.744% for the financial year 2020-21 on the total income of the appellant of Rs.64,02,500/- works out of Rs.27,36,686/-. From the intimation it can be seen that the appellant has total income of Rs.64,02,500/-and the tax as per the Maximum Marginal Rate of 42.744% for the financial year 2020-21 works out to Rs.27,36,686/- and per intimation it is same at Rs.27,36,686/- (tax + surcharge + Health & Education Cess). The above will be more clear from the table given below:
Thus, in the intimation the total tax is calculated as per Maximum Marginal Rate of 42.744% and there is no mistake. In the intimation the tax, surcharge and health & education cess has been shown separately for clarity purposes but the total tax has been charged correctly at the Maximum Marginal Rate as per provisions of section 167B of the Income Tax Act, 1961. 10.0 In view of the discussion made above, the computation of tax, surcharge and cess in the intimation passed u/s.143(1), dated 13-10-2022 by the A.O., CPC, Bangalore is found to be in order, being at the maximum marginal rate, as the provisions of section 1678 (2)(i) of the Income Tax Act,
Further, reliance was placed on the decision of the Co-ordinate Bench of the Bangalore Tribunal in the case of Clestra Foundation vs. ITO [2024] 169 taxmann.com 46 (Bangalore – Trib.)
We have heard the rival contentions and perused the material available on record. We find that in the case of Araadhya Jain Trust vs. ITO (Supra), the Special Bench of the Tribunal has dealt with the issue as to whether in the case of private discretionary trust, whose income is chargeable to tax at maximum marginal rate, surcharge is chargeable at the highest applicable rate or at a slab rates and the relevant findings are contained in paragraph Nos. 21 to 32 of its order, which we can gainfully refer to and the same reads as under:
“21. We have given a thoughtful consideration to the rival submissions and perused materials on record. We have also applied our mind to the judicial precedents cited before us. The short issue arising for consideration before us is, 'whether the definition of maximum marginal rate in terms with section 2(29C) of the Act can be interpreted in a manner to suggest that not only the rate of tax on the total income of assessee would be at the highest rate, but even the surcharge to be computed on such tax would be at the highest rate'.
Before we proceed to deal with the issue, let us understand what is meant by a "Private Discretionary Trust'. A 'Discretionary Trust' is generally a Trust registered under the Indian Trusts Act, 1882, whereunder, the Trustees hold the power to decide the class of beneficiaries who can receive either capital or income from the Trust at the discretion of the Trustees. However, no one beneficiary has an absolute entitlement either to income or capital. In other words, in a discretionary trust, distribution of all capital and income is completely at the discretion of the Trustees. Generally speaking, in these kind of trusts not only the beneficiaries but even the shares of beneficiaries remain indeterminate. These Trusts/Association of Persons/Body of individuals are covered either u/s.164 or 167B of the Act. These provisions provided that the income of such Trusts/AOPs/BOIs are 3129 & 3130/Mum/2025 brought to tax at the maximum marginal rate. The expression "maximum marginal rate" has been defined u/s 2(29C) of the Act as under: "maximum marginal rate" means the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year; 23. A plain reading of the aforesaid definition clause would indicate that the 'maximum marginal rate' would mean the rate of income tax, including surcharge on income tax, if any, applicable to the highest slab of income of an individual, association of person or body of individual as specified in the Finance Act of the relevant year. In other words, at the first instance, the tax on the total income of the discretionary trust has to be determined by applying the maximum marginal rate, as applicable to the highest slab of income relating to an individual, association of person or body of individual specified in the Finance Act of the relevant year. Thereafter, the surcharge, if any, has to be computed on such income-tax.
As could be seen from a conjoint reading of sections 164/167B of the Act, these provisions provide for computation of income-tax at the maximum marginal rate. However, in these provisions there is no reference to levy of surcharge. Whereas, the definition of 'maximum marginal rate' u/s. 2(29C) of the Act refers to surcharge. But, this definition clause by itself does not fix the rate of tax, instead, refers to the rate prescribed under the Finance Act of the relevant year. Thus, what should be the maximum marginal rate of income-tax is to be determined based on the rate of income-tax provided in Finance Act of the relevant year. The rates of income tax is provided u/s.2 of the Finance Act. A reference to section 2 of Finance Act, 2023, makes it clear that as per sub-section (1) of section 2, for the A.Y. 2023-24 income-tax shall be charged at the rate specified in Paragraph A, Part (I) of First Schedule to the Finance Act-2023 and such tax shall be increased by a surcharge, collected for the purposes of the Union, calculated in each case in the manner provided therein. Of-course, sub section (1) of section 2 is subject to the provisions of sub-sections (2) and (3). Sub section (2) of section 2 speaks of an assessee having net agricultural income exceeding five thousand rupees, in addition to total income, hence, is not relevant for our purpose. However, sub section (3) of section 2 of Finance Act provides that in case of assessee's covered under Chapter XII or XII-A or section 115JB or section 115JC or Chapter XII-FA or Chapter XII-FB or sub-section (1A) of section 161 or section 164 or section 164A or section 167B of the Income-tax Act, the tax chargeable shall be determined as provided in those Chapters or sections, and with reference to the rates imposed by sub- section (1) or the rates as specified in that Chapter or section, as the case may be. Thus, sub section 2(1) of Finance Act, which is subject to the provisions of sub-section (3), though, provides that income-tax shall be charged at the rate specified in Part 1 of the specified schedule, however, sub-section (3) carves out an exception in case of certain class of income or 3129 & 3130/Mum/2025 assessees by providing that the chargeable tax shall be determined in terms with those Chapters or sections, and with reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter or section, as the case may be.
In case of discretionary trusts, sections 164/167B of the Act, do not by themselve specify the rate of tax. They only say that tax on total income is to be determined at the maximum marginal rate. The definition of 'maximum marginal rate' u/s.2(29C) of the Act, in turn, refers to the rate of income-tax applicable to the highest slab as provided under the Finance Act of the relevant year. Thus, for determining the maximum marginal rate of tax, one has to revert back to the rate prescribed in Paragraph A, Part (1) of First Schedule to the Finance Act-2023. Sub-section 2(1) of the Finance Act, further provides that the tax so determined shall be increased by a surcharge collected for the purposes of Union, calculated under each case in the manner provided in the First Schedule. For ease of reference, Paragraph A, Part (1) of First Schedule to the Finance Act-2023, which is relevant for our purpose, is reproduced hereunder:
THE FIRST SCHEDULE (See section 2) PART 1 INCOME-TAX Paragraph A (1) In the case of every individual other than the individual referred to in items (II) and (III) of this Paragraph or Hinda undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, not being a case to which any other Paragraph of this Part applies,-
Rates of income-tax (1) where the total income does not Nil: exceed Rs. 2,50,000 2) where the total income exceeds Rs. 5 per cent of the amount by which the 2.50,000 but does not exceed Rs. total Income exceeds Rs. 2,50,000. 5,00,000 Rs.12,500 plus 20 per cent of the (3) where the total income exceeds Rs. amount by which the total income 5,00,000 but does not exceed Rs. exceeds Rs. 5,00,000; 10,00,000
(II) In the case of every individual, being a resident in India, who is of the age of sixty years or more but less than eighty years at any time during the previous year.- Rates of income-tax (1) where the total income does not Nil: exceed Rs. 3,00,000 (2) where the total income exceeds Rs. 5 per cent of the amount by which the 3,00,000 but does not exceed Rs. total income exceeds Rs. 3,00,000; 5,00,000 (3) where the total income exceeds Rs. Rs. 10,000 plus 20 per cent of the 5,00,000 but does not exceed Rs. amount by which the total income 10,00,000 exceeds Rs. 5,00,000; (4) where the total income exceeds Rs. Rs. 1,10,000 plus 30 per cent of the 10,00,000 amount by which the total income exceeds Rx. 10,00,000. (III) In the case of every individual, being a resident in India, who is of the age of eighty years or more at any time during the previous year.- Rates of income-tax (1) where the total income does not Nil: exceed Rs. 5,00,000 (2) where the total income exceeds Rs. 20 per cent of the amount by which 5,00,000 but does not exceed Rs. the total income exceeds Rs. 5,00,000; 10,00,000 (3) where the total income exceeds Rs. 1,00,000 plus 30 per cent of the 10,00,000 amount by which the total income exceeds Rs. 10,00,000
Surcharge on income-tax The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 or section 112A or the provisions of section 113BAC of the Income-tax Act, shall be increased by a surcharge for the purposes of the Union, calculated, in the case of every indivicheal or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act - 3129 & 3130/Mum/2025 (a) having a total income (including the income by way of dividend or income under the provisions of rection 111A, section 112 and section 112A of the Income-tax Act) exceeding fifty lakh rupees but not exceeding one crore rupees, at the rate of ten per cent of nich income- tax; (b) having a total income (including the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income tax Act) exceeding one crore rupees, but not exceeding two crore rupees, at the rate of fifteen per cent of such income-tax: (c) having a total income (excluding the income bry way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income-tax Act) exceeding two crore rupees but not exceeding five crore rupees, at the rate of twenty-five per cent of such income-tax, (d) having a total income (excluding the income by way of dividend or income under the provisions of section IIIA, section 112 and section 112A of the Income-tax Act) exceeding five crore rupees, at the rate of thirty-seven per cent of such income-tax, and (e) having a total income (including the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A) exceeding two crore rupees but it not covered under clauses (c) and (d), shall be applicable at the rate of fifteen per cent of such in- come-tax: Provided that in case where the total income includes any income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income-tax Act, the rate of surcharge on the amount of income-tax computed in respect of that part of income shall not exceed fifteen per cent: Provided further that in case of an association of persons consisting of only companies as its members, the rate of surcharge on the amount of Income- tax shall not exceed fifteen per cent: Provided also that in the case of persons mentioned above having total income exceeding.- (a) fifty lakh rupees but not exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of fifty lakh rupees by more than the amount of income that exceeds fifty lakh rupees: (b) one crore rupees but does not exceed two crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees; 3129 & 3130/Mum/2025 (c) two crore rupees but does not exceed five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of two crore rupees by more than the amount of income that exceeds two crore rupees: (d) five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of five crore rupees by more than the amount of income that exceeds five crore rupees.
On going through Paragraph A, Part (1) of First Schedule to the Finance Act-2023, it becomes very much clear that under Item (1), the rates of income tax applicable to individuals, Hindu undivided family or association of persons or body of individuals have been provided. As could be seen from the rates of income-tax for different income brackets, if the total income does not exceed Rs.2,50,000/-, the rate of income tax is Nil. If the total income exceeds Rs.2,50,000/-, but does not exceed Rs.5,00,000/-, the rate of income tax is 5% of the amount by which the total income exceeds Rs. 2,50,000/-, Where the total income exceeds Rs.5,00,000/- but des not exceed Rs. 10,00,000/-, the rate of income tax is Rs.12,500 plus 20% of the amount by which the total income exceeds Rs.5,00,000/- and lastly, where the total income exceeds Rs.10,00,000/-, then the rate of tax is Rs.1,12,500/-plus 30% of the amount by which the total income exceeds Rs. 10,00,000/-. Thus, as per the rates of income tax prescribed in Item (1), the highest slab of income is Rs.10 lacs and above and the applicable rate of income tax is 30%. Thus, in terms with section 2(29C) of the Act, the maximum marginal rate of tax will be 30% as applicable to the highest slab of income.
The expression 'slab' is not mentioned either in sub-section (1) of section 2 or even under Paragraph A, Part (1) of First Schedule to the Finance Act- 2023. However, as per the materials placed before us, it is observed that in Press Note dated 01.12.1965 issued by Government of India, copy of which is placed at pg. no. 45 of the Paper Book, submitted in case of NIK Family Trust, the expression 'slab' refers to 'income' and not the tax. In fact, even section 2(29C) of the Act refers to highest slab of income. Even Circular No. 2/2018 (F.No. 370142/15/2017-TPL] containing Explanatory Notes to Provisions of Finance Act, 2017, a copy of which is placed at pg. no. 47 of the Paper Book filed by the NIK Family Trust, refers the expression 'slab' to the various categories of income. Thus, in terms with sections 164/167B r.w.s. 2(29C) of the Act, tax as per maximum marginal rate would mean 'the rate of tax applicable to the highest slab of income' under Item (1) of Paragraph A. Part (1) of First Schedule to the Finance Act-2023.
Under the head 'Surcharge on income-tax' appearing in Paragraph A, Part (1), First Schedule it has been provided that the amount of income-tax computed as per the rate of income-tax under Item (1), (2) and (3) or under 3129 & 3130/Mum/2025 the provisions of section 111A or section 112 or section 112A or the provision of section 115BAC of the Income Tax Act, shall be increased by a surcharge, for the purposes of the Union, calculated in the case of particular class of assessees in the manner provided therein. As could be seen from items (a) to (e), provided under the head 'Surcharge on income-tax', there are different rates of surcharge on income tax, depending upon the categories of income. The rate of surcharge starts from minimum of 10% to the maximum of 37% on income-tax. The maximum rate of surcharge at 37% on income-tax is applicable in case of assessees having total income, exceeding Rs.5 crores. It further emanates that the minimum rate of surcharge @ 10% on the income-tax is applicable only when the income of the assessee is above Rs.50 lacs, but less than Rs.1 crore. Thus, as per Paragraph A. Part (1) of First Schedule to the Finance Act-2023, the threshold limit for applicability of surcharge is when total income is Rs.50 lacs and above. In other words, if the total income is below the threshold limit of Rs.50 lacs, there would be no surcharge. Even the first proviso under the heading 'Surcharge on income-tax carves out an exception regarding the rate of surcharge by stating that in case where assessee's total income includes dividend income or income under the provisions of section 111A, 112A and section 112A of the Act, the rate of surcharge on the amount of income-tax computed on that part of income shall not exceed 15%. In other words, if the total income of an assessee includes any income by way of dividend or income under certain provisions of the Act, the rate of surcharge on tax computed on such part of income under no circumstances would exceed 15%.
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. In our view, once the definition of 'maximum marginal rate refers to the rate of income-tax and surcharge provided under the Finance Act of the relevant year, then the rates of income-tax and applicable rate of surcharge as provided under Paragraph A, Part (1) of First Schedule to the Finance Act-2023, would apply. Any other interpretation, in our view, would lead to undesirable consequences and would be discriminatory. In our view, the expression 'including Surcharge on income-tax, if any, within the bracketed portion of section 2(29C) of the Act, would mean the surcharge as provided in the computation mechanism under the heading 'surcharge on income tax' finding place in Paragraph A, Part (I) of First Schedule to the Finance Act- 2023.
3129 & 3130/Mum/2025 30. The Revenue has taken a line of argument that the words 'if any succeeding the words 'including surcharge on income tax' appearing in the definition of maximum marginal rate u/s. 2(29C) of the Act are only for the purpose that when levy of surcharge is specifically provided under the Finance Act of the relevant year, it would be included in income-tax computed at the highest rate, otherwise, not. Though, at first blush this argument of the department sounds attractive, however, on deeper analysis it is found to be superfluous, for the following reasons. As discussed earlier, Article 271 of the Constitution of India, empowers the Union to impose surcharge for the purposes of Union. Whereas, Article 265 of the Constitution of India mandates that no tax can be collected without authority of law. Therefore, levy of surcharge has to be preceded by a law enacted by the parliament authorizing such levy. Thus, in absence of any law authorising levy of surcharge, it cannot be collected. This legal position is as clear as daylight, hence, does not require further clarification with the use of words 'if any to mean whether the Finance Act of a particular year, if at all, provides for levy of surcharge or not. Though, in our view, there is no conflict between provisions contained u/s. 164/167B, 2(29C) of the Income Tax Act and section 2 of the Finance Act, however, even assuming that there are some conflicts, a harmonious construction has to be made to avoid absurdity and make the provisions workable. 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.
As we find, the Revenue has placed strong reliance upon the decision of the co-ordinate bench in case of Araadhya Jain Trust (supra) and couple of other decisions, which are on similar line. Pertinently, the decision rendered in case of Anant Bajaj Trust vs. DDIT (in vide order dated 26.08.2024) was subsequently recalled. Whereas, the bench has followed the decision of Anant Bajaj Trust (supra) while deciding the appeal of Kapur Family Trust vs. ITO in ITA Nos. 3834 & 3835/Mum/2024 vide order dated 30.10.2024). Therefore, the decision rendered in case of Kapur Family Trust (supra) has lost its relevance. Insofar as the decision of the co-ordinate bench in the case of Araadhya Jain Trust (supra) is concerned, in our view, the bench has drawing its conclusion, primarily relying upon certain decisions of Hon'ble Kerala High Court and Hon'ble High Court of Bombay. As discussed elsewhere in the order.
However, upon carefully going through these decisions, we are of the considered view that the issue arising in the present case never fell for consideration before the Hon'ble Courts. The issue in dispute in those cases was primarily concerning what should be the maximum marginal rate and its applicability. The issue 'whether the rate of surcharge would also be at 3129 & 3130/Mum/2025 the highest rate while computing tax at maximum marginal rate' was never the issue before the Hon'ble Courts. Thus, in our view, the view expressed by the co-ordinate benches in decisions referred to in Paragraph 10(supra) lay down the correct proposition of law. Thus, in the ultimate analysis, we hold, 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 rates prescribed in the Finance Act under the heading 'surcharge on income tax' appearing in Paragraph A, Part 1, First Schedule, applicable to the relevant assessment year. Hence, reference is decided in favour of the assessee. The records may be returned back to the respective benches for deciding the appeals accordingly.”
The Special Bench has held that 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 and 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 rates prescribed in the Finance Act under the heading 'surcharge on income tax' appearing in Paragraph A, Part 1, First Schedule, applicable to the relevant assessment year. Applying the legal proposition so laid down in the instant case, we find that where the total income of the assessee, being the Association of Persons, is chargeable to tax at maximum marginal rate of 30%, surcharge has to be computed on the income tax having reference to the slab rates prescribed in the Finance Act under the heading 'surcharge on income tax' appearing in Paragraph A, Part 1, First Schedule, applicable to the impugned assessment year 2021-22 which is at the rate of 10% of 30% given that the total income amounting to Rs 64,02,500, exceeds fifty lacs but doesn‟t exceeds one crore rupees. The Assessing officer is accordingly directed to apply rate of surcharge at the rate of 10% instead of 37% as currently done and recompute the tax liability of the assessee accordingly. Hence, while setting aside the appellate order, we allow the ground so raised by the assessee.
& 3130/Mum/2025 (AYs. 2022-23 & 2023-24):
Since the facts of the present appeals for the AYs. 2022-23 & 2023- 24 are identical to one as decided by us in AY. 2021-22 (supra) and, therefore, our findings in the said appeal, mutatis mutandis, would apply to these appeals as well. Hence, while setting aside the appellate order(s) in these two appeals, we allow the grounds raised
by the assessee in both the assessment years under consideration.
16. In the result, the appeals filed by the assessee for the AYs. 2022-23 & 2023-24 are also allowed.
17. To sum-up, all the appeals filed by the assessee are allowed.