LOTUS FAMILY TRUST ,MUMBAI vs. DEPUTY DIRECTOR OF INCOME TAX EXEM.WARD 1(4), MUMBAI

The learned CIT(A) erred in facts and law by imposing surcharge at the rate of 15% on the Appellant's total tax of Rs. 26,22,900/- on the dividend income earned

Your Appellant prays that the surcharge on tax on dividend income should be restricted to Rs.2,62,290/- i.e. 10% of the total tax, rather than 15% on the total tax.

Your Appellant craves leave to file additional evidences during the course of appeal proceedings in terms of Rule 46A r.w.s. 250. 2. Your Appellant craves leave to add, amend, alter, modify or delete all or any of the above grounds of appeal.”

Brief facts of the case are that the assessee is an irrevocable private discretionary trust formed under the Indian Trust Act, 1882. The assessee had filed its return of income u/s. 139(1) of the Act, dated 27.07.2022, declaring total income at Rs. 87,43,000/- out of the dividend income under the head ‘Income from other sources’ and the same was processed u/s. 143(1) of the Act, where the ld. AO/CPC raised a demand of Rs. 7,84,660/- vide intimation dated 16.03.2023, which pertains to the levy of surcharge @37% amounting to Rs. 9,70,413/- instead of Rs. Nil computed by the assessee along with the consequential interest u/s. 234B of the Act. 5. Aggrieved the assessee was in appeal before the first appellate authority, who vide order dated 17.05.2024, restricted the rate of surcharge to be 15% on the total dividend income amounting to Rs. 87,43,000/-. 6. The assessee is in appeal before us, challenging the impugned order of the ld. CIT(A). 7. We have heard the rival submissions and perused the materials available on record. The only moot issue that requires adjudication is the rate of surcharge applicable on the assessee’s income as per Section 2(29C) of the Act. It is observed that the ld. AO/CPC

The learned Departmental Representative ('ld. DR' for short) for the revenue on the other hand controverted the said fact and relied on the order of the lower authorities. 10. On the above factual matrix of the case, it is observed that the surcharge applicable of tax computed at Maximum Marginal Rate (MMR) in accordance with Section 164 of the Act along with Section 2(29C) of the Act is as per the relevant Finance Act. It is observed that for private discretionary trust which are governed by the provisions of Section 164 or 167B, the rate of surcharge is calculated as per the relevant Finance Act. The Maximum Marginal Rate (MMR) which is defined u/s. 2(29C) of the Act means rate of income tax which includes surcharge on income tax which is applicable at the highest slab, were the assessee is an individual, association of person, body of individual which are specified in the Finance Act of the relevant year. Pertinently, the provisions of Section 164 or 167B of the act does not expressly provide for levy of surcharge and it is only in Section 2(29C) of the Act surcharge has been specified. The rates at which such surcharge has to be levied are specifically mentioned in the Finance Act of each year. It is observed that the rates of surcharge are provided under clause (a) to (e) applicable to the different slabs of income. As there was persistent ambiguity in case of the determination of the rate of surcharge, this issue was addressed by the Special Bench in the case of Aaradhya Jain Trust (supra), where the issue reached its finality. It was held that the rate of surcharge would be determined depending upon the slab rate prescribed in the finance and not at the highest rate while computing tax at Maximum Marginal Rate (MMR). The relevant extract of the said decision is cited herein under for ease of reference:

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 incometax and applicable rate of surcharge as provided under Paragraph A, Part (I) 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. ITA No. 3607 & 3608/Mum/2024 (A.Y. 2022-23 & 2023-24) Lotus Family Trust

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 coordinate 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 ITA No. 199/Mum/2024 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

As it is now a settled proposition of law, we find no dispute in determining the rate of surcharge as per the slab rate prescribed in the Finance Act for the relevant year. As this issue is squarely covered in favour of the assessee, we direct the ld. AO to determine the surcharge in accordance with the slab rate prescribed as per the Finance Act. Here in this case, since the assessee’s income exceeds Rs. 50 lacs but does not exceed Rs. 1 Crores, the rate of surcharge applicable would be 10% which is the applicable rate in the present case in hand. We therefore, direct the ld. AO to recompute the surcharge accordingly. 12. In the result, the appeal filed by the assessee is hereby allowed. ITA Nos. 3608/Mum/2024, A.Y. 2023-24

The findings recorded in ITA No. 3607/Mum/2024 will apply mutatis mutandis to this appeal also. 14. In the result, both the appeals filed by the assessee are hereby allowed. Order pronounced in the open court on 04.06.2025 (OM PRAKASH KANT) JUDICIAL MEMBER

The Appellant 2. The Respondent 3. CIT- concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER,