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Facts
The assessee, a private discretionary trust, filed its return declaring total income. The AO/CPC levied surcharge at 37% on the entire income. The CIT(A) restricted the surcharge to 15% on the dividend income. The assessee contended that the surcharge should be 10% based on the income slab.
Held
The Tribunal held that the rate of surcharge should be determined based on the slab rates prescribed in the Finance Act for the relevant assessment year, not necessarily the maximum marginal rate. In this case, since the assessee's income exceeded Rs. 50 lacs but did not exceed Rs. 1 Crore, the applicable surcharge rate is 10%.
Key Issues
What is the correct rate of surcharge applicable to a private discretionary trust when its total income includes dividend income and exceeds Rs. 50 Lakhs but not Rs. 1 Crore?
Sections Cited
139(1), 143(1), 234B, 250, 111A, 112A, 115BAC, 164, 167B, 2(29C)
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI. OM PRAKASH KANT, AM
O R D E R Per Kavitha Rajagopal, J M: These appeals filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals), ADDL/JCIT-(A)-1 Gurugram (‘ld. CIT(A)’ for short), passed u/s.250 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short) 2022-23 and 2023-24. 2. As the facts are identical, we hereby pass a consolidated order by taking for A.Y. 2022-23 as a lead case. 3. The assessee has raised the following grounds of appeal: Ground No. 1: Incorrect levy of surcharge amounting to Rs.1,31,145/-
1. 1. 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 & 3608/Mum/2024 (A.Y. 2022-23 & 2023-24) Lotus Family Trust instead of surcharge applicable at the rate of 10% in accordance with the provisions of First Schedule to Finance Act, 2020 as the appellant's total income exceeds Rs. 50 Lakhs but was less than Rs. 1 Crore for the year under consideration.
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. Ground No.2: General Grounds of appeal
1. 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.”
4. 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 & 3608/Mum/2024 (A.Y. 2022-23 & 2023-24) Lotus Family Trust has levied surcharge at the Maximum Marginal Rate (MMR) of slab at 37% on the whole of the income earned by the assessee. The ld. CIT(A) on the other hand held that as per Finance Act, 2021, when the total income includes any income chargeable u/s. 111A, 112A and dividend income then the rate of surcharge shall not exceed 15% and for the remaining income, the Finance Act has not provided any specific rate or relief and therefore, the rate of surcharge would be at the maximum slab rate of 37% as per Section 2(29C) of the Act. The ld. CIT(A) further held that the benefits of Clause (a) to (e) of the Finance Act, 2021 is applicable only when it is taxed at slab rate and not at Maximum Marginal Rate (MMR) as per Section 2(29C) of the Act and thereby restricted the rate of surcharge to be 15% on the dividend income amounting to Rs. 87,43,000/-.
The learned Authorised Representative ('ld. AR' for short) for the assessee contended that when the total income exceeds the threshold limit of Rs. 50 lacs then the income would be subject to Maximum Marginal Rate (MMR), where the surcharge applicable is as per the slab rate provided in the Finance Act, 2021, which is relevant for the impugned year and in the present case in hand, the same would be 10% as the total income exceeds Rs. 50 lacs but does not exceed Rs. 1 crore. The ld. AR further stated that the rate applied by the CPC as well as the ld. CIT(A) are not in accordance with provisions of law. The ld. AR relied on a catena of decisions including the recent Special Bench decision on this issue in the case of Aaradhya Jain and Trust vs. ITO, Ward 22(1)(6), order dated 09.04.2025, where the issue in hand has been dealt with elaborately.
& 3608/Mum/2024 (A.Y. 2022-23 & 2023-24) Lotus Family Trust 9. 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.
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:
& 3608/Mum/2024 (A.Y. 2022-23 & 2023-24) Lotus Family Trust “28. 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 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 incometax 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 (I) 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 incometax’ 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 incometax 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 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.
& 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 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 & 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 & 3608/Mum/2024 (A.Y. 2022-23 & 2023-24) Lotus Family Trust should be the maximum marginal rate and its applicability. The issue ‘whether the rate of surcharge would also be at 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 coordinate 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”
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.
In the result, the appeal filed by the assessee is hereby allowed.
A.Y. 2023-24 13. The findings recorded in will apply mutatis mutandis to this appeal also.
In the result, both the appeals filed by the assessee are hereby allowed. Order pronounced in the open court on 04.06.2025 Sd/- Sd/- (OM PRAKASH KANT) (KAVITHA RAJAGOPAL) ACCOUNTANT MEMBER JUDICIAL MEMBER & 3608/Mum/2024 (A.Y. 2022-23 & 2023-24) Lotus Family Trust Mumbai; Dated: 04.06.2025 Karishma J. Pawar (Stenographer) Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. CIT- concerned 4. DR, ITAT, Mumbai 5. Guard File BY ORDER,