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Facts
The assessee, an AOP engaged in real estate development, filed returns for AY 2021-22 and 2022-23 computing tax at the maximum marginal rate and applying surcharge based on slab rates. The CPC, however, applied a uniform 37% surcharge, leading to additional demand.
Held
The Tribunal held that surcharge is conditional and must be computed in line with the graded rates under the Finance Act, not automatically at the highest rate. The Special Bench's decision in Aaradhya Jain Trust was relied upon, confirming that for private discretionary trusts taxed at MMR, surcharge computation must follow slab-wise structure.
Key Issues
Whether the CPC correctly applied a uniform 37% surcharge or if the surcharge should be computed based on the slab rates as per the Finance Act for AOPs taxed at maximum marginal rate.
Sections Cited
143(1), 2(29C), 164, 167B, 255(3), 271
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Income Tax Appellate Tribunal, ‘D’ BENCH
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals have been filed by the assessee against separate impugned orders passed by NFAC, Delhi dated 20/06/2024 in relation to the adjustment made u/s.143(1) for the A.Y.2021-22 and 2022-23. 2. In A.Y 2021-22, the only issue involved is with regard to levy of surcharge @37% instead of 10% applicable to the assessee as per the Income Tax Act 1961 and relevance Finance Act for the A.Y.2021-22; and in A.Y. 2022-23 levy of surcharge 4008/Mum/2024 Mahalaxmi Construction Co. @37% instead of 25% applicable as per the Relevance Finance Act and thereby raising additional demand.
The brief facts are that assessee is an AOP engaged in the business of real estate development. It has a definite and pre- decided arrangement of sharing the profit and losses of the AOP under a MoU wherein 9 members had constituted the AOP. The return of income for the A.Y. 2021-22 was filed on 08/10/2021 declaring total income of Rs.92,49,770/-. The assessee computed the tax at maximum marginal rate and also paid surcharge @10% which was applicable for the slab rate of income declared between Rs.50,00,000/- to Rs.1,00,00,000/- as per the Relevance Finance Act. However, the CPC processed the return u/s. 143(1) and applied surcharge rate of 37%. Similarly, for the A.Y. 2022-23 return of income was filed on 23/08/2022 declaring total income of Rs.2,72,68,630/-, the tax was computed at maximum marginal rate and surcharge was calculated at an applicable rate of 25%, i.e., applicable on the slab rate of income declared by the assessee. However, the CPC has computed surcharge @37%, thus, resulting into excess demand.
4. Admittedly, this issue now stands covered by the decision of the Hon’ble Special Bench in the case of Aaradhya Jain Trust vs. Income Tax Officer in judgment dated 09/04/2025 wherein the Hon’ble Special Bench held that in the case of private discretionary trusts taxed at the maximum marginal rate, the computation of surcharge must be based on 4008/Mum/2024 Mahalaxmi Construction Co. the slab-wise surcharge structure prescribed in the Finance Act under Paragraph A of Part I of the First Schedule, and not at a flat highest rate. Accordingly, the reference was answered in favour of the assessee.
Here in this case there is no dispute that tax would be levied at maximum marginal rate and the only issue is with regard to rate of surcharge and whether CPC has correctly applied the surcharge rate or not? By the Finance Act, 2020 income exceeding Rs.50,00,000/- to below Rs.1,00,00,000/-, the rate of surcharge is 10%. Similarly, the rate of surcharge on the return of income filed by the assessee for A.Y.2022-23, the slab rate of income below 3 crores, prescribed surcharge rate of 25%. The surcharge levied under the Income Tax Act is specified under the Finance Act for each year which is an additional levy imposed where income exceeds certain threshold. The Finance Act specified the income (beyond the surcharge levied) at varying percentage i.e. 10%, 15%, 25% or 37%. In the case before the Hon’ble Special Bench the key issue involved was whether the surcharge on the income of a private discretionary trust-taxable at the maximum marginal rate (MMR)-should be applied at the highest rate regardless of income, or based on slab rates as laid out in the Finance Act. The trust declared an income of Rs. 4,85,290 for A.Y. 2023-24. The CPC applied the highest surcharge (37%), treating MMR as inclusive of the highest possible surcharge. The assessee contended that surcharge must be applied as per the slab rates in the Finance Act, where no 4008/Mum/2024 Mahalaxmi Construction Co. surcharge applies below Rs.50 lakh, and the Tribunal constituted a Special Bench under Section 255(3) to resolve the issue. The assessee argued that while tax may be levied at the MMR under Sections 164 and 167B, surcharge is a separate impost and not automatically part of the MMR. Relying on Commissioner of Income Tax, Kerala v. K. Srinivasan [(1972) 83 ITR 346 (SC)), it was contended that surcharge is a distinct charge under Article 271 of the Constitution, to be applied only if income crosses prescribed thresholds. The phrase "including surcharge on income-tax, if any" in Section 2(29C) was argued to be parenthetical and indicative, not mandatory. The interpretation was supported by Fuerst Day Lawson Lid vs. Jindal Exports Ltd [(2011) 8 SCC 333], which held that bracketed phrases serve as supplementary explanations. The counsel also relied on several Tribunal decisions supporting slab-based surcharge application, including: 1. ITO vs. Tayal Sales Corporation ((2003) 1 SOT 579 (Hyd.)] 2. Lintas Employees Professional Development Trust vs. ITO (ITA No. 4791/Mum/2023); 3. Sriram Trust, Hyderabad vs. ITO (ITA Nos. 439-441/Hyd./2024); 4. Ujjwal Business Trust us. CPC (ITA No. 602/Mum/2024); 5. Lintas Employees Holiday Assistance Trust vs. CPC (ITA No. 1796/Mum/2024); 6. Jitendra Gala Navneet Trust & Dilip Sampat Navneet Trust vs. DDIT (ITA Nos. 2484 &2485/Mum/2024); 7. Lintas Employees Holiday Assistance Trust us. ITO (ITA No. 3949/Mum/2024); 8. V. Meera Charitable Trust vs. ITO (ITA No. 2140/Chny/2024)
4008/Mum/2024 Mahalaxmi Construction Co.
Conversely, the Departmental Representative argued that the definition of MMR in Section 2(29C) must be interpreted with reference to the Finance Act and its intent to prevent tax avoidance in the case of discretionary trusts. Referring to the Memorandum to the Finance Bill, 1980 and Gosar Family Trust vs. CIT [(1995) 81 Taxman 146 (SC)), the DR submitted that the highest surcharge rate should be applied as part of the MMR. He further cited CIT vs. CV Divakaran Family Trust [(2002) 122 Taxman 405 (Ker)], noting that surcharge is meant to be linked to income quantum and not levied uniformly He invoked CIT vs. J.H. Ghotla [(1985) 156 ITR 323 (SC)] to emphasize the need for contextual interpretation to avoid absurd results. In support of uniform surcharge application, the DR also relied on decisions like: Anant Bajaj Trust vs. DDIT (ITA No. 1995/Mum/2024) Araadhya Jain Trust της. ITO (ITA No. 2197/Mum/2024) Kapur Family Trust Ds. ITO (ITA Nos. 3834 & 3835/Mum/2024) 7. The core legal question before the Special Bench was, whether the phrase used in Section 2(29C) "including surcharge on income-tax, if any” mandates a flat highest surcharge or requires conditional application based on income thresholds. The SB held that language clearly refers to the rate applicable to the highest slab of income for individuals, AOPs, or BOIs under the relevant Finance Act. Since neither Section 164 nor Section 167B independently mandates surcharge, its application must follow 4008/Mum/2024 Mahalaxmi Construction Co. the Finance Act's structure. Section 2(1) of the Finance Act provides slab-based tax rates and a graded surcharge structure (e.g., 10% above Rs.50 lakh, 15% above 21 crore, and up to 37% above Rs.5 crore). Section 2(3) of the Finance Act reiterates that tax under Sections 164 or 167B must still refer back to the slab- wise rates and thresholds in Section 2(1).
Thus, a uniform 37% surcharge irrespective of income contradicts both the Finance Act and the contextual reading of Section 2(29C). The parenthetical "if any" reflects that surcharge is not always applicable-it is conditional on the taxpayer's income exceeding thresholds. Any other interpretation would result in disproportionate taxation and violate the principle against absurd outcomes. Thus, the conclusion emerging from this line of reasoning, reinforced by Special Bench and statutory construction, is that the surcharge under Section 2(29C) is conditional and must be computed in line with the graded rates under the Finance Act-not automatically at the highest rate. After reviewing various judicial precedents cited by both sides, the Special Bench held that none of the earlier High Court decisions had directly examined the precise issue in dispute- namely, whether the rate of surcharge applied along with the maximum marginal rate should also be the highest surcharge rate, regardless of the level of income. The Tribunal clarified that those decisions dealt broadly with the concept and applicability of the maximum marginal rate, not the rate of surcharge per se. Consequently, the coordinate bench decisions referred to by the 4008/Mum/2024 Mahalaxmi Construction Co. assessee (e.g., Lintas Employees Professional Development Trust, Sriram Trust, Ujjwal Business Trust, V. Meera Charitable Trust, and others) correctly reflected the legal position that surcharge should not be applied at the highest rate unless the relevant income threshold under the Finance Act is exceeded.
Ultimately, the Special Bench held that in the case of private discretionary trusts taxed at the maximum marginal rate, the computation of surcharge must be based on the slab-wise surcharge structure prescribed in the Finance Act under Paragraph A of Part I of the First Schedule, and not at a flat highest rate. Accordingly, the reference was answered in favour of the assessee, and the matter was directed to be returned to the respective benches for decision on the individual appeals. Thus, this issue stands covered in favour of the assessee by the Special Bench and accordingly, we hold that the assessee has rightly computed the surcharge @10% for A.Y.2021-22 and @25% for the A.Y.2022-23. Accordingly, the grounds raised
by the assessee are allowed.
11. In the result, appeals of the assessee are allowed. Order pronounced on 23rd April, 2025.