2024 (10) TMI 481 - AT - Income Tax

Liability to pay tax at maximum marginal rate as per provisions of Section 167B - assessee is a private discretionary trust - CIT(A) rejected the contention of the assessee and held that the maximum marginal rate is required to be computed at the highest rate of taxation and surcharge also - CIT(A) held that the provisions of Section 2(29C) do not remotely suggest to include surcharge in MMR as per different slab rates of income. and it is clear that maximum marginal rate is required to be computed of the tax rate of highest slab @ 30% and surcharge for highest slab @ 37% alongwith education Cess @ 4% Applicable rate of surcharge - How to calculate the maximum marginal rate? - HELD THAT - Language of law is clear that maximum marginal rate shall be maximum rate of tax and surcharge of the highest rate in case of an individual. If the surcharge was to be levied according to the slab rate of the assessee it was not required to be mentioned in Section 2(29C) of the Act that rate of income tax (including surcharge of income tax if any) applicable in relation to the highest slab of income in case of an individual. Thus purpose of mentioning surcharge in that section is to compute maximum marginal rate as high rate of tax and also highest rate of surcharge. If one reads the provisions of the law as suggested by the learned A.R. mentionof the word surcharge in Section 2(29C) of the Act becomes redundant. The definition is not capable of any doubt and only meaning that it admits is that the rate on the maximum slab of income and maximum rate of surcharge is to be treated as the maximum marginal rate. The Finance Act for each year prescribes various slabs for each category of the assessee and the corresponding rates applicable. This view is also supported by the decision of C.V. Divakaran Family Trust 2001 (12) TMI 56 - KERALA HIGH COURT It is also true that the Policy of Law as suggested in Section 2(29C) of the Act is to discourage discretionary trust by charging the income of such trust in the hands of the trustee at the maximum marginal rate except in certain specified situation. Thus such a policy is defeated if we hold that the beneficiary of a trust is chargeable to tax and also surcharge at the highest slab but the assessee trust is charged to tax at the highest slab but lower rate of surcharge. See Gosar Family Trust Jamnagar etc vs. CIT 1995 (4) TMI 2 - SUPREME COURT The levy of maximum marginal rate on trust is thus specific anti Avoidance rule and therefore should be given a strict interpretation. Law prescribes that tax shall be charged on income in respect of which such person is so liable at the maximum marginal rate. There is no provision in the law to charge specific discretionary trust bit lower than the rates of tax and surcharge applicable to a beneficiary individual. We also draw strength from the decision of JK Holdings 2002 (12) TMI 15 - BOMBAY HIGH COURT In the result we confirm the order of CIT(A) holding that the maximum marginal rate is correctly computed by the Central Processing Centre by taking the maximum rate of income tax and maximum of rate of surcharge applicable in case of an individual for the assessment year and same is applicable on assessee a private discretionary trust. CPC power to vary the rate of surcharge by processing the return of income u/s. 143(1) - For this proposition we find that CPC has power to compute the correct amount of tax and sum payable by the assessee in terms of provisions of Section 143(1)(b) and (c) of the Act. Therefore on this ground also we do not find any reason to interfere with the order of the learned CIT(A). Assessee appeal dismissed.

Summary

Issues Involved:
Calculation of surcharge at maximum marginal rate for a private discretionary trust under Section 2(29C) of the Income Tax Act, 1961.

Detailed Analysis:

1. Calculation of Maximum Marginal Rate:
The appeal concerns the calculation of the maximum marginal rate for a private discretionary trust. The assessee contended that the surcharge should be computed based on the income slab of the trust, not at the highest rate provided in the Finance Act. The Revenue argued that both tax and surcharge should be at the highest rates applicable to an individual. Section 2(29C) defines the maximum marginal rate as the highest slab of income tax and surcharge for an individual. The Tribunal held that the law mandates the highest tax and surcharge rates for calculating the maximum marginal rate, as supported by legal commentaries and judicial precedents. The purpose is to discourage discretionary trusts by taxing them at the maximum marginal rate.

2. Judicial Precedents and Interpretation:
The Tribunal cited the decision of the Hon'ble Kerala High Court in CIT vs. C.V. Divakaran Family Trust, emphasizing the strict interpretation of the anti-avoidance rule for trusts. It also referred to the Supreme Court's decision in Gosar Family Trust vs. CIT and the Bombay High Court's ruling in CIT vs. JK Holdings to support the application of the maximum marginal rate to trusts. The Tribunal highlighted that prior decisions of coordinate benches did not consider these authoritative judgments and commentaries, emphasizing the need to follow higher court decisions.

3. Power of Central Processing Centre (CPC):
The assessee argued that CPC lacked the authority to vary the surcharge rate under Section 143(1) of the Act. However, the Tribunal held that CPC has the power to compute the correct tax amount and sum payable by the assessee as per Section 143(1)(b) and (c) of the Act. Therefore, the Tribunal upheld the decision of the CIT(A) regarding the computation of the correct surcharge rate by CPC.

4. Final Decision:
After thorough consideration, the Tribunal dismissed the appeal of the assessee, affirming the order of the CIT(A) regarding the correct calculation of the maximum marginal rate and the power of CPC to determine the surcharge rate. The judgment was pronounced on 07/10/2024, settling the dispute over the calculation of surcharge for a private discretionary trust.