2025 (4) TMI 648 - AT - Income Tax

Surcharge chargeable in the case of private discretionary trusts whose income is chargeable to tax at maximum marginal rate - at the highest applicable rate or at a slab rates? - 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 ? HELD THAT - What is meant by a Private Discretionary Trust . A Discretionary Trust is generally a Trust registered under the Indian Trusts Act 1882 where under 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 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 brought to tax at the maximum marginal rate. 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. 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 (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. 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. 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. 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.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Appellate Tribunal was: "Whether, in the case of private discretionary trusts whose income is chargeable to tax at the maximum marginal rate, surcharge is chargeable at the highest applicable rate or at slab rates?"

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents:

The assessment focused on provisions under sections 164 and 167B of the Income Tax Act, 1961, which mandate that the income of private discretionary trusts is taxed at the maximum marginal rate. The definition of "maximum marginal rate" is provided under section 2(29C) of the Act, which includes surcharge on income tax, if any, applicable to the highest slab of income as specified in the Finance Act of the relevant year.

The Tribunal also considered the Finance Act, 2023, specifically section 2(1) and its First Schedule, which outlines the rates of income tax and surcharge applicable to different income brackets. The Tribunal reviewed several judicial precedents, including Commissioner Of Income Tax, Kerala v. K. Srinivasan, and other tribunal decisions concerning the interpretation of surcharge applicability.

Court's Interpretation and Reasoning:

The Tribunal interpreted the provisions to mean that while the maximum marginal rate applies to the basic tax rate, the surcharge should be computed based on the slab rates provided in the Finance Act, rather than a blanket application of the highest surcharge rate. The Tribunal noted that sections 164 and 167B do not explicitly mention surcharge, and the definition of "maximum marginal rate" in section 2(29C) refers to the rate of income tax applicable to the highest slab of income, not explicitly to surcharge rates.

Key Evidence and Findings:

The Tribunal examined the First Schedule of the Finance Act, 2023, which provides specific income tax rates and surcharge rates based on income brackets. The Tribunal found that the Finance Act distinguishes between rates of income tax and surcharge, indicating that surcharge is an additional amount levied on the income tax rather than a component of the tax rate itself.

Application of Law to Facts:

The Tribunal applied the law by determining that the surcharge on income tax for private discretionary trusts should be calculated based on the slab rates applicable to the income bracket of the trust, as specified in the Finance Act. This interpretation aligns with the purpose of the Finance Act to levy surcharge based on income levels, ensuring a fair and equitable tax burden.

Treatment of Competing Arguments:

Arguments from the Revenue suggested that the surcharge should be applied at the highest rate irrespective of income, based on the interpretation of "maximum marginal rate" to include the highest surcharge rate. The Tribunal rejected this argument, finding it inconsistent with the legislative intent and the structure of the Finance Act, which provides specific surcharge rates based on income levels.

Conclusions:

The Tribunal concluded that the surcharge for private discretionary trusts should be calculated based on the slab rates provided in the Finance Act, rather than applying the highest surcharge rate indiscriminately. This conclusion ensures that the tax burden is aligned with the income levels of the trust, consistent with the Finance Act's provisions.

SIGNIFICANT HOLDINGS

The Tribunal held that "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."

The Tribunal emphasized that any other interpretation would lead to absurd and discriminatory outcomes, as it would disregard the structured approach of the Finance Act in determining surcharge based on income levels. The Tribunal's decision favors an interpretation that harmonizes the provisions of the Income Tax Act and the Finance Act, ensuring a fair application of tax laws.