2025 (4) TMI 1355 - AT - Income Tax

Levying surcharge on the tax in the hands of the assessee as a result of maximum marginal rate despite the income was much below limit of Rs. 50, 00, 000/- prescribed under the relevant Finance Act - HELD THAT - Hon ble Special Bench in the case of Araadhya Jain Trust 2025 (4) TMI 648 - ITAT MUMBAI clarified that in case of Private Discretionary Trust whose income is chargeable to tax at marginal rate surcharge has to be computed on the income tax having reference to the slab rates prescribed in the Finance Act under the surcharge of Income Tax accordingly we hold that even if rate tax is applicable at maximum marginal rate however if the slab rates are below Rs. 50, 00, 000/- for levy of surcharge no surcharge can be levied. Here in this case it is not in dispute that slab rate of income of the assessee trust is much below of Rs. 50, 00, 000/- and therefore surcharge cannot be levied. Appeals of the assessee are allowed.

The core legal question considered in these appeals is whether surcharge at the maximum marginal rate can be levied on the income tax of a private discretionary trust whose total income is below the threshold limit of Rs. 50,00,000/- as prescribed under the relevant Finance Act. Specifically, the issue is whether the definition of "maximum marginal rate" under section 2(29C) of the Income Tax Act mandates that surcharge must be computed at the highest rate applicable to the highest income slab irrespective of the actual income of the trust, or whether surcharge should be levied in accordance with the income slabs and thresholds prescribed in the Finance Act for the relevant assessment year.

Another related issue is the interpretation and application of sections 164 and 167B of the Income Tax Act, which provide for taxation of income of discretionary trusts/AOPs/BOIs at the maximum marginal rate, and how these provisions interact with the surcharge provisions under the Finance Act.

Issue-wise detailed analysis:

1. Interpretation of "Maximum Marginal Rate" under section 2(29C) of the Income Tax Act:

The legal framework involves section 2(29C) which defines "maximum marginal rate" as the rate of income-tax including surcharge on income-tax, if any, applicable in relation to the highest slab of income in the case of an individual, association of persons or body of individuals as specified in the Finance Act of the relevant year. Sections 164 and 167B mandate that income of discretionary trusts/AOPs/BOIs be taxed at this maximum marginal rate.

The Court examined the plain language of section 2(29C) and noted that while the definition includes surcharge, it refers to the rate applicable to the highest slab of income as prescribed in the Finance Act. The Finance Act itself provides detailed slab rates for income tax and surcharge, with surcharge applicable only when total income exceeds Rs. 50,00,000/-.

Precedents and authoritative materials, including a Special Bench decision in a related case, were considered. The Court noted that the term "slab" refers to income brackets, not tax rates, and that the Finance Act prescribes surcharge rates starting at incomes exceeding Rs. 50 lakhs, with the highest surcharge rate of 37% applicable only for incomes exceeding Rs. 5 crores.

The Court reasoned that if surcharge were to be levied at the highest rate of 37% regardless of actual income, it would render the income thresholds and varying surcharge rates meaningless and lead to absurd results. Such an interpretation would also nullify exceptions and provisos in the Finance Act relating to surcharge applicability.

The Court emphasized the constitutional mandate that taxes and surcharges must be levied only with authority of law, and that the Finance Act is the governing statute for surcharge rates and thresholds. The phrase "including surcharge on income-tax, if any" in section 2(29C) must be read in harmony with the Finance Act's provisions, not in isolation.

2. Application of sections 164 and 167B of the Income Tax Act vis-`a-vis surcharge under the Finance Act:

Sections 164 and 167B provide for taxation of income of discretionary trusts/AOPs/BOIs at the maximum marginal rate but do not themselves specify surcharge rates or thresholds. The Finance Act prescribes the rates of income tax and surcharge applicable to various income brackets.

The Court held that the tax on total income of discretionary trusts must be computed at the maximum marginal rate as defined, but the surcharge component must be determined with reference to the income slabs and surcharge rates prescribed in the Finance Act for the relevant year.

This interpretation ensures that surcharge is levied only when the income exceeds the threshold limit of Rs. 50 lakhs, consistent with the Finance Act. The Court rejected the Revenue's contention that surcharge must be levied at the highest rate regardless of income, as this would conflict with the Finance Act and lead to discriminatory and absurd outcomes.

3. Treatment of competing arguments and precedents:

The Revenue relied on coordinate bench decisions that had upheld levy of surcharge at the maximum marginal rate irrespective of income levels. The Court noted that some of these decisions were subsequently recalled or had lost relevance. The Special Bench decision in the case cited was considered authoritative and binding on the issue.

The Court further observed that the High Courts whose decisions were relied upon by the Revenue had not considered the specific question of surcharge at the highest rate irrespective of income, but rather dealt with the applicability of maximum marginal rate itself.

The Court thus distinguished the precedents relied upon by the Revenue and found that the correct legal position is that surcharge must be levied in accordance with the income slabs and thresholds prescribed in the Finance Act, even for discretionary trusts taxed at the maximum marginal rate.

4. Application of law to facts:

In the present cases, the income of the discretionary trust was Rs. 21,56,130/- for A.Y. 2022-23 and Rs. 4,69,160/- for A.Y. 2023-24, both well below the Rs. 50,00,000/- threshold for surcharge applicability. Therefore, the Court held that no surcharge could be levied on the income tax computed at the maximum marginal rate.

The Court set aside the orders of the CIT(A) which had upheld surcharge levy at the highest rate and allowed the appeals of the assessee trust accordingly.

Significant holdings:

"The short issue arising for consideration before us is, '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'."

"A plain reading of the aforesaid definition clause would indicate that the 'maximum marginal rate' would mean the rate of income tax, including surcharge on income tax, if any, applicable to the highest slab of income of an individual, association of person or body of individual as specified in the Finance Act of the relevant year."

"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."

"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."

"Thus, even if rate tax is applicable at maximum marginal rate however, if the slab rates are below Rs. 50,00,000/- for levy of surcharge, no surcharge can be levied."

Core principles established include that the maximum marginal rate involves the highest slab rate of income tax plus applicable surcharge as prescribed in the Finance Act, but surcharge is not automatically levied at the highest rate unless the income exceeds the relevant threshold. The surcharge component must be computed in accordance with the income slabs and surcharge provisions of the Finance Act, ensuring consistency, fairness, and avoidance of absurd results.

The final determination was that surcharge cannot be levied on discretionary trusts whose income is below Rs. 50,00,000/-, even though their income tax is computed at the maximum marginal rate, and accordingly, the appeals were allowed in favor of the assessee.

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