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TMI Blog2025 (4) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to tax at maximum marginal rate, surcharge is chargeable at the highest applicable rate or at a slab rates?" 2. Before we proceed to deal with the aforesaid substantive issue, it is necessary to provide a brief factual backdrop leading to the constitution of Special Bench. 3. The assessee-appellant - Araadhya Jain Trust, a Private Discretionary Trust, filed its return of income for the assessment year (A.Y. for short) 2023-24, declaring income of Rs. 4,85,290/-. In terms with the provision contained u/s. 164 read with section 2(29C) of the Act, the assessee paid tax at the 'maximum marginal rate'. While processing the return of income filed by the assessee, the Centralized Processing Centre (CPC) levied highest rate of surcharge on the maximum marginal rate at which the tax was computed. 4. Being aggrieved with the levy of surcharge, the assessee preferred an appeal before the first appellate authority. 5. Before the first appellate authority, assessee's contention, in sum and substances, was to the effect that levy of surcharge for the relevant financial year is applicable in terms with the Finance Act, in case the total income of the assessee exceeds Rs. 50 lacs. Wherea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dekar, Advocate, who appeared in the lead matter, i.e., Araadhya Jain Trust, Mumbai and on behalf of interveners nos. 2, 3 and 5 submitted that as per section 164 and 167B of the Act, tax in case of a Private Discretionary Trust is to be charged at the maximum marginal rate. He submitted, the maximum marginal rate is defined u/s. 2(29C) of the Act, to mean the rate of income tax applicable in relation to highest slab of income as specified in the Finance Act of the relevant year with reference to an individual, association or body of individual and such tax is to be increased by applicable surcharge, if any. He submitted, the rate of income tax in force for a relevant year is provided u/s. 2(1) of the Finance Act, 2023 read with its schedule. However, he submitted, sub-section (1) to section 2 of Finance Act, 2023 is subject to sub-sections (2) and (3). Drawing our attention to sub-section (3) of section 2 of Finance Act, 2023, he submitted, as per the said provision, in case of a Private Discretionary Trust, tax is charged as per the provision of section 164/167B of the Act, i.e., at the maximum marginal rate. However, he submitted, sub section (3) to section 2 of Finance Act, 202 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayal Sales Corporation [2003] 1 SOT 579 (Hyd.) 2. Lintas Employees Professional Development Trust vs. ITO (ITA No. 4791/Mum/2023 decided on 29.05.2024) 3. Sriram Trust, Hyderabad vs. ITO (ITA Nos. 439, 440 & 441/Hyd./2024, decided on 19.06.2024) 4. Ujjwal Business Trust vs. CPC (in ITA No. 602/Mum2024 decided on 28.06.2024) 5. Lintas Employees Holiday Assistance Trust vs. CPC (ITA No. 1796/Mum/2024 decided on 26.07.2024) 6. Jitendra Gala Navneet Trust vs. DDIT and Dilip Sampat Navneet Trust vs. DDIT (ITA Nos. 2484 & 2485/Mum/2024 decided on 22.10.2024) 7. Lintas Employees Holiday Assistance Trust vs. ITO (ITA No. 3949/Mum/2024 decided on 20.01.2025) 8. V. Meera Charitable Trust vs. ITO (ITA No. 2140/Chny/2024 decided on 07.02.2025) 11. Again drawing our attention to the definition of 'maximum marginal rate' u/s.2(29C) of the Act, he submitted, the words "including surcharge on income-tax, if any", since are placed in round brackets within the definition clause, the term must be interpreted as connoting extra information separate from the main context of the definition itself and as such, it would be incorrect to levy surcharge at the highest rate. In support of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act-2023, provides for computation of income tax in accordance with the rates prescribed in the slabs given or as per the provisions of sections 110, 11A, 112, 112A of the Act and such income tax shall be increased by a surcharge collected for the purposes of Union and calculated in the manner provided therein. 15. Thus, he submitted, as per the provisions of Finance Act, firstly, normal or basic income-tax is to be computed on the total income by applying the rate of tax, either as prescribed in the Finance Act or at special rates prescribed in the Income-tax Act, to total income. Thereafter, surcharge is added to basic/normal tax, after such basic/normal tax is computed. He submitted, surcharge is computed on the amount of income tax at the rate prescribed under the Finance Act and rate of surcharge is not applied to the total income. He submitted, certain provisions in the Income Tax Act provide for levy of tax at the maximum marginal rate, which amongst others include sections 164, 164A and 167B of the Act. Drawing our attention to the provisions contained u/s. 164 and 167B of the Act, ld. Counsel submitted that theses provisions only deal with the levy of tax and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n absurdity, such interpretation has to be eschewed by adopting a different contextual interpretation. For such proposition, he relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. J H Ghotla [1985] 156 ITR 323 (SC). Without prejudice, ld. Counsel submitted, where there are conflicting views available on a particular issue, the view favorable to the assessee should be preferred, when the issue under consideration is the basic charging provision and provision dealing with levy of tax. Referring to the decision of the co-ordinate bench in the case of Araadhya Jain Trust (supra), ld. Counsel submitted that though the decisions of the co-ordinate bench were available, however, they have been distinguished by the Bench by wrongly relying upon certain decisions which are clearly distinguishable on facts and do not at all deal with the issue at hand, i.e., whether surcharge has to be levied at the maximum rate. Thus, he finally submitted that the definition of maximum marginal rate as provided u/s. 2(29C) of the Act has to be read in conjunction with section 2(1) of the Finance Act and along with its schedule provided under Paragraph A, Part (I) of First Schedule t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e surcharge. Thus, he submitted, the memorandum explaining the provisions of Finance Bill, makes it clear that not only the rate of income- tax, but surcharge is also to be fixed at the rate applicable to the highest slab of income. He submitted, this is so because, maximum marginal rate was introduced as a measure of countering tax avoidance. In this context, he drew our attention to the following observations of Hon'ble Supreme Court in the case of Gosar Family Trust (supra) "we must say that the policy of law as disclosed from Section 164(1) is to discourage discretionary trusts by charging the income of such trusts in the hands of trustees at the maximum marginal rate except in certain specified situations." 20. Proceeding further, he submitted, the intention of the legislature in charging tax and surcharge at the maximum rate is further visible from the use of word 'if any' in section 2(29C) of the Act. He submitted, the words 'if any' would mean whether the levy of surcharge is introduced in the Finance Act of the relevant assessment year or not. If the Finance Act provides for levy of surcharge, then surcharge has to be levied at the highest rate provided under the Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees 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 other words, 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. The expression "maximum marginal rate" has been defined u/s.2(29C) of the Act as under: "maximum marginal rate" means 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, as the case may be, body of individuals as specified in the Finance Act of the relevant year; 23. A plain reading of the aforesaid definition clause would indicate that the 'maximum margin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter or section, as the case may be. Thus, sub section 2(1) of Finance Act, which is subject to the provisions of sub-section (3), though, provides that income-tax shall be charged at the rate specified in Part 1 of the specified schedule, however, sub-section (3) carves out an exception in case of certain class of income or assessees by providing that the chargeable tax shall be determined in terms with those Chapters or sections, and with reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter or section, as the case may be. 25. In case of discretionary trusts, sections 164/167B of the Act, do not by them selve specify the rate of tax. They only say that tax on total income is to be determined at the maximum marginal rate. The definition of 'maximum marginal rate' u/s.2(29C) of the Act, in turn, refers to the rate of income-tax applicable to the highest slab as provided under the Finance Act of the relevant year. Thus, for determining the maximum marginal rate of tax, one has to revert back to the rate prescribed in Paragraph A, Part (I) of First Schedule t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the previous year,- Rates of income-tax (1) where the total income does not exceed Rs. 5,00,000 Nil; 5,00,000 (2) where the total income exceeds but does not exceed Rs. 10,00,000 20 per cent of the amount by which the total income exceeds Rs. 5,00,000; (3) where the total income exceeds Rs. 10,00,000 Rs. 1,00,000 plus 30 per cent of the amount by which the total income exceeds Rs. 10,00,000. Surcharge on income-tax The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 or section 112A or the provisions 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 every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act,- (a) having a total income (including the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income-tax Act) exceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds one crore rupees; (c) two crore rupees but does not exceed five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of two crore rupees by more than the amount of income that exceeds two crore rupees; (d) five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of five crore rupees by more than the amount of income that exceeds five crore rupees. 26. On going through Paragraph A, Part (I) of First Schedule to the Finance Act-2023, it becomes very much clear that under Item (1), the rates of income tax applicable to individuals, Hindu undivided family or association of persons or body of individuals have been provided. As could be seen from the rates of income-tax for different income brackets, if the total income does not exceed Rs. 2,50,000/-, the rate of income tax is Nil. If the total income exceeds Rs. 2,50,000/-, but does not exceed Rs. 5,00,000/-, the rate of income tax is 5% of the amount by which the total income exceeds Rs. 2,50,000/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income- tax 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 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceded 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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