2025 (5) TMI 1660 - AT - Income Tax

Calculation of surcharge at 37% on the income by invoking the provisions of sec.164 - rejecting the appellants contention that surcharge should be levied at the rate of 15% only - HELD THAT - The levy of surcharge depends on the amount of income of the assessee. Admittedly the income offered for tax by the assessee and accepted by the AO/ CPC for AY 2022-23 is Rs. 1, 18, 07, 380/-. For the relevant AY 2022-23 under consideration surcharge is leviable (subject to marginal relief) when the income of the assessee exceeds 50, 00, 000/- and the maximum rate of surcharge of 37% is leviable if the income exceeds Rs. 5 crore. Where the income falls within the bracket of more than Rs. 1 crore upto 2 crores (as in the case of the assessee in the instant case) surcharge is leviable at the rate of 15% as rightly claimed by the assessee in his return of income and rectification application thereafter. Thus in light of the ratio laid down in the case of Araadhya Jain Trust 2025 (4) TMI 648 - ITAT MUMBAI AO/ CPC erred in leving surcharge @ 37% on the assessee which was confirmed by the Ld. CIT(A). Appeal of the assessee is allowed.

Summary

Issues Presented and Considered

1. Whether the surcharge on the income of the private discretionary trust should be levied at the rate of 37% as applied by the Assessing Officer (AO)/Centralized Processing Centre (CPC) under section 164 of the Income Tax Act, or at 15% as contended by the assessee.

2. Whether the intimation served under section 143(1) of the Income Tax Act by the CPC, which included the surcharge at 37%, was correctly processed and legally valid.

Issue-wise Detailed Analysis

Issue 1: Correct Rate of Surcharge on Income of Private Discretionary Trust

Relevant Legal Framework and Precedents: The applicable provisions relate to the computation of surcharge on income tax under the Income Tax Act, specifically the slab rates prescribed in the Finance Act for the relevant Assessment Year (AY 2022-23). Section 164 was invoked by the AO/CPC to levy surcharge at the Maximum Marginal Rate (MMR) of 37%. The key precedent considered was the decision of the Special Bench of the Mumbai ITAT in Araadhya Jain Trust, which held that for private discretionary trusts, surcharge must be computed with reference to slab rates applicable to individuals as per the Finance Act, not at the MMR indiscriminately.

Court's Interpretation and Reasoning: The Tribunal observed that the income of the assessee trust was Rs. 1,18,07,380/-, which falls within the surcharge slab of income exceeding Rs. 1 crore but less than Rs. 2 crore. According to the Finance Act applicable for AY 2022-23, the surcharge rate for income in this bracket is 15%, not 37%. The Tribunal noted that the AO/CPC erroneously applied the 37% surcharge rate, which is reserved for income exceeding Rs. 5 crore.

The Tribunal emphasized that the surcharge must be computed according to the slab rates prescribed under the Finance Act, and the maximum marginal rate is not automatically applicable to private discretionary trusts simply because their income is taxed at the MMR.

Key Evidence and Findings: The assessee declared income of Rs. 1,18,07,380/- and paid tax at 30% plus surcharge at 15% and cess at 4%. The CPC processed the return under section 143(1) but levied surcharge at 37%, leading to a higher tax demand. The assessee filed a rectification application under section 154, which was rejected, and the CIT(A) confirmed the CPC's order. The Tribunal relied heavily on the Mumbai ITAT Special Bench ruling in Araadhya Jain Trust, which was not available at the time of the CIT(A) order.

Application of Law to Facts: Applying the ratio of the Special Bench, the Tribunal held that the surcharge rate applicable to the assessee's income slab is 15%, not 37%. The AO/CPC and CIT(A) erred in applying the maximum marginal rate surcharge indiscriminately.

Treatment of Competing Arguments: The Revenue did not raise any objection to the Special Bench decision and conceded to the assessee's submission. The Tribunal noted the absence of contrary material from the Revenue and relied on the binding precedent to set aside the surcharge levy at 37%.

Conclusions: The Tribunal allowed the ground of appeal challenging the surcharge rate, directing the AO/CPC to recompute the surcharge at 15% as per the Finance Act slab rates applicable to the assessee's income.

Issue 2: Validity of CPC's Processing of Return and Intimation under Section 143(1)

Relevant Legal Framework and Precedents: Section 143(1) of the Income Tax Act provides for processing of return and issuance of intimation to the assessee. Section 154 allows for rectification of mistakes apparent from record. The issue was whether the CPC's intimation incorporating surcharge at 37% was legally valid and whether the rectification application was properly rejected.

Court's Interpretation and Reasoning: The Tribunal found that the CPC's processing under section 143(1) was flawed due to incorrect surcharge computation. The rectification application under section 154 was rightly filed by the assessee to correct this mistake. However, the rectification order upheld the surcharge at 37%, which was contrary to the legal position established later by the Special Bench decision.

Key Evidence and Findings: The CPC's intimation accepted the income declared but applied incorrect surcharge. The rectification application was rejected, and the CIT(A) confirmed this rejection. The Tribunal found this approach erroneous in light of the binding precedent.

Application of Law to Facts: The Tribunal held that the CPC's intimation under section 143(1) was not correct in law because it applied an incorrect surcharge rate. The rectification application under section 154 was justified and should have been allowed to correct the surcharge rate.

Treatment of Competing Arguments: The Revenue did not dispute the correctness of the Special Bench ruling or provide any material to justify the surcharge at 37%. The Tribunal accordingly found the CPC's and CIT(A)'s approach unsustainable.

Conclusions: The Tribunal allowed the ground challenging the CPC's processing and intimation, directing modification of the assessment to reflect correct surcharge computation.

Significant Holdings

"In case of Private Discretionary Trusts, whose income is chargeable to tax at maximum chargeable 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 Para A, Part 1, First Schedule, applicable to the relevant assessment year."

The Tribunal conclusively held that the surcharge rate must correspond to the income slab of the assessee and not be automatically levied at the maximum marginal rate merely because the income is taxed at the MMR.

The Tribunal set aside the CIT(A) order confirming surcharge at 37% and directed the AO/CPC to compute surcharge at 15%, consistent with the Finance Act slab rates for income between Rs. 1 crore and Rs. 2 crore.

Further, the Tribunal held that the CPC's intimation under section 143(1) and the rectification order under section 154 were not correct in law due to erroneous surcharge application, and directed rectification accordingly.