2025 (6) TMI 1207 - AT - Income Tax

Levy of surcharge - interpretation and application of the definition of Maximum Marginal Rate (MMR) - HELD THAT - The Tribunal in case of Ria Zaveri Trust 2024 (12) TMI 1585 - ITAT AHMEDABAD has allowed the appeal of the assessee therein thereby observing that the surcharge is leviable only when amount of income tax is computed where the total income exceeds Rs. 50 lakhs. The decision of Coordinate Bench is applicable in the present assessee s case and hence the appeal of the assessee is allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Tribunal include:

• Whether the impugned order passed by the CIT(A) without affording a reasonable opportunity of hearing violated the principles of natural justice.
• Whether surcharge under the Income Tax Act was rightly imposed on the appellant's income, which was below the statutory threshold of Rs. 50 lakhs.
• The correct interpretation and application of the definition of Maximum Marginal Rate (MMR) under Section 2(29C) of the Income Tax Act in relation to surcharge imposition.
• Whether the CIT(A) erred in disregarding judicial precedents that restrict surcharge levy only to cases where total income exceeds Rs. 50 lakhs.
• The correctness of the tax computation under Section 143(1) and whether the demand raised exceeded the declared income.
• The impact of the surcharge demand on the appellant's charitable activities and whether such demand was ultra vires statutory provisions.

Issue-wise Detailed Analysis

1. Violation of Principles of Natural Justice

The appellant contended that the CIT(A) passed the impugned order without providing a reasonable opportunity of hearing, thereby violating the principles of natural justice. Reliance was placed on the Supreme Court ruling in Maneka Gandhi vs. Union of India, which established the right to be heard as an essential component of fair procedure. Although this issue was raised, the Tribunal did not explicitly dwell on this point in its reasoning, focusing primarily on the substantive tax issues. The absence of a contrary finding suggests no substantial procedural infirmity was found or argued effectively by the Revenue.

2. Imposition of Surcharge Despite Income Below Rs. 50 Lakhs

The pivotal legal framework involves Section 167B of the Income Tax Act, which prescribes that surcharge is leviable only if the total income exceeds Rs. 50 lakhs. The appellant's total income was Rs. 44,690, well below this threshold. The appellant argued that the CIT(A) erroneously confirmed surcharge inclusion despite this clear statutory limit.

Section 2(29C) defines Maximum Marginal Rate (MMR) as the rate of income tax including surcharge applicable to the highest slab of income for entities such as associations of persons (AOPs). The appellant submitted that the surcharge should apply only when income exceeds the prescribed threshold, consistent with the legislative intent to shield lower-income entities from additional tax burdens.

Judicial precedents cited include ITO vs. Tayal Sales Corporation and Sriram Trust, Hyderabad vs. Income Tax Officer (2024), which consistently held surcharge is leviable only when statutory conditions, including income thresholds, are met. The appellant also relied on recent coordinate bench decisions such as Ria Zaveri Trust vs. ACIT and Ujjwal Business Trust vs. ITO, which reinforced this position.

The Revenue contended that the Maximum Marginal Rate includes surcharge applicable to the highest slab as per the Finance Act, regardless of the appellant's income level, and thus surcharge inclusion was justified. The Revenue relied on the CIT(A)'s order supporting this interpretation.

The Tribunal analyzed the coordinate bench decision in Ria Zaveri Trust vs. ACIT, which held surcharge is leviable only when total income exceeds Rs. 50 lakhs. The Tribunal found this precedent directly applicable and persuasive, concluding that surcharge could not be imposed in the appellant's case given the income was below the threshold.

3. Interpretation of Maximum Marginal Rate under Section 2(29C)

The appellant argued that the CIT(A) misinterpreted the definition of MMR by ignoring the threshold condition for surcharge imposition. The purpose of Section 2(29C) is to apply the highest applicable tax rate only when income crosses the prescribed limit. The appellant's income being Rs. 44,690 meant the highest slab and associated surcharge were not applicable.

The Tribunal agreed with the appellant's interpretation, emphasizing that surcharge is a component of the MMR only when income exceeds the threshold. The Revenue's argument that surcharge applies regardless of income level was rejected as inconsistent with the statutory scheme and judicial precedents.

4. Reliance on Judicial Precedents

The appellant relied heavily on several recent judicial rulings which consistently held surcharge is leviable only when total income exceeds Rs. 50 lakhs. The Tribunal found these precedents binding and directly applicable, noting that the CIT(A)'s dismissal of these precedents was erroneous.

5. Computation of Tax Liability and Demand Raised

The appellant contended that the tax demand raised under Section 143(1) was flawed because the taxes demanded exceeded the declared income, violating the principle that tax liability cannot surpass total income. The surcharge inclusion inflated the tax demand unjustifiably, causing financial burden.

The Tribunal did not provide detailed separate analysis on this point but implicitly accepted the appellant's position by allowing the appeal and setting aside the surcharge demand.

6. Impact on Charitable Activities and Ultra Vires Nature of Surcharge Demand

The appellant highlighted that the erroneous surcharge demand adversely affected its bona fide charitable activities, including relief to the poor and promotion of education. The appellant argued that the surcharge imposition was ultra vires statutory provisions and lacked express legal authority, invoking the principle of "Nullum Crimen Sine Lege" (no liability without law).

The Tribunal's decision to allow the appeal aligns with the appellant's contention that the surcharge demand lacked statutory basis and was thus unsustainable.

Significant Holdings

The Tribunal held that surcharge under the Income Tax Act is leviable only when the total income exceeds the statutory threshold of Rs. 50 lakhs, and any surcharge demand imposed below this threshold is unsustainable. The Tribunal observed:

"The Tribunal in case of Ria Zaveri Trust vs. ACIT has allowed the appeal of the assessee therein thereby observing that the surcharge is leviable only when amount of income tax is computed where the total income exceeds Rs. 50 lakhs. The decision of Coordinate Bench is applicable in the present assessee's case and hence the appeal of the assessee is allowed."

This establishes the core principle that surcharge cannot be arbitrarily imposed without fulfillment of the income threshold condition prescribed by law.

The Tribunal also implicitly reaffirmed the importance of adherence to judicial precedents and statutory interpretation consistent with legislative intent, rejecting the Revenue's broader interpretation of MMR and surcharge applicability.

On the procedural issue, while raised, the Tribunal's silence suggests no violation of natural justice was found or was determinative.

In conclusion, the Tribunal allowed the appeal, quashing the surcharge demand and thereby correcting the tax liability computation in accordance with the statutory provisions and binding precedents.