2025 (6) TMI 1936 - AT - Income Tax

Assessment of private discretionary trusts - income as chargeable to tax at the Maximum Marginal Rate ( MMR ) - surcharge is chargeable at the highest applicable rate or as per slab rate? - levying surcharge of 37% or 15% - section 167B rws 2(29C) applicability applicability HELD THAT - In light of the ratio laid down in the case of Araadhya Jain Trust 2025 (4) TMI 648 - ITAT MUMBAI in our considered view Addl./JCIT(A) has erred in holding that that the entire income of the assessee is required to be subjected to MMR with surcharge @ 37%. The assessee has rightly claimed the levy of surcharge @ 15% in its return of income and the Ld. AO/CPC has rightly allowed the said claim of the assessee in the rectification order. Appeal of the assessee is allowed.

Summary

The core legal questions considered by the Tribunal revolve around the applicability and computation of surcharge on income of private discretionary trusts taxed at the Maximum Marginal Rate (MMR) under the Income Tax Act. Specifically, the issues include whether the Assessing Officer (AO)/Centralized Processing Centre (CPC) possesses the authority to vary the surcharge rate during return processing under section 143(1), the interpretation of section 167B read with section 2(29C) concerning the applicability of the highest slab rate of surcharge on the entire income, and whether surcharge should be applied uniformly at the highest rate or in accordance with slab rates prescribed for different categories of income, particularly short-term capital gains and dividend income.

Regarding the AO/CPC's power to vary surcharge under section 143(1), the Tribunal noted that the assessee challenged the levy of surcharge at 37% by the AO/CPC while processing the return. The assessee contended that the surcharge should be levied at 15%, consistent with the rates applicable to short-term capital gains under section 111A and dividend income, as per the proviso in Paragraph A of Part I of the First Schedule to the Finance Act, 2021. The Tribunal observed that the AO/CPC had partially rectified the surcharge rate to 15% on such income via a rectification order under section 154, but the appellate authority had declined to accept this adjustment. The Tribunal did not explicitly rule on the AO/CPC's power to vary surcharge under section 143(1) but implicitly accepted the rectification order's correctness in adjusting the surcharge rate.

The principal issue analyzed was the applicability of surcharge rates under section 167B read with section 2(29C) of the Income Tax Act. The AO and the appellate authority had held that the entire income of the private discretionary trust should be taxed at the highest surcharge rate of 37%, applying the MMR uniformly. The assessee disputed this, arguing that the surcharge should be computed as per the slab rates applicable to different income heads, not uniformly at the highest rate.

The Tribunal relied heavily on the decision of the Special Bench of the Mumbai Tribunal in the case of Araadhya Jain Trust, which directly addressed this issue. The Special Bench held that for private discretionary trusts taxed at the MMR, surcharge must be computed on the income tax with reference to the slab rates prescribed under the Finance Act for the relevant assessment year. Crucially, the Special Bench clarified that for income earned by way of dividend and short-term capital gains under sections 111A, 112, and 112A, the surcharge rate cannot exceed 15%, notwithstanding the application of MMR to the trust's income.

The Tribunal examined the statutory framework governing surcharge rates. The Finance Act prescribes graduated surcharge rates based on income slabs: 10% for income exceeding Rs. 50 lakhs up to Rs. 1 crore; 15% for income between Rs. 1 crore and Rs. 2 crores; 25% for income between Rs. 2 crores and Rs. 5 crores; and 37% for income exceeding Rs. 5 crores. However, for specified income categories such as dividends and short-term capital gains under section 111A, the surcharge rate is capped at 15%, as per the proviso in the First Schedule of the Finance Act.

Applying this framework to the facts, the Tribunal noted that the assessee's total income of approximately Rs. 4.85 crores included Rs. 4.77 crores of income attracting a maximum surcharge of 15% (short-term capital gains and dividend income) and a balance income of Rs. 8.35 lakhs. The surcharge on the balance income was also to be computed at 15% as per the relevant clause of the Finance Act. The AO/CPC's rectification order had correctly applied this differentiated surcharge rate, but the appellate authority erred in rejecting this approach and insisting on a uniform 37% surcharge.

In addressing competing arguments, the Tribunal noted that the Revenue failed to produce any binding precedent supporting the imposition of the highest surcharge rate uniformly on all income of the trust. The Tribunal found the Special Bench decision authoritative and binding, emphasizing that the surcharge must be computed in accordance with the prescribed slab rates relevant to the nature of income, even when MMR applies to the trust's total income.

Conclusively, the Tribunal held that the appellate authority erred in confirming the levy of surcharge at 37% on the entire income of the trust. The assessee's claim for surcharge at 15% on income categories attracting lower surcharge rates was upheld, and the AO/CPC's rectification order granting partial relief was affirmed. The Tribunal set aside the appellate order and allowed the appeal on grounds 1 to 8 raised by the assessee.

Significant holdings include the Tribunal's adoption of the Special Bench's principle that "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." It further held that "for the income earned by way of dividend including income referred u/s 111A, 112 and 112A of the Act, the rate of surcharge shall not exceed 15%."

The Tribunal's final determination clarified that the MMR application to the income of private discretionary trusts does not mandate a uniform highest rate of surcharge on all income. Instead, surcharge computation must respect the differentiated rates prescribed for various income categories under the Finance Act, thereby preventing the automatic imposition of the highest surcharge slab on all income heads.