2025 (5) TMI 122 - AT - Income Tax

Levying surcharge of 37% on the tax calculated on the income of appellant trust at maximum marginal rate - HELD THAT - As per the income tax rates slab 37% of surcharge is leviable in case income of the assessee exceeds Rs. 5, 00, 00, 000/- Special bench in case of Araadhya Jain Trust 2025 (4) TMI 648 - ITAT MUMBAI has held that where the income of private district trust is chargeable to tax at maximum marginal rate surcharge has to be computed on the income having reference to the slab rates prescribed in the Finance Act under the heading Surcharge on Income Tax appearing in Para A Para 1 first schedule applicable to the relevant assessment year. Thus we are inclined to hold that since the surcharge is leviable when the income of an assessee exceeds Rs. 50, 00, 000/- and the maximum rate of surcharge of 37% is leviable if income exceeds Rs. 5 crore and therefore as the income of the assessee is only Rs. 3, 48, 040/- CPC grossly erred in leving surcharge of 37% on the assessee. Therefore no surcharge was leviable for the year under consideration on tax payable by the assessee. Effective grounds of appeal raised by the assessee are allowed.

Summary

Core legal questions considered by the Tribunal in this appeal include:

1. Whether adjustments or modifications to tax liability can be made under section 143(1) of the Income-tax Act, 1961 on debatable issues without providing an opportunity of hearing to the assessee.

2. Whether the imposition of surcharge at the rate of 37% on the assessee's income tax liability was valid, given the income level and applicable surcharge slabs under the Finance Act, 2022.

3. Whether the status of the assessee as an "Association of Person" versus an "Individual" was correctly determined for tax purposes.

4. Whether the maximum marginal rate of tax should have been capped at 35.88% considering the nature of income (dividend income) and the applicable surcharge limits.

5. Validity of the levy of interest under sections 234B and 234C of the Income-tax Act, including the correctness of the amounts computed and the basis of computation.

Issue-wise detailed analysis:

1. Validity of adjustments under section 143(1) without opportunity of hearing

The legal framework recognizes that section 143(1) provides for summary assessment or processing of returns, but judicial precedents have established that no adjustments on debatable or contentious issues should be made at this stage without affording the assessee an opportunity to be heard. The assessee contended that the imposition of surcharge and related tax computations under section 143(1) were made without such opportunity, rendering the intimation order invalid.

The Tribunal noted this contention but primarily focused on the surcharge issue as the core grievance. It acknowledged the settled position that adjustments on debatable issues under section 143(1) without hearing are bad in law, thereby allowing the related grounds. This aligns with principles of natural justice and statutory scheme ensuring fair procedure before final tax demand is confirmed.

2. Levy of surcharge at 37% on tax liability

The Finance Act, 2022 prescribes surcharge rates applicable on income tax depending on the income slab of the assessee. The highest surcharge rate of 37% applies only if the total income exceeds Rs. 5 crore. For incomes below this threshold, lower surcharge rates or no surcharge apply.

The assessee's income for the year was Rs. 3,48,040/-, well below the threshold for surcharge applicability. The Central Processing Centre (CPC) erred by applying a 37% surcharge on the tax computed at the maximum marginal rate of 30%, resulting in an inflated tax liability.

The Tribunal relied on the decision of the Special Bench of the Mumbai ITAT in the Araadhya Jain Trust case, which held that for trusts taxed at the maximum marginal rate, surcharge must be computed with reference to the slab rates prescribed under the Finance Act and not arbitrarily applied. The Tribunal found that the CPC's action was contrary to this principle and the statutory surcharge slabs.

The Tribunal held that no surcharge was leviable on the assessee's income for the year under consideration and quashed the surcharge demand. This conclusion was based on the statutory surcharge slabs and consistent judicial interpretation.

3. Classification of assessee's status as 'Association of Person' vs. 'Individual'

The assessee challenged the classification of its status as an Association of Person (AOP) rather than an Individual, which affects the applicable tax rates and surcharge. The Tribunal noted this ground but did not delve into detailed adjudication, as the primary dispute centered on surcharge applicability. The ground was treated as general and consequential, requiring no separate determination.

4. Maximum marginal rate of tax and capping surcharge on dividend income

The assessee argued that the maximum marginal rate of tax should have been restricted to 35.88%, reflecting tax at 30% plus surcharge capped at 15% and cess at 4%, particularly since the income consisted solely of dividend income, on which surcharge is capped as per Paragraph A, Part I of the First Schedule to the Finance Act, 2022.

The Tribunal did not explicitly rule on this issue separately but implicitly supported the principle that surcharge must be computed in accordance with the Finance Act's prescribed slabs and caps, as reflected in its decision to quash the surcharge levied at 37%. This aligns with the assessee's contention regarding the capping of surcharge on dividend income.

5. Levy of interest under sections 234B and 234C

The assessee contended that the interest levied under sections 234B and 234C was excessive and incorrectly calculated, arguing that interest under section 234C should be computed on the returned income rather than the adjusted income.

The Tribunal did not specifically adjudicate these grounds, considering them general or consequential in nature and thus not requiring separate determination. The focus remained on the surcharge issue, which was dispositive of the appeal.

Significant holdings:

The Tribunal held: "since the surcharge is leviable when the income of an assessee exceeds Rs. 50,00,000/- and the maximum rate of surcharge of 37% is leviable if income exceeds Rs. 5 crore and therefore as the income of the assessee is only Rs. 3,48,040/- CPC grossly erred in levying surcharge of 37% on the assessee. Therefore considering the income of the assessee no surcharge was leviable for the year under consideration on tax payable by the assessee."

This establishes the core principle that surcharge must be strictly applied as per the income slabs prescribed in the Finance Act and cannot be arbitrarily imposed at the maximum rate without regard to the assessee's actual income.

The Tribunal also affirmed the settled legal position that adjustments under section 143(1) on debatable issues without opportunity of hearing are invalid, thereby reinforcing procedural safeguards in the assessment process.

On other grounds, including classification of status and interest levies, the Tribunal found them to be general or consequential and did not adjudicate separately, thereby implicitly upholding the primary findings on surcharge and procedural fairness.