Surcharge on dividend income for discretionary trusts is levied at slab rates, not the maximum 37%.

By | May 28, 2025
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Surcharge on dividend income for discretionary trusts is levied at slab rates, not the maximum 37%.

Issue:

Whether the surcharge on dividend income earned by a private discretionary trust, which is taxable at the Maximum Marginal Rate (MMR) under Section 164 of the Income-tax Act, 1961, should be levied at the highest rate (e.g., 37%) or based on the slab rates provided in the First Schedule to the Finance Act, 2023.

Facts:

  • The assessee is a private discretionary trust that earned dividend income from companies for Assessment Year 2022-23.
  • The assessee initially calculated surcharge on dividend income at the rate of 10 percent.
  • The Assessing Officer (AO), however, calculated surcharge on the dividend income at the rate of 37 percent.
  • It was established that the assessee was a Family Trust and its income was indeed liable to be taxed at the Maximum Marginal Rate (MMR) as per Section 164, read with Section 2(29C) of the Income-tax Act, 1961.
  • The assessee’s income fell within the slab rate of Rs. 50.00 lakh to Rs. 1 crore.

Decision:

The court ruled in favor of the assessee. It held that while the income of a private discretionary trust is taxable at the Maximum Marginal Rate (MMR), the surcharge on dividend income should be levied based on the slab rates referred to in Paragraph A of Part I of the First Schedule to the Finance Act, 2023. Consequently, the surcharge on dividend income could not exceed 15 percent. Since the assessee’s income was between Rs. 50.00 lakh and Rs. 1 crore, the surcharge was leviable at the rate of 10 percent.

Key Takeaways:

  • Maximum Marginal Rate (MMR) for Discretionary Trusts: Private discretionary trusts are generally taxed at the MMR, as their beneficiaries’ shares may be indeterminate (Section 164 read with Section 2(29C)). MMR refers to the highest slab rate of income tax applicable to an individual.
  • Surcharge Applicability to MMR: While the basic income tax for such trusts is at MMR, the surcharge thereon is not automatically at the highest possible rate (e.g., 37%). Instead, the surcharge rates are determined based on the income slabs provided in the relevant Finance Act.
  • Slab-based Surcharge: The Finance Act specifies graded surcharge rates based on income thresholds for individuals, associations of persons (AOPs), and bodies of individuals (BOIs). These slab rates also apply to the income of discretionary trusts for the purpose of calculating surcharge.
  • Dividend Income Surcharge Cap: Specifically for dividend income, and certain other special incomes (e.g., those taxable under sections 111A, 112A), the maximum surcharge rate is capped at 15 percent, irrespective of the total income slab.
  • Correct Surcharge Calculation: In this case, despite the trust being taxed at MMR, its total income being between Rs. 50 lakh and Rs. 1 crore meant that the applicable surcharge rate for dividend income was 10 percent, consistent with the slab rates for individuals and the cap on dividend income surcharge.
IN THE ITAT PUNE BENCH ‘B’
Sow Rachna Rathi Family Trust
v.
Deputy Director of Income-tax
Dr. Manish Borad, Accountant Member
and Vinay Bhamore, Judicial Member
IT Appeal No. 2713 (PUNE) of 2024
[Assessment year 2022-23]
MAY  14, 2025
Nikhil S. Pathak for the Appellant. Ganesh B. Budruk for the Respondent.
ORDER
Dr. Manish Borad, Accountant Member.- The captioned appeal at the instance of assessee pertaining to A.Y. 2022-23 is directed against the order dated 23.10.2024 passed by Addl.JCIT(A), Prayagraj u/s.250 of the Income-tax Act, 1961 (in short ‘the Act’) arising out of the Intimation order dated 16.03.2023 passed u/s.143(1) of the Act.
2. Brief facts of the case are that the assessee is a Discretionary Private Trust and income of Rs.90,13,190/-declared in the return for A.Y. 2022-23 furnished on 28.07.2022. For the year under consideration, assessee earned dividend income of Rs.90,12,900/- from companies and saving account interest of Rs.285/-. Assessee calculated the surcharge on dividend @10%. CPC vide intimation order dated 16.03.2023 computed the tax liability of Rs.8,33,716/-, thereby creating a demand of Rs.10,26,350/-. While doing so, the CPC calculated the surcharge on the dividend income @37%.
3. Aggrieved assessee preferred appeal before ld.CIT(A) and the ld.CIT(A) affirmed the action of the CPC on the ground that rate of Maximum Marginal Rate has to be calculated as per the provisions of section 2(29C) of the Income-tax Act r.w.s.164 of the Act by virtue of sub-section 3 of section 2 of Finance Act, 2021.
4. Now the assessee is in appeal before this Tribunal by raising the following grounds :
“On the facts of the case and in law:-
1.1 The Honourable CIT(A) erred in determining tax on the dividend income earned by Discretionary Trust at maximum marginal tax rate of 42.744% by considering the surcharge @ 37% on Dividend Income of Rs. 90,12,900/- ignoring that the maximum marginal rate applicable to Income from dividend is @ 35.88% (Income Tax @ 30% + Surcharge @ 15% + Health and Education Cess @ 4%).
1.2 The Honourable CIT(A) failed to appreciate that in any case, the maximum surcharge applicable on dividend income cannot exceed 15% as per the rates prescribed in Finance Act 2022. Therefore, the maximum tax rate cannot exceed 35.88% as against 42.744% adopted by the Honourable CIT(A).
2. 1 The Honourable CIT(A), erred in upholding interest calculated by learned AO u.s.234B and 234C after levying surcharge @37% on assessed tax, determining tax payable of Rs. 8,33,716/- and raised the outstanding demand of Rs. 10,26,350/-.
3. The Honourable CIT(A) erred in ignoring the fact that the similar issue was covered during the appeal proceedings of AY 2021-22, wherein, the Hon’ble CIT(A) has given the decision in favour of the appellant by limiting surcharge to the 15% for dividend income.
4. The Appellant prays for appropriate relief.
5. The Appellant Trust craves leave to add to, alter, amend, modify and/or delete any or all of the above Grounds of Appeal.”
5. At the outset, ld. Counsel for the assessee submitted that the case of the assessee’s is squarely covered by the decision of Hon’ble Special Bench in the case of Araadhya Jain Trust v. ITO (Mum.-Trib.)/ITA No. 4272/Mum/2024 order dated 09.04.2025 where it has been held that surcharge shall be levied based on the slab rate in First schedule under the heading “surcharge on income tax” appearing in Paragraph A, Part 1, First Schedule, applicable to the relevant assessment year. Referring to the said decision Ld. Counsel for the assessee submitted that for the relevant year under consideration as per the tax rate slab the income of the assessee falls under the head where surcharge is levied @10% whereas the CPC has levied surcharge @37%.
6. On the other hand, ld, Departmental Representative supported the orders of the lower authorities.
7. We have considered the rival arguments made by both the sides and perused the record placed before us. The only issue for our consideration is that whether surcharge on the dividend income of Rs.90,12,900/- added by the CPC was justified. We notice that the assessee is a Family Trust and the income earned is liable to be taxed at the Maximum Marginal Rate (MMR). For the year under consideration, the income of Rs.90,12,900/- has been earned from dividend. Total income declared in the income tax return filed on 28.07.2022 at Rs.90,13,190/- on the tax liability of Rs.27,03,957/-, assessee has paid surcharge @10%. However, the CPC calculated the surcharge at Rs.10,04,464/-@37%. Before us, Ld. Counsel for the assessee has referred to the Special Bench decision in the case of Araadhya Jain Trust (supra) where the Special Bench affirmed the view taken by various coordinate benches referred in Para 10 of the order and for the sake of convenience Para 10 is reproduced below:
“10. Referring to sub-section (3) of section 2 of Finance Act, 2023, he submitted, it only refers to charge of income tax for the purpose of section 164/167B of the Act and does not refer to the charge of surcharge. He submitted, insofar as, surcharge is concerned, the charging provision is specifically provided u/s. 2(1) of Finance Act, 2023, which refers to the First Schedule and provides for levy of surcharge at slab rates, meaning thereby, the highest rate of surcharge at 37% can be made applicable only when the income exceeds Rs.5 crores. Thus, he submitted, unless the threshold limit of Rs.5 crores is reached, surcharge at the highest rate of 37% cannot be levied. He submitted, when assessee’s income is returned at Rs.4,85,290/-, though, the applicable rate of income tax would be at 30%, being the maximum marginal rate, however, no surcharge would be leviable, as the quantum of income is less than Rs.50 lacs. In support of such contention, Id. Counsel relied upon the following decisions:
1.ITO v. Tayal Sales Corporation [2003] 1 SOT 579 (Hyd.)
2.Lintas Employees Professional Development Trust v. ITO (ITA No. 4791/Mum/2023 decided on 29.05.2024)
3.Sriram Trust, Hyderabad v. ITO (ITA Nos. 439, 440 & 441/Hyd./2024, decided on 19.06.2024)
4.Ujjwal Business Trust v. CPC (in ITA No. 602/Mum2024 decided on 28.06.2024)
5.Lintas Employees Holiday Assistance Trust v. CPC (ITA No. 1796/Mum/2024 decided on 26.07.2024)
6.Jitendra Gala Navneet Trust v. DDIT and Dilip Sampat Navneet Trust v. DDIT (ITA Nos. 2484 & 2485/Mum/2024 decided on 22.10.2024)
7.Lintas Employees Holiday Assistance Trust v. 3949/Mum/2024 decided on 20.01.2025) ITO (ITA No.
8.V. Meera Charitable Trust v. ITO (ITA No. 2140/Chny/2024 decided on 07.02.2025).”
8. Now in the light of above decision of the Special Bench and examining the facts of the instant case, we notice that the surcharge is to be levied based on the slab rates referred in First Schedule, Paragraph A of Part 1 and surcharge on Dividend Income cannot exceed 15%. First Schedule to the Finance Act, 2023 is also reproduced below for necessary guidance :
9. From going through above schedule for rate of surcharge we find that in the instant case the income is only from dividend and is between the slab rate of Rs.50.00 lakh to Rs.1 crore and therefore surcharge is leviable @10% and therefore CPC erred in charging surcharge @37%. Thus, finding of CIT(A) is reversed and grounds of appeal raised by the assessee are allowed.
10. In the result, appeal of the assessee is allowed.