Surcharge on Discretionary Trusts restricted to slab rates; Flat 37% surcharge rejected
Issue
Whether an Assessing Officer (AO) can levy a flat surcharge of 37% on a charitable trust (assessed as an AOP without Section 12A registration) where the income is chargeable at the Maximum Marginal Rate (MMR), or if the surcharge must follow the slab rates prescribed in the Finance Act.
Facts
Entity: The assessee is a charitable trust that did not have registration under Section 12A/12AA.
Assessment Status: Consequently, it was assessed as an Association of Persons (AOP).
Taxation: The AO taxed the income at the Maximum Marginal Rate (MMR) of 30% under Section 164.
The Dispute: In addition to the 30% tax, the AO levied a flat surcharge of 37% on the entire income, treating it as the applicable surcharge for MMR cases, regardless of the actual income level.
Assessee’s Argument: The assessee contended that while the tax rate is fixed at 30% (MMR), the surcharge component of MMR must follow the slab rates prescribed in the Finance Act (e.g., 10% for income between ₹50L-1Cr, 15% for ₹1Cr-2Cr, etc.), and 37% applies only to income exceeding ₹5 Crores.
Decision
Definition of MMR: The Tribunal analyzed Section 2(29C), which defines “Maximum Marginal Rate” as the rate of income-tax (including surcharge) applicable to the highest slab of income for an individual or AOP as specified in the Finance Act.
Surcharge follows Income Slabs: The Tribunal held that “MMR” is not a static single number for surcharge. While the base tax rate is the highest (30%), the surcharge depends on the total income of the assessee.
Finance Act Mandate:
If income is between ₹50 Lakhs and ₹1 Crore, the surcharge is 10%.
If income is between ₹1 Crore and ₹2 Crores, the surcharge is 15%.
The enhanced surcharge of 25% or 37% applies only if the income crosses the respective higher thresholds (₹2Cr and ₹5Cr).
Ruling: Applying a flat 37% surcharge on income that falls in a lower slab (e.g., ₹50L – ₹1Cr) contradicts the Finance Act. The AO was directed to recompute the tax and surcharge based on the applicable slab rates.
Key Takeaways
MMR ≠ Highest Surcharge Always: When a trust is taxed at MMR, it means they pay the highest base tax (30%). It does not automatically mean they pay the highest surcharge (37%) unless their income actually exceeds ₹5 Crores.
Relief for AOPs: This ruling provides significant relief to private trusts and unregistered charitable trusts, preventing the department from mechanically applying the super-rich surcharge of 37% on lower incomes.
Review Assessments: Trustees should review past assessments where MMR was applied to ensure the surcharge was levied according to income slabs, not a flat maximum rate.
IN THE ITAT MUMBAI BENCH ‘D’
Rahulkumar Bajaj Charitable Trust
v.
Deputy Commissioner of Income-tax, Circle 26(1), Mumbai*
Ms. Kavitha Rajagopal, Judicial Member
and Om Prakash Kant, Accountant Member
and Om Prakash Kant, Accountant Member
IT Appeal Nos. 1768 to 1770 (Mum) of 2025
[Assessment years 2021-22 to 2023-24]
[Assessment years 2021-22 to 2023-24]
DECEMBER 23, 2025
M. A. Gohel for the Appellant. R. R. Makwana, Addl. CIT for the Respondent.
ORDER
Ms. Kavitha Rajagopal, Judicial Member.- These captioned appeals have been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals) ADDL/JCIT (A), Udaipur (‘ld. CIT(A)’ for short), passed u/s.250 of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Year (‘A.Y.’ for short) 2021-22 to 2023-24.
2. As the facts are identical, we hereby pass a consolidated order by taking ITA No.1768/Mum/2025 for A.Y. 2021-22 as a lead case for sake of convenience.
ITA No. 1768/Mum/2025; (A.Y.: 2021-22)
3. The assessee has raised the following grounds of appeal:
“I. ADJUSTMENT MADE UNDER SECTION 143(1) OF THE ACT:
1.1. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in confirming tax at flat rate of 30% levied by the Assistant Director of Income Tax, CPC (hereinafter referred to as “the AO”).
1.2. It is submitted that the adjustment has been made without affording the appellant any opportunity of being heard and the same is in gross violation of principles of natural justice and also not in accordance with the provisions of Section 143(1) of the Act.
1.3. The Appellant prays that the adjustment made is illegal, unwarranted and contrary to the law and may therefore kindly be struck down/deleted.
IL RATE OF TAX:
2.1. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in confirming the erroneous tax rate applied by the Assistant Director of Income Tax, CPC (hereinafter referred to as the “AO”) Le. levying the Tax at flat rate of 30%, instead of normal slab rate applicable in the case of the Appellant.
2.2. The learned CIT(A) and the learned Assessing Officer failed to appreciate that the Appellant is a charitable trust not enjoying/availing exemption under Section 11 of the Act and is accordingly assessed as an Association of Persons (AOP). The Appellant is accordingly liable to pay tax at the slab rates applicable in the case of an Individual, etc.
The learned CIT(Appeals) erroneously decided the appeal under a wrong presumption that the appellant is a private discretionary trust.
The Appellant prays that the learned Assessing Officer be directed to re-compute the tax liability of the Appellant as explained above and reduce the same accordingly.
III. ERRONEOUS LEVY OF SURCHARGE:
3.1. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in confirming surcharge levied at the rate of 37% (Le., Rs. 6,55,413/-) instead of applicable rate of 10%, while processing the return of income under section 143(1) of the Act.
3.2. The learned CIT(Appeals) and the learned AO failed to appreciate that the Total Income of the Appellant is within the range of Rs. 50 Lakh to Rs. 1 Crore (ie., Rs. 59,04,620/-) and therefore the Appellant is liable to pay-surcharge at the rate of 10% only.”
4. Brief facts of the case are that the assessee is a charitable trust without registration u/s. 12A/12AA of the Act and assessed to tax as an Association of Persons (AOP) carrying out various charitable activities by granting donations to other charitable trusts/institutions engaged in similar activities and said to have valid exemption certificate. The assessee had filed its return of income declaring total income at Rs.59,04,620/-, dated 11.10.2021, u/s. 139(1) of the Act before the extended due date for filing of returns viz. 31.12.2021. The same was processed u/s. 143(1) of the Act, where the refund of Rs. 7,11,904/- was determined as against Rs. 18,11,966/- as per assessee’s computation, after considering the TDS of Rs. 8,66,827/- and the advance tax paid amounting to Rs. 28,40,000/-.
5. Aggrieved by the intimation order u/s. 143(1) of the Act, dated 16.12.2022 passed by the ADIT/CPC, Bengaluru, the assessee was in appeal before the first appellate authority challenging the intimation order on various grounds. The ld. CIT(A) vide order dated 16.01.2025 dismissed the appeal filed by the assessee, thereby upholding the order of ld. AO/CPC.
6. The assessee is in appeal before us, challenging the order of the ld. CIT(A).
7. The learned Authorised Representative (‘ld. AR’ for short) for the assessee contended that the adjustment u/s. 143(1) of the Act was made without giving opportunity of hearing to the assessee, thereby violating the principle of natural justice. Further, the ld. AR contended that the ld. AO/CPC erred in levying the tax at flat rate of 30% instead of normal slab rate applicable for AOP/individual and the same is erroneously upheld by the ld. CIT(A). The ld. AR further argued that the surcharge levied @37% is also erroneous as the rate applicable in case of the assessee whose total income is within Rs. 50 lacs to Rs. 1 Crore is only 10% for the relevant assessment year. The ld. AR relied on catena of decisions.
8. The learned Departmental Representative (‘ld. DR’ for short) for the revenue controverted the said fact and stated that the Maximum Marginal Rate (MMR) was applicable in assessee’s case according to first Schedule, Part I of Finance Act, 2020 which is applicable for the relevant assessment year. Further, the ld. DR contended that the Maximum Marginal Rate (MMR) are to be calculated as per Section 2(29C) of the Act r.w.s. 164 of the Act in accordance with the Finance Act of that year, where the rate of tax of the highest slab along with the surcharge of highest slab has to be charged and further stated that the word ‘if any’ mentioned in Section 2(29C) of the Act does not apply to the rate of surcharge but pertains to the levy of surcharge as per the Finance Act. The ld. DR relied on the order of the ld. CIT(A).
9. We have heard the rival submissions and perused the materials available on record. The moot issue that requires adjudication is what would be the rate of tax and surcharge applicable in assessee’s case and whether the Maximum Marginal Rate (MMR) has to be as per the slab rate specified in the first Schedule of the Finance Act, 2020 or the rate applicable for the highest slab at 37%. It is the Revenue’s contention that the assessee is a private discretionary trust which does not have registration u/s. 12A of the Act and is assessed to tax in the status of AOP. This fact has not been controverted by the revenue as per the order of the lower authorities. Having said that the issue that requires consideration is whether the total income declared by the assessee at Rs.59,04,620/- for which the tax is to be computed at Maximum Marginal Rate (MMR) or at 30% as against the slab rate applicable to individuals and the levy of surcharge amounting to Rs.6,55,413/- @37% instead of 10% as alleged by the assessee.
10. The Revenue’s contention is that the MMR specified in part 1 of the schedule are applicable only to the extent of calculating the MMR which will be in accordance with sub section 3 of section 2 of Finance Act, 2020. It is further contended that MMR has to be calculated as per section 2(29C) r.w.s. 164 of the Act and that the Finance Act of every year is only relevant to determine the highest slab of rate of tax and surcharge. The Revenue further interpreted that the word “if any” in section 2(29C) of the Act is applicable to the surcharge to the highest slab of income mentioned in the relevant Finance Act which will be applicable for that particular assessment year and further the word “surcharge, if any” relates to the levy of surcharge if mentioned in the Finance Act and further no surcharge would be applicable for highest slab if the same is mentioned in the schedule of the Finance Act while calculating MMR. The Ld. CIT(A) has extensively relied on the decision of the co-ordinate Bench of the Tribunal in the case of Anant Bajaj Trust v. Dy. DIT [IT Appeal No.1995 (Mum.) of 2024, dated 26-8-2024] which was decided against the assessee. Pertinently this issue stands covered in favour of the assessee by the decision of the Special Bench in case of Araadhya Jain Trust v. ITO ITD 1 (Mumbai – Trib.) (SB)/ITA No.4272/M/2024, the relevant extract of which is cited herein under for ease of reference:
“21. We have given a thoughtful consideration to the rival submissions and perused materials on record. We have also applied our mind to the judicial precedents cited before us. The short issue arising for consideration before us is, ‘whether the definition of maximum marginal rate in terms with section 2(29C) of the Act can be interpreted in a manner to suggest that not only the rate of tax on the total income of assessee would be at the highest rate, but even the surcharge to be computed on such tax would be at the highest rate’.
22. Before we proceed to deal with the issue, let us understand what is meant by a ‘Private Discretionary Trust’. A ‘Discretionary Trust’ is generally a Trust registered under the Indian Trusts Act, 1882, whereunder, the Trustees hold the power to decide the class of beneficiaries who can receive either capital or income from the Trust at the discretion of the Trustees. However, no one beneficiary has an absolute entitlement either to income or capital. In other words, in a discretionary trust, distribution of all capital and income is completely at the discretion of the Trustees. Generally speaking, in these kind of trusts not only the beneficiaries but even the shares of beneficiaries remain indeterminate. These Trusts/Association of Persons/Body of individuals are covered either u/s.164 or 167B of the Act. These provisions provided that the income of such Trusts/AOPs/BOIs are brought to tax at the maximum marginal rate. The expression “maximum marginal rate” has been defined u/s.2(29C) of the Act as under:
“maximum marginal rate” means the rate of income-tax (including surcharge on incometax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year;
23. A plain reading of the aforesaid definition clause would indicate that the ‘maximum marginal rate’ would mean the rate of income tax, including surcharge on income tax, if any, applicable to the highest slab of income of an individual, association of person or body of individual as specified in the Finance Act of the relevant year. In other words, at the first instance, the tax on the total income of the discretionary trust has to be determined by applying the maximum marginal rate, as applicable to the highest slab of income relating to an individual, association of person or body of individual specified in the Finance Act of the relevant year. Thereafter, the surcharge, if any, has to be computed on such incometax.
24. As could be seen from a conjoint reading of sections 164/167B of the Act, these provisions provide for computation of income-tax at the maximum marginal rate. However, in these provisions there is no reference to levy of surcharge. Whereas, the definition of ‘maximum marginal rate’ u/s. 2(29C) of the Act refers to surcharge. But, this definition clause by itself does not fix the rate of tax, instead, refers to the rate prescribed under the Finance Act of the relevant year. Thus, what should be the maximum marginal rate of income-tax is to be determined based on the rate of income-tax provided in Finance Act of the relevant year. The rates of income tax is provided u/s.2 of the Finance Act. A reference to section 2 of Finance Act, 2023, makes it clear that as per sub-section (1) of section 2, for the A.Y. 2023-24 income-tax shall be charged at the rate specified in Paragraph A, Part (I) of First Schedule to the Finance Act-2023 and such tax shall be increased by a surcharge, collected for the purposes of the Union, calculated in each case in the manner provided therein. Of-course, sub section (1) of section 2 is subject to the provisions of sub-sections (2) and (3). Sub section (2) of section 2 speaks of an assessee having net agricultural income exceeding five thousand rupees, in addition to total income, hence, is not relevant for our purpose. However, sub section (3) of section 2 of Finance Act provides that in case of assessee’s covered under Chapter XII or XII-A or section 115JB or section 115JC or Chapter XII-FA or Chapter XII-FB or sub-section (1A) of section 161 or section 164 or section 164A or section 167B of the Income-tax Act, the tax chargeable shall be determined as provided in those Chapters or sections, and with reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter or section, as the case may be. Thus, sub section 2(1) of Finance Act, which is subject to the provisions of sub-section (3), though, provides that income-tax shall be charged at the rate specified in Part 1 of the specified schedule, however, sub-section (3) carves out an exception in case of certain class of income or assessees by providing that the chargeable tax shall be determined in terms with those Chapters or sections, and with reference to the rates imposed by sub-section (1) or the rates as specified in that Chapter or section, as the case may be.
25. In case of discretionary trusts, sections 164/167B of the Act, do not by themselves specify the rate of tax. They only say that tax on total income is to be determined at the maximum marginal rate. The definition of ‘maximum marginal rate’ u/s.2(29C) of the Act, in turn, refers to the rate of income-tax applicable to the highest slab as provided under the Finance Act of the relevant year. Thus, for determining the maximum marginal rate of tax, one has to revert back to the rate prescribed in Paragraph A, Part (I) of First Schedule to the Finance Act-2023. Sub-section 2(1) of the Finance Act, further provides that the tax so determined shall be increased by a surcharge collected for the purposes of Union, calculated under each case in the manner provided in the First Schedule. For ease of reference, Paragraph A, Part (I) of First Schedule to the Finance Act-2023, which is relevant for our purpose, is reproduced hereinunder:
THE FIRST SCHEDULE
(See section 2)
PART I
INCOME-TAX Paragraph A
| (I) | In the case of every individual other than the individual referred to in items (II) and (III) of this Paragraph or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, not being a case to which any other Paragraph of this Part applies,— |
Rates of income-tax
| (1) | where the total income does not exceed Rs. 2,50,000 | Nil; |
| (2) | where the total income exceeds Rs.2,50,000 but does not exceeds Rs.5,00,000 | 5 per cent of the amount by which the total income exceeds Rs. 2,50,000; |
| (3) | where the total income exceeds Rs.5,00,000 but does not exceeds Rs.10,00,000 | Rs.12,500 plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000; |
| (4) | where the total income exceeds Rs.10,00,000 | Rs. 1,12,500 plus 30 per cent of the amount by which the total incomeexceeds Rs.10,00,000. |
| (II) | In the case of every individual, being a resident in India, who is of the age of sixty years or more but less than eighty years at any time during the previous year,— |
Rates of income-tax
| (1) | where the total income does not exceed Rs. 3,00,000 | Nil; |
| (2) | where the total income exceeds Rs. 3,00,000 but does not exceed Rs. 5,00,000 | 5 per cent of the amount by which the total income exceeds Rs. 3,00,000; |
| (3) | where the total income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000 | Rs.10,000 plus 20 per cent of the amount by which the total income exceeds Rs. 5,00,000; |
| (4) | where the total income exceeds Rs. 10,00,000 | Rs. 1,10,000 plus 30 per cent of the amount by which the total income exceeds Rs.10,00,000. |
(III) In the case of every individual, being a resident in India, who is of the age of eighty years or more at any time during the previous year,—
Rates of income-tax
| (1) | where the total income does not exceed Rs.5,00,000 | Nil; |
| (2) | where the total income exceeds Rs. 5,00,000 but does not exceed Rs. 10,00,000 | 20 per cent of the amount by which the total income exceeds Rs. 5,00,000; |
| (3) | where the total income exceeds Rs. 10,00,000 | Rs. 1,00,000 plus 30 per cent of the amount by which the total income exceeds Rs. 10,00,000. |
Surcharge on income-tax
The amount of income-tax computed in accordance with the preceding provisions of this Paragraph, or the provisions of section 111A or section 112 or section 112A or the provisions of section 115BAC of the Income-tax Act, shall be increased by a surcharge for the purposes of the Union, calculated, in the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act,—
| (a) | having a total income (including the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income-tax Act) exceeding fifty lakh rupees but not exceeding one crore rupees, at the rate of ten per cent of such income-tax; |
| (b) | having a total income (including the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income-tax Act) exceeding one crore rupees, but not exceeding two crore rupees, at the rate of fifteen per cent of such income-tax; |
| (c) | having a total income (excluding the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income-tax Act) exceeding two crore rupees but not exceeding five crore rupees, at the rate of twenty-five per cent of such income-tax; |
| (d) | having a total income (excluding the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Income-tax Act) exceeding five crore rupees, at the rate of thirty-seven per cent of such income-tax; and |
| (e) | having a total income (including the income by way of dividend or income under the provisions of section 111A, section 112 and section 112A) exceeding two crore rupees but is not covered under clauses (c) and (d), shall be applicable at the rate of fifteen per cent of such in-come-tax: |
Provided that in case where the total income includes any income by way of dividend or income under the provisions of section 111A, section 112 and section 112A of the Incometax Act, the rate of surcharge on the amount of income-tax computed in respect of that part of income shall not exceed fifteen per cent:
Provided further that in case of an association of persons consisting of only companies as its members, the rate of surcharge on the amount of Income-tax shall not exceed fifteen per cent: Provided also that in the case of persons mentioned above having total income exceeding,—
| (a) | fifty lakh rupees but not exceeding one crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax on a total income of fifty lakh rupees by more than the amount of income that exceeds fifty lakh rupees; |
| (b) | one crore rupees but does not exceed two crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of one crore rupees by more than the amount of income that exceeds one crore rupees; |
| (c) | two crore rupees but does not exceed five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of two crore rupees by more than the amount of income that exceeds two crore rupees; |
| (d) | five crore rupees, the total amount payable as income-tax and surcharge on such income shall not exceed the total amount payable as income-tax and surcharge on a total income of five crore rupees by more than the amount of income that exceeds five crore rupees. |
26. On going through Paragraph A, Part (I) of First Schedule to the Finance Act-2023, it becomes very much clear that under Item (1), the rates of income tax applicable to individuals, Hindu undivided family or association of persons or body of individuals have been provided. As could be seen from the rates of income-tax for different income brackets, if the total income does not exceed Rs.2,50,000/-, the rate of income tax is Nil. If the total income exceeds Rs.2,50,000/-, but does not exceed Rs.5,00,000/-, the rate of income tax is 5% of the amount by which the total income exceeds Rs.2,50,000/-. Where the total income exceeds Rs.5,00,000/- but des not exceed Rs.10,00,000/-, the rate of income tax is Rs.12,500 plus 20% of the amount by which the total income exceeds Rs.5,00,000/- and lastly, where the total income exceeds Rs.10,00,000/-, then the rate of tax is Rs.1,12,500/-plus 30% of the amount by which the total income exceeds Rs.10,00,000/-. Thus, as per the rates of income tax prescribed in Item (1), the highest slab of income is Rs.10 lacs and above and the applicable rate of income tax is 30%. Thus, in terms with section 2(29C) of the Act, the maximum marginal rate of tax will be 30% as applicable to the highest slab of income.
27. The expression ‘slab’ is not mentioned either in sub-section (1) of section 2 or even under Paragraph A, Part (I) of First Schedule to the Finance Act-2023. However, as per the materials placed before us, it is observed that in Press Note dated 01.12.1965 issued by Government of India, copy of which is placed at pg. no. 45 of the Paper Book, submitted in case of NIK Family Trust, the expression ‘slab’ refers to ‘income’ and not the tax. In fact, even section 2(29C) of the Act refers to highest slab of income. Even Circular No. 2/2018 (F.No. 370142/15/2017-TPL] containing Explanatory Notes to Provisions of Finance Act, 2017, a copy of which is placed at pg. no. 47 of the Paper Book filed by the NIK Family Trust, refers the expression ‘slab’ to the various categories of income. Thus, in terms with sections 164/167B r.w.s. 2(29C) of the Act, tax as per maximum marginal rate would mean ‘the rate of tax applicable to the highest slab of income’ under Item (1) of Paragraph A, Part (I) of First Schedule to the Finance Act-2023.
28. Under the head ‘Surcharge on income-tax’ appearing in Paragraph A, Part (1), First Schedule it has been provided that the amount of income-tax computed as per the rate of income-tax under Item (1), (2) and (3) or under the provisions of section 111A or section 112 or section 112A or the provision of section 115BAC of the Income Tax Act, shall be increased by a surcharge, for the purposes of the Union, calculated in the case of particular class of assessees in the manner provided therein. As could be seen from items (a) to (e), provided under the head ‘Surcharge on income-tax’, there are different rates of surcharge on income tax, depending upon the categories of income. The rate of surcharge starts from minimum of 10% to the maximum of 37% on income-tax. The maximum rate of surcharge at 37% on income-tax is applicable in case of assessees having total income, exceeding Rs.5 crores. It further emanates that the minimum rate of surcharge @ 10% on the incometax is applicable only when the income of the assessee is above Rs.50 lacs, but less than Rs.1 crore. Thus, as per Paragraph A, Part (I) of First Schedule to the Finance Act-2023, the threshold limit for applicability of surcharge is when total income is Rs.50 lacs and above. In other words, if the total income is below the threshold limit of Rs.50 lacs, there would be no surcharge. Even the first proviso under the heading ‘Surcharge on incometax’ carves out an exception regarding the rate of surcharge by stating that in case where assessee’s total income includes dividend income or income under the provisions of section 111A, 112A and section 112A of the Act, the rate of surcharge on the amount of incometax computed on that part of income shall not exceed 15%. In other words, if the total income of an assessee includes any income by way of dividend or income under certain provisions of the Act, the rate of surcharge on tax computed on such part of income under no circumstances would exceed 15%.
29. If we accept the contention of the Revenue that, irrespective of the nature or quantum of income, as per the definition of maximum marginal rate u/s.2(29C) of the Act, surcharge has to be computed at the highest rate of 37% applicable to the highest income bracket of Rs.5 crores and above, then the exception provided under the first proviso under the heading ‘Surcharge on income-tax’ would become otiose. Even, the different rates of surcharge on income-tax provided under clause (a) to (e) applicable to the different slabs of income would become meaningless so far as discretionary trusts are concerned. In our view, such an interpretation would lead to absurdity, hence, is unworkable. In our view, once the definition of ‘maximum marginal rate’ refers to the rate of income-tax and surcharge provided under the Finance Act of the relevant year, then the rates of incometax and applicable rate of surcharge as provided under Paragraph A, Part (I) of First Schedule to the Finance Act-2023, would apply. Any other interpretation, in our view, would lead to undesirable consequences and would be discriminatory. In our view, the expression ‘including Surcharge on income-tax, if any’, within the bracketed portion of section 2(29C) of the Act, would mean the surcharge as provided in the computation mechanism under the heading ‘surcharge on income tax’ finding place in Paragraph A, Part (I) of First Schedule to the Finance Act-2023.
30. The Revenue has taken a line of argument that the words ‘if any’ succeeding the words ‘including surcharge on income tax’ appearing in the definition of maximum marginal rate u/s. 2(29C) of the Act are only for the purpose that when levy of surcharge is specifically provided under the Finance Act of the relevant year, it would be included in income-tax computed at the highest rate, otherwise, not. Though, at first blush this argument of the department sounds attractive, however, on deeper analysis it is found to be superfluous, for the following reasons. As discussed earlier, Article 271 of the Constitution of India, empowers the Union to impose surcharge for the purposes of Union. Whereas, Article 265 of the Constitution of India mandates that no tax can be collected without authority of law. Therefore, levy of surcharge has to be preceded by a law enacted by the parliament authorizing such levy. Thus, in absence of any law authorising levy of surcharge, it cannot be collected. This legal position is as clear as daylight, hence, does not require further clarification with the use of words ‘if any’ to mean whether the Finance Act of a particular year, if at all, provides for levy of surcharge or not. Though, in our view, there is no conflict between provisions contained u/s. 164/167B, 2(29C) of the Income Tax Act and section 2 of the Finance Act, however, even assuming that there are some conflicts, a harmonious construction has to be made to avoid absurdity and make the provisions workable. Thus, in our view, the expression ‘if any’ used in section 2(29C) has to be read not de hors but in conjunction with the computation mechanism provided under the heading ‘surcharge on income tax’ provided in section 2 of Finance Act. This view of ours is further fortified by the object for which levy of surcharge was introduced to the Finance Act – to augment the Revenue of the Union for developmental work by asking persons in the highest income bracket to contribute little more than the other citizens, for nation building.
31. As we find, the Revenue has placed strong reliance upon the decision of the coordinate bench in case of Araadhya Jain Trust (supra) and couple of other decisions, which are on similar line. Pertinently, the decision rendered in case of Anant Bajaj Trust (supra) was subsequently recalled. Whereas, the bench has followed the decision of Anant Bajaj Trust (supra) while deciding the appeal of Kapur Family Trust (supra). Therefore, the decision rendered in case of Kapur Family Trust (supra) has lost its relevance. Insofar as the decision of the co-ordinate bench in the case of Araadhya Jain Trust (supra) is concerned, in our view, the bench has drawing its conclusion, primarily relying upon certain decisions of Hon’ble Kerala High Court and Hon’ble High Court of Bombay. As discussed elsewhere in the order.
32. However, upon carefully going through these decisions, we are of the considered view that the issue arising in the present case never fell for consideration before the Hon’ble Courts. The issue in dispute in those cases was primarily concerning what should be the maximum marginal rate and its applicability. The issue ‘whether the rate of surcharge would also be at the highest rate while computing tax at maximum marginal rate’ was never the issue before the Hon’ble Courts. Thus, in our view, the view expressed by the coordinate benches in decisions referred to in Paragraph 10(supra) lay down the correct proposition of law. Thus, in the ultimate analysis, we hold, in case of Private Discretionary Trusts, whose income is chargeable to tax at maximum marginal 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 Paragraph A, Part 1, First Schedule, applicable to the relevant assessment year. Hence, reference is decided in favour of the assessee. The records may be returned back to the respective benches for deciding the appeals accordingly.”
11. From the above, it is evident that it is now settled proposition of law that in case of trust/AOP/BOIs which is chargeable to tax at MMR including the surcharge which has to be computed with reference to the slab rate prescribed under the relevant Finance Act for that assessment year and when income is between Rs.50,00,000/- to Rs.1,00,00,000/- then the rate of surcharge is 10% as per Finance Act, 2020. It is further held that surcharge @ 37% cannot be applied to all slabs of income as the same would contradict the slab rates prescribed by the Finance Act and also the provisions of section 2(29C) of the Act. As the said issue is covered in favour of the assessee by the decision of the Special Bench, we find no justification in upholding the order of the Ld. CIT(A) and accordingly direct the Ld. AO to recompute the tax and the surcharge as per the proposition laid down by the Special Bench. We, therefore, are of the considered view that grounds Nos. 2 and 3 raised by the assessee are to be allowed on the above observation.
12. The other grounds of appeal raised by the assessee have not been argued by both sides and therefore we render the same as academic in nature.
13. In the result, the appeal filed by the assessee is hereby partly allowed.
14. The finding given in this appeal i.e. ITA No.1768/M/2025 will apply mutatis mutandis to ITA Nos.1769 & 1770/M2025 as well. Accordingly, all the appeals filed by the assessee are hereby partly allowed.