Recently, the Kolkata Bench of the ITAT has
ruled that surcharge is not leviable on a private discretionary trust taxed at
the maximum marginal rate (‘MMR’) where the total income is below ₹50 lakhs.
The Tribunal held that the definition of “maximum marginal rate” under section
2(29C) of the Income-tax Act, 1962 requires reference to the Finance Act rates,
and surcharge becomes applicable only when the prescribed income threshold is
exceeded.
In the present case, the assessee, a private discretionary trust, filed its
return declaring total income of ₹4,56,900 and computed tax without surcharge.
Subsequently, while processing the return and rectification, the AO levied
surcharge at 37%, raising additional demand. The Commissioner of Income Tax
(Appeals) upheld the levy, holding that the maximum marginal rate includes
surcharge. Aggrieved, the assessee preferred an appeal before the ITAT,
contending that surcharge is leviable only when income crosses the statutory
threshold specified under the Finance Act.
Upon hearing the matter, the ITAT observed that private discretionary trusts
are generally taxed at the maximum marginal rate; however, such rate must be
determined with reference to the Finance Act provisions. The Tribunal relied on
the Special Bench ruling in Araadhya Jain Trust vs. ITO, wherein it was
clarified that surcharge cannot be automatically applied at the highest rate
and must instead be computed based on the applicable income slabs specified in
the First Schedule to the Finance Act. Since the assessee’s income in all
relevant years was below ₹50 lakhs, the statutory threshold for levy of
surcharge was not met. The Tribunal further noted that interpreting MMR to
always include surcharge at the highest rate would render the surcharge
provisions redundant and lead to an absurd interpretation. Accordingly, the
Tribunal directed that tax be computed at 30% plus applicable cess, without
surcharge, and allowed the assessee’s appeal.
