Sow Rachna Rathi Family Trust Vs Dy. DIT (ITAT Pune)
Income Tax Appellate Tribunal (ITAT) Pune Bench has ruled that surcharge on dividend income for discretionary trusts should be levied at the slab rates as per the First Schedule of the relevant Finance Act, rather than the maximum rate of 37%. This decision came in the case of Sow Rachna Rathi Family Trust Vs. Dy. DIT (ITAT Pune), for the Assessment Year 2022-23, where the Tribunal reversed the orders of the Centralized Processing Centre (CPC) and the Additional Joint Commissioner of Income Tax (Appeals) (Addl. JCIT(A)).
The case involved the Sow Rachna Rathi Family Trust, a discretionary private trust, which declared an income of Rs. 90,13,190/- for A.Y. 2022-23. The primary source of income was dividend income amounting to Rs. 90,12,900/-, with a minor component of saving account interest of Rs. 285/-. The trust had initially calculated the surcharge on its dividend income at 10%.
However, the CPC, in its intimation order dated March 16, 2023, computed the tax liability at Rs. 8,33,716/-, leading to a demand of Rs. 10,26,350/-. The CPC’s calculation notably applied a surcharge rate of 37% on the dividend income.
Aggrieved by this, the trust appealed to the Addl. JCIT(A). The Addl. JCIT(A) upheld the CPC’s action, reasoning that the Maximum Marginal Rate (MMR) had to be calculated as per the provisions of Section 2(29C) of the Income-tax Act read with Section 164 of the Act, and further supported by sub-section (3) of Section 2 of the Finance Act, 2021. This interpretation implied that the maximum surcharge rate was applicable.
The assessee subsequently appealed to the ITAT Pune, raising several grounds. Key among these were contentions that the CIT(A) erred in applying a maximum marginal tax rate of 42.744% (including 37% surcharge) on dividend income, arguing that the maximum surcharge on dividend income could not exceed 15% as per the Finance Act, 2022, thus capping the tax rate at 35.88%. The trust also pointed out that a similar issue for A.Y. 2021-22 had been decided in its favor by the CIT(A), limiting the surcharge to 15% for dividend income.
During the ITAT proceedings, the counsel for the assessee argued that the case was directly covered by the decision of the Hon’ble Special Bench in Araadhaya Jain Trust vs. ITO (ITA No. 4272/Mum/2024, order dated April 9, 2025). This precedent, it was submitted, held that surcharge should be levied based on the slab rates specified in the First Schedule under the heading “surcharge on income tax” in Paragraph A, Part 1, for the relevant assessment year. The counsel highlighted that for the A.Y. 2022-23, the trust’s income fell within the slab where a 10% surcharge was applicable, not 37%.
The Departmental Representative, in response, supported the orders of the lower authorities.
The ITAT, after considering the arguments and reviewing the records, noted that the core issue was the justification of the 37% surcharge levied by the CPC on the dividend income. The Tribunal acknowledged that the assessee was a Family Trust and its income was generally liable to be taxed at the Maximum Marginal Rate. However, it placed significant reliance on the Special Bench decision in Araadhaya Jain Trust (supra).
The Special Bench in Araadhaya Jain Trust had affirmed the view taken by various coordinate benches. The Tribunal in the present case reproduced Paragraph 10 of the Araadhaya Jain Trust order, which clarified that sub-section (3) of Section 2 of the Finance Act, 2023 (or relevant Finance Act), only refers to the charge of income tax for the purpose of Sections 164/167B of the Act and does not specifically address the charge of surcharge. It emphasized that the charging provision for surcharge is Section 2(1) of the Finance Act, which refers to the First Schedule and provides for surcharge levy at slab rates. This means the highest surcharge rate of 37% would only apply when the income exceeds Rs. 5 crores. The Special Bench had cited several judicial precedents to support this interpretation, including:
1. ITO vs. Tayal Sales Corporation [2003] 1 SOT 579 (Hyd.)
2. Lintas Employees Professional Development Trust vs. ITO (ITA No. 4791/Mum/2023 decided on 29.05.2024)
3. Sriram Trust, Hyderabad vs. ITO (ITA Nos. 439, 440 & 441/Hyd./2024, decided on 19.06.2024)
4. Ujjwal Business Trust vs. CPC (in ITA No. 602/Mum2024 decided on 28.06.2024)
5. Lintas Employees Holiday Assistance Trust vs. CPC (ITA No. 1796/Mum/2024 decided on 26.07.2024)
6. Jitendra Gala Navneet Trust vs. DDIT and Dilip Sampat Navneet Trust vs. DDIT (ITA Nos. 2484 & 2485/Mum/2024 decided on 22.10.2024)
7. Lintas Employees Holiday Assistance Trust vs. ITO (ITA No. 3949/Mum/2024 decided on 20.01.2025)
8. V. Meera Charitable Trust vs. ITO (ITA No. 2140/Chny/2024 decided on 07.02.2025)
Applying the principles from the Araadhaya Jain Trust decision to the facts of the Sow Rachna Rathi Family Trust case, the ITAT observed that the surcharge is to be levied based on the slab rates mentioned in the First Schedule, Paragraph A of Part 1. The Tribunal explicitly stated that surcharge on dividend income cannot exceed 15%.
Upon examining the First Schedule to the Finance Act, 2023 (relevant for A.Y. 2022-23 rates), the Tribunal concluded that since the trust’s income was from dividends and fell within the slab of Rs. 50 lakh to Rs. 1 crore, the applicable surcharge rate was 10%. Consequently, the ITAT held that the CPC erred in charging a surcharge of 37%.
In light of these findings, the ITAT reversed the decision of the CIT(A) and allowed the grounds of appeal raised by the assessee. The appeal was therefore allowed. This ruling provides clarity for discretionary trusts regarding the applicability of surcharge rates on dividend income, aligning it with the general slab rates rather than the highest maximum marginal rate.
FULL TEXT OF THE ORDER OF ITAT PUNE
