Summary: A dispute arose regarding the surcharge applicability on private discretionary trusts and AOPs taxed at the Maximum Marginal Rate (MMR) under Sections 164 and 167B of the Income Tax Act. The Central Processing Centre (CPC) was applying the highest surcharge rate, assuming MMR inherently includes it. This was contested by assessees, leading to conflicting decisions across ITAT benches. Some benches initially supported the CPC’s view, while others held that surcharge should be levied based on the income slabs defined in the Finance Act, as MMR’s definition in Section 2(29C) includes surcharge conditionally (“if any”). To resolve this, a Special Bench of the ITAT Mumbai was constituted. In its order dated April 9, 2025, the Special Bench ruled in favor of the slab-based surcharge, stating that even for entities taxed at MMR, surcharge must be computed according to the income thresholds specified in the relevant Finance Act. This decision clarifies that the automatic application of the highest surcharge rate by the CPC is incorrect and can lead to excessive taxation.
CONTROVERSY – Maximum Marginal Rate Vs. Maximum Rate of Surcharge
Araadhya Jain Trust ITAT Mumbai
CORE ISSUE INVOLVED (Section 164 & 167B)
Whether, in the case of private discretionary trusts whose income is chargeable to tax at maximum marginal rate, surcharge is chargeable at the highest applicable rate or at a slab rates?”
A Special Bench of the Hon’ble Income Tax Appellate Tribunal, Mumbai, was constituted by the Hon’ble President, ITAT, in terms of Section 255(3) of the Income Tax Act, 1961 (“the Act”), to adjudicate the above substantial question of law involving conflicting decisions across different Benches of the Tribunal:
Contrary Views on the Issue
In the first round of litigation, a Division Bench of the ITAT, Mumbai, adjudicated the matter against the assessee and held that in the case of private discretionary trusts assessed at the maximum marginal rate, surcharge is chargeable at the highest applicable rate.
Similarly, in the case of Anant Bajaj Trust vs. Deputy Director of Income Tax (ITAT Mumbai), a similar view was taken. However, the said judgment was subsequently recalled upon allowing a Miscellaneous Application filed by the assessee.
At the same time, several other coordinate benches of the ITAT have taken a contrary view in favour of the assessee. These decisions have uniformly held that surcharge, in cases where income is chargeable at the maximum marginal rate, must be levied in accordance with the slab rates prescribed in the applicable Finance Act and not at a flat highest rate (such as 37%). The notable decisions in this regard include:
1. ITO vs. Tayal Sales Corporation (ITAT Hyderabad)
2. Lintas Employees Professional Development Trust vs. ITO (ITAT Mumbai)
3. Sriram Trust, Hyderabad vs. ITO (ITAT Hyderabad)
4. Ujjwal Business Trust vs. CPC (ITAT Mumbai)
5. Lintas Employees Holiday Assistance Trust vs. CPC (ITAT Mumbai)
6. Jitendra Gala Navneet Trust vs. DDIT and Dilip Sampat Navneet Trust vs. DDIT (ITAT Mumbai)
7. Lintas Employees Holiday Assistance Trust vs. ITO (ITAT Mumbai)
8. V. Meera Charitable Trust vs. ITO (ITAT Chennai)
Request for Special Bench
Finding that there are decisions of the Tribunal holding contrary view, the assessee on 22.10.2024 furnished an application before the Hon’ble President requesting to constitute a Special Bench for deciding the issue under reference. Upon considering the application of the assessee, Hon’ble President, in the administrative side, passed order dated 14.11.2024, constituting the Special Bench to decide the issue under reference. The Final hearing had taken place on 17th March 2025 and the Order was pronounced on 9th April 2025
Final Hearing and Pronouncement of Order
The Special Bench conducted a final hearing of the matter on 17th March 2025. The order of the Special Bench was pronounced on 9th April 2025 as under:
Thus, in the ultimate analysis, the Special Bench Mumbai held that 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.
Misapplication of Surcharge under Section 167B: CPC’s Mechanical Approach Results in Excessive Taxation Contrary to Finance Act Provisions
It has come to notice that the Centralized Processing Centre (CPC), while processing Income Tax Returns of Associations of Persons (AOPs) and discretionary trusts assessed under Section 167B or Section 164 of the Income Tax Act, is incorrectly applying a surcharge of 37% (or 25%) instead of the correct slab-based rate of 10% as prescribed under the Income Tax Act and the relevant Finance Act. This erroneous application of the highest surcharge rate, without reference to the actual income level, results in excessive and unfair taxation. The tax intimations issued in such cases are legally flawed and do not reflect the factual or statutory position. This issue arises because CPC mechanically applies the highest surcharge without considering the income slabs and thresholds provided in the Finance Act. Further complexity is added by conflicting decisions of the Income Tax Appellate Tribunal (ITAT), with some benches incorrectly affirming the 37% rate while others have correctly applied the appropriate surcharge based on slab rates. Section 167B governs the taxation of AOPs, BOIs, and discretionary trusts where the shares of beneficiaries are indeterminate or unknown, and mandates taxation at the Maximum Marginal Rate (MMR). However, it does not define the MMR independently; instead, it relies on Section 2(29C), which defines MMR as the rate of income-tax (including surcharge, if any) applicable to the highest slab of income as specified in the Finance Act for individuals, AOPs, or BOIs.
MAXIMUM MARGINAL RATE & RATE OF SURCHARGE
Erroneous Levy of 37% Surcharge on AOPs and Discretionary Trusts: CPC’s Mechanical Processing Violates Finance Act Provisions and Leads to Excessive Taxation
1.1 It has recently been observed that the Centralized Processing Centre (CPC), while processing the Income Tax Returns of AOPs or Discretionary Trusts that are taxed under Section 167B or Section 164, is wrongly applying a surcharge of 37% (or 25%) instead of the correct rate of 10% as mentioned in the Income Tax Act and the Finance Act. Because of this, a much higher tax is being charged than what is actually payable. The tax intimation sent by CPC in these cases is not legally correct, does not fit the facts, and is therefore unfair, excessive, and wrong. The CPC is applying the highest surcharge rate without checking the actual income level, instead of using the correct slab-based rates given in the Finance Act. Even the Income Tax Appellate Tribunal (ITAT) has given mixed decisions on this issue — some benches have confirmed the highest rate of 37%, while others have followed the proper slab rates as per the Finance Act.
Application under Section 167B
1.2 Section 167B of the Income Tax Act governs the taxation of Associations of Persons (AOPs), Bodies of Individuals (BOIs), and discretionary trusts in cases where the shares of members are indeterminate or where specific conditions are met. It mandates that in such cases, the income is to be taxed at the Maximum Marginal Rate (MMR). However, Section 167B does not independently prescribe this rate; instead, it adopts the definition from Section 2(29C), which defines MMR as the rate of income-tax (including surcharge on income-tax, if any) applicable to the highest slab of income for an individual, AOP, or BOI, as specified in the Finance Act for the relevant assessment year.
Definition under Section 2(29C)
2.1 Section 2(29C) defines the Maximum Marginal Rate as:
“The rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons (AOP) or body of individuals (BOI) as specified in the Finance Act of the relevant year.”
Maximum Marginal Rate and Parenthetical Phrase
2.2 This definition is referential, not autonomous. The inclusion of surcharge is explicitly conditional—“if any”—making its application contingent on whether such a surcharge is actually leviable under the Finance Act in a given assessment year and for the relevant income level or assessee category.
Interpreting the Conditional Nature of the Maximum Marginal Rate (MMR) under the Income-tax Act, 1961
3.1 The computation of the Maximum Marginal Rate (MMR) under Section 167B of the Income-tax Act, 1961, must be firmly anchored in the conditional framework laid down under Section 2(29C). This provision defines MMR as the rate of income tax “(including surcharge on income-tax, if any)” applicable to the highest slab of income in the case of individuals, associations of persons (AOPs), or bodies of individuals (BOIs), as specified in the Finance Act. This definition is not self-contained—it expressly incorporates by reference the dynamic, income-sensitive mechanism outlined in the Finance Act, which prescribes varying surcharge rates annually based on income thresholds and taxpayer categories.
Conditional Inclusion of Surcharge
3.2 The parenthetical phrase “(including surcharge on income-tax, if any)” is not incidental—it serves a clarificatory and limiting function. The words “if any” confirm that surcharge is to be included only where legislatively mandated, i.e., when income thresholds defined under the Finance Act are exceeded. This prevents the automatic or flat inclusion of the highest surcharge rate (such as 37%) in all cases and reinforces that MMR is a dynamic concept meant to align with evolving surcharge policies and thresholds.
3.3 Had the statute merely stated “including surcharge,” it could have been misinterpreted as requiring surcharge inclusion in every case, irrespective of income. Instead, the “if any” qualification ensures flexibility and avoids overreach, maintaining proportionality in tax liability. For instance, an AOP earning ₹92 lakh would attract a 10% surcharge, not 37%, because the latter applies only above ₹5 crore income. Applying the higher surcharge uniformly would distort the conditional nature of MMR and result in unlawful taxation.
Interpretative Role of Parenthetical Phrases
4.1 In statutory interpretation, particularly under tax law, parenthetical expressions like “(including surcharge on income-tax, if any)” are treated as clarificatory aids rather than substantive enactments. As explained in Justice G.P. Singh’s Principles of Statutory Interpretation, such phrases reinforce the main text and prevent misapplication of the provision. Even if the phrase were omitted, the definition of MMR would broadly stand, but its absence would risk inconsistent interpretations and misapplication—especially in a legal context where surcharge rates vary annually.
Courts have consistently held that statutory language must be given full effect and that no part of a statute is surplus. The inclusion of “if any” is a legislative signal that surcharge is not always applicable and cannot be applied universally without regard to specific conditions in the Finance Act.
Incorporation by Reference and the Role of the Finance Act
5.1 Section 167B does not independently define MMR but instead adopts the meaning from Section 2(29C). This makes the computation mechanism in the Finance Act an integral part of MMR for purposes of Section 167B. As such, any tax imposed under Section 167B must adhere to the surcharge thresholds and slabs set out in the Finance Act.
5.2 For example, the Finance Act, 2022 introduced a 10% surcharge cap for AOPs comprising only companies. In such cases, including a 37% surcharge in the MMR computation is erroneous and overrides the statutory carve-out. The law must give effect to such distinctions, and administrative convenience or standardisation cannot justify ignoring them.
Judicial Position on Computation and Charging Provisions
5.3 In the absence of a computation mechanism, the charging provision fails. The same principle applies here: if the Finance Act provides a conditional computation for surcharge, that condition must be honored. A deeming provision like Section 167B cannot operate independently of the incorporated computation structure—it must work within it.
5.4 This view finds further support in the principle that a charge cannot be presumed beyond what is clearly legislated. Applying a flat surcharge rate of 37% regardless of income thresholds contradicts this foundational principle of taxation and results in demands lacking statutory authority.
Misapplication Through Mechanical Assessment
5.5 In practice, especially through automated systems like CPC processing, a flat 37% surcharge is often applied indiscriminately, resulting in an inflated effective MMR of 42.744%. This occurs even when the assessee does not meet the income threshold for such a surcharge, leading to disproportionate and ultra vires tax demands. This mechanical approach fails to respect the conditionality embedded in the Finance Act and the nuanced structure of the MMR definition.
Equity, Proportionality, and Legislative Intent
6.1 The MMR framework is designed to ensure fairness, proportionality, and adaptability in taxation. Its structure allows for the inclusion of surcharge only when income levels or taxpayer categories warrant it. This approach honors both the intent and the letter of the law, ensuring that taxation is imposed only as authorized by Parliament and not by administrative overreach.
By incorporating surcharge conditionally, the statute ensures that only those assessees whose income meets the statutory thresholds bear the surcharge burden. This guards against inequitable outcomes and preserves the integrity of the tax system.
Interpretation of the Parenthetical Phrase “(including surcharge on income-tax, if any)” in the Definition of Maximum Marginal Rate under Section 2(29C) of the Income Tax Act, 1961
7.1 Clarification of Maximum Marginal Rate (MMR)
The Maximum Marginal Rate (MMR) refers to the highest applicable rate of income tax, including surcharge, levied on high-income taxpayers. The parenthetical phrase “(including surcharge on income-tax, if any)” is incorporated to ensure the surcharge is considered part of the MMR where applicable. The words “if any” make it clear that the surcharge is conditional and depends on specific income thresholds.
7.2 Legislative Purpose of Parenthetical Phrases
Parenthetical phrases in tax statutes are intended to clarify and prevent ambiguity. In this case, the phrase ensures that the surcharge is included in MMR computations only when relevant, thereby ensuring accurate and consistent tax calculations aligned with the Finance Act.
7.3 Judicial Understanding of Parenthetical Clarifications
Courts interpret parenthetical phrases as supplementary details that reinforce the legislative intent without altering the core statutory meaning. Here, the phrase “if any” confirms that the surcharge is not universally applicable but only applies when explicitly provided in the Finance Act.
7.4 Clarifying When Surcharge Applies
The phrase explicitly states that surcharge forms part of the MMR calculation only if it is applicable under the Finance Act. This prevents the erroneous application of surcharge to incomes that fall below the specified threshold.
7.5 Ensuring Consistency Across Taxpayer Categories
The phrase ensures uniform application of MMR among all taxpayers—individuals, AOPs, and BOIs—by incorporating surcharge conditionally. It reinforces consistency in tax liability based on income level and legislative provisions.
7.6 Role of Parentheses in Statutory Interpretation
Parentheses provide clarifications without altering the main provision. In this context, they help accurately define MMR by explicitly including surcharge only when applicable, ensuring precision in legal interpretation.
7.7 Flexibility Enabled by “If Any”
The phrase “if any” enables the statute to adapt to annual changes in surcharge thresholds, preserving the dynamic character of tax policy. Its omission would risk rigid and potentially inaccurate MMR calculations across tax years.
7.8 Income-Based Conditional Application of Surcharge
The words “if any” create a conditional framework for surcharge application, linking it to income thresholds defined in the Finance Act. This avoids automatic surcharge application and maintains a fair, income-sensitive tax structure.
7.9 Linking Surcharge to Income Quantum
Surcharge is levied based on the quantum of income rather than a flat rate, and may change annually. The inclusion of “if any” ensures that MMR adjusts appropriately with changing income-based surcharge rules.
7.10 Ensuring MMR’s Legal Precision and Flexibility
By introducing conditionality, the phrase “if any” ensures that MMR is not rigid but legally precise, adapting to Finance Act variations. It helps tax administrators and courts apply the correct rate in accordance with the law.
7.11 Distinction Between Conditional and Automatic Surcharge Inclusion
The phrase “including surcharge, if any” denotes conditional application, unlike “including surcharge,” which implies automatic inclusion. This distinction is crucial in preventing over-taxation of incomes below the surcharge threshold.
7.12 Consequences of Omitting “If Any”
7.13 Omitting “if any” would render the surcharge automatically applicable to all MMR calculations, potentially conflicting with the Finance Act’s conditional surcharge provisions and leading to misapplication of tax rates.
7.14 Retaining Flexibility in Tax Policy
The phrase maintains legislative flexibility by allowing surcharge applicability to reflect changes in income thresholds and policy intent each year. This ensures that MMR remains current and context-sensitive.
7.15 Clarification for Discretionary Trusts under Section 167B
For discretionary trusts taxed under Section 167B at MMR, the phrase ensures surcharge is applied only when trust income exceeds the specified thresholds. It prevents blanket application of surcharge irrespective of income level.
7.16 Parenthetical Interpretation in Legal Frameworks
Courts consider parenthetical material a crucial interpretive tool. The phrase here serves to expand and clarify the MMR definition to include surcharge when income conditions are met, aligning with the statute’s broader purpose.
7.17 Supplemental Role of Parentheses in Tax Law
While parenthetical phrases are not primary provisions, they are integral to statutory clarity. This phrase supplements MMR interpretation to reflect a full and accurate tax burden.
7.18 Trust Taxation and Income-Based Surcharge Application
For trusts, the MMR includes surcharge only if the total income exceeds specified levels. This ensures equitable tax treatment and prevents the surcharge from being unfairly imposed on lower-income trusts.
FINAL WORDS
8.1 The Maximum Marginal Rate as defined under Section 2(29C) and applied under Section 167B must be interpreted and applied as a conditional, composite mechanism. The surcharge component of MMR is not a constant but varies depending on:
- The income level of the assessee;
- The composition of the assessee (e.g., AOP comprising only companies);
- The applicable Finance Act provisions for the relevant assessment year.
8.2 Accordingly, the application of a flat 37% surcharge, leading to a de facto MMR of 42.744%, in disregard of these conditionalities, is legally untenable. The correct MMR must be computed in accordance with the applicable Finance Act, including only such surcharge as is actually leviable in that specific context.
Any deviation from this interpretive framework risks violating fundamental principles of tax law, resulting in erroneous assessments and unlawful tax demands.
Case Laws on Applicability of Maximum Surcharge @ 37% in Cases Taxable at the Maximum Marginal Rate
1) Araadhya Jain Trust ITAT Mumbai 9th April 2025
The Income Tax Appellate Tribunal (ITAT) Mumbai has on 9th April 2025 delivered an important ruling that clarifies how surcharge should be applied to Private Discretionary Trusts (taxed under Section 164) and Business AOPs (taxed under Section 167B). *For some time now, the Central Processing Centre (CPC) has been routinely applying the highest surcharge rate of 37% to all such entities—regardless of their actual income levels. This is contrary to the slab-based surcharge computation reflected in the official income tax utility available on the Income Tax Department’s website* The CPC’s position has been that since these entities are taxed at the “maximum marginal rate,” this rate automatically includes the highest possible surcharge. The ITAT has now categorically held that this interpretation is incorrect.
The Tribunal explained that while private discretionary trusts/AOP are indeed taxed at the maximum marginal rate under Sections 164 and 167B of the Income Tax Act, this does not mean they are also subject to the highest surcharge. The term “maximum marginal rate” refers only to the basic income tax rate applicable to the highest income slab—currently 30%. The surcharge, on the other hand, is an additional levy that only applies if a trust’s total income exceeds certain thresholds set in the Finance Act. For example, a 10% surcharge applies when income exceeds ₹50 lakhs, and 37% applies only when it exceeds ₹5 crores.
In the case before the Tribunal, the trust’s income was only around ₹4.85 lakhs, far below the minimum threshold for any surcharge. The Tribunal emphasized that the phrase “including surcharge on income-tax, if any” in the definition of maximum marginal rate does not mean surcharge must always be applied. It simply means that surcharge may be added—but only if the income levels legally require it. The ruling also pointed out that applying the highest surcharge to all discretionary trusts would make the entire system of slab-based surcharge rates meaningless, which cannot have been the intent of the law.
This decision supports the view that surcharge must follow the Finance Act’s rules and apply only when income thresholds are crossed. If trust’s income is below the surcharge limits surcharge is not applicable or certainly not the 37% rate.
The issue pertained to the levy of surcharge at the rate of 37% on income including interest under section 234F. The Addl./JCIT (Appeals) had upheld the surcharge on the basis that tax liability must be computed at the Maximum Marginal Rate (MMR) under section 2(29C). However, the Tribunal clarified that the MMR includes surcharge “if any” and that both the tax rate and surcharge must be applied as per the income slabs prescribed under the relevant Finance Act. Referring to the First Schedule to the Finance Bill, 2022, the Tribunal noted that surcharge is leviable only when the total income exceeds ₹50 lakhs. Since the assessee’s total income was only ₹1,27,095/-, it did not attract any surcharge. The ITAT held that the view of the Addl./JCIT (Appeals) was contrary to the law and directed the Assessing Officer not to levy any surcharge. Consequently, the appeal of the assessee was allowed.
The assessee challenged the levy of surcharge amounting to ₹1,73,278/- on an assessed income of ₹16,24,880/- for Assessment Year 2021–22. The Income Tax Department had levied surcharge under the assumption that the Maximum Marginal Rate applied, but the assessee contended that surcharge was not applicable since its total income was below ₹50 lakhs, as clarified in the First Schedule to the Finance Act, 2021. The Tribunal observed that the Commissioner (Appeals) failed to adjudicate this ground despite acknowledging it. Citing the Finance Act provisions, the Tribunal held that surcharge is leviable only where total income exceeds ₹50 lakhs. Accordingly, it deleted the surcharge and allowed the assessee’s appeal.
4) Income-Tax Officer v. Tayal Sales Corporation [ITA No. 1783/HYD/1996, decided on 01.02.2001; 2001 (2) TMI 877 – ITAT Hyderabad; also reported as [2003] 1 SOT 579 (Hyd)],
The assessee, a firm, declared a total income of ₹40,560. The Assessing Officer levied a surcharge, which was deleted by the CIT(A) on the ground that the total income was below ₹1 lakh—the threshold specified in the relevant Finance Act for surcharge applicability. The ITAT upheld this view, holding that in light of Section 2(29C) and Section 4 of the Income-tax Act, and the provisions of the Finance Act, surcharge could not be levied where the income did not exceed ₹1 lakh. Accordingly, the Tribunal dismissed the Revenue’s appeal.
The issue was whether surcharge could be levied when tax is charged at the maximum marginal rate under Section 167B of the Income-tax Act. The assessee argued that even if tax is chargeable at the maximum marginal rate, surcharge should be levied based on the thresholds prescribed in the Finance Act, and not at the highest rate by default. The Tribunal agreed, holding that under Section 2(29C), surcharge is applicable only where total income exceeds ₹50 lakhs, and it cannot be imposed on incomes below this threshold. Relying also on ITO v. Tayal Sales Corporation [2001 (2) TMI 877], the Tribunal ruled that no surcharge was leviable in the assessee’s case, as income was below ₹50 lakhs, and accordingly allowed the appeal.
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