Araadhya Jain Trust Vs ITO (ITAT Mumbai)
Whether surcharge is applicable at respective surcharge slab rate or at maximum surcharge rate in case of the Private Discretionary Trust?
In a significant ruling that brings clarity to taxation of Private Discretionary Trusts, the Income Tax Appellate Tribunal (ITAT) Special Bench has held that surcharge on such trusts should be levied according to applicable income slabs, rather than automatically at the maximum rate.
Background
The case arose from an appeal by Araadhya Jain Trust, a Private Discretionary Trust, against the Income Tax Department’s levy of the highest rate of surcharge on its income of Rs. 4,85,290 for Assessment Year 2023-24.
Under Sections 164 and 167B of the Income Tax Act, income of Private Discretionary Trusts is taxed at the “maximum marginal rate.” The key issue before the Special Bench was whether this meant that surcharge should also be automatically applied at the highest rate (37%), regardless of income level.
The Ruling
The Special Bench, comprising President Justice (Retd.) C.V. Bhadang, Vice President Saktijit Dey, and Accountant Member B.R. Baskaran, ruled in favor of the assessee, holding that:
- While income tax on discretionary trusts must be calculated at the maximum marginal rate (30%), surcharge depends on income slabs as specified in the Finance Act.
- The definition of “maximum marginal rate” under Section 2(29C) refers to both income tax rate and surcharge as specified in the Finance Act of the relevant year, which clearly provides different surcharge rates for different income levels.
- For AY 2023-24, surcharge became applicable only when total income exceeded Rs. 50 lakhs, with rates progressively increasing from 10% to 37% based on income levels.
Key Reasoning
