[Opinion] Surcharge on Private Discretionary Trust – ITAT Ruling

Subham Kumar & Karthik Swami – [2025] 174 taxmann.com 208 (Article)

In the recent past, there has been rulings in the litigation landscape focused on the applicable surcharge rate for taxing a private discretionary trust under the Income Tax Act, 1961 (the “Act”). The discussion below is broadly based on the Special Bench of Hon’ble Mumbai ITAT ruling in the case of Aradhya Jain Trust v. ITO. Before diving into the judgement, let us delve upon the relevant provisions under the Act.

Relevant Provisions Under the Act

As per Section 167B of the Act, where the individual shares of the members of association of persons (AOP) or body of individuals (BOI) is indeterminate or unknown, tax shall be charged on the total income of the AOP or BOI at maximum marginal rate (MMR).

Further, the definition of MMR is provided underSection 2(29C) of the Act which states that

“‘maximum marginal rate’ means 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 or, as the case may be, body of individuals as specified in the Finance Act of the relevant year.”

Facts of the Case

Aradhya Jain Trust (the “Assessee”) is a private discretionary trust liable to pay tax at MMR, had filed its Return of Income (“ROI”) for AY 2023-24, declaring an income of INR 4,85,290/-. The Assessee had computed the applicable tax by considering a ‘nil’ surcharge rate on tax based on the slab rate of income as per the relevant Finance Act as the income falls within the slab of less than INR 50 lakhs. The ROI was processed by Central Processing Centre (“CPC”) and an adjustment was made under Section 143(1) of the Act, by considering a surcharge of 37% on tax.

The primary contention of the Assessee is that the MMR is applicable only for computing the income tax component and for determining the surcharge component, the income slab under which the Assessee’s income falls under the relevant Finance Act should form the basis.

Consequent to the CPC intimation, the Assessee has appealed to the jurisdictional Commissioner of Income Tax (CIT(A)), which rejected the claims raised by the Assessee. Aggrieved by the judgement of CIT(A), the Assessee preferred an appeal before the Hon’ble Mumbai ITAT.

Post filing the above appeal, the Assessee’s appeal for AY 2022-23 involving an identical issue was disposed of by the Hon’ble Mumbai ITAT Aaradhya Jain Trust v. ITO, wherein the judgement was issued as below.

“Based on Section 2(29C) of the Act, where the Assessee is taxed at MMR, the applicable liability is to be arrived at by considering the highest slab of tax and highest slab of surcharge applicable in case of individual. This view is explicitly provided in the commentary on Income Tax by Chaturvedi and Pithisaria as well as in the book published by Mr. Vinod Singhania.

Even otherwise, the language of the law is clear that MMR shall be maximum rate of tax and surcharge of the highest rate in case of an individual. The language of Section 2(29C) of the Act expressly provides that the rate of income tax (including surcharge on income tax, if any) applicable in relation to the highest slab of income in case of an individual. Thus, the purpose of explicitly providing the surcharge in that Section is to compute MMR as high rate of tax and also the highest rate of surcharge. If the provisions were to be read as per the contention of the Assessee, the mention of the word ‘Surcharge’ in Section 2(29C) of the Act would be defeated. The definition under Section 2(29C) of the Act is not capable of any doubt and only the meaning that it admits is that the rate on the maximum slab of income and maximum rate of surcharge is to be considered as the MMR.

The Hon’ble Mumbai ITAT further held that the Policy of Law under Section 2(29C) of the Act is to discourage discretionary trust by charging the income of such trust in the hands of the trustee at the MMR except in certain specified situation. Accordingly, such policy would be defeated if it is held that the beneficiary of a trust is chargeable to tax and also the surcharge at the highest slab, but the Assessee (being a trust) is charged to tax at the highest slab but lower rate of surcharge. The levy of MMR on trust is thus specific anti avoidance rule and therefore should be provided a strict interpretation under the Act. There is no provision in the law to charge specific discretionary trust a bit lower than the rates of tax and surcharge as applicable to a beneficiary individual. The reference is drawn to the judgement of the Hon’ble Bombay High Court in the case of JK Holdings.

While delivering the above judgement, the Hon’ble Mumbai ITAT took reference from the verdict of Hon’ble Kerala High Court in the case of C.V. Divakaran Family Trust and the verdict of the Hon’ble Supreme Court in the case of Gosar Family Trust.”

Ironically, the verdict in the above case directly contradicts the judgement issued by Hon’ble Hyderabad ITAT in the case of ITO v. Tayal Sales Corporation and in the case of Sriram Trust v. ITO (Exemptions), wherein it was held that the Act does not provide that MMR shall include surcharge on income tax irrespective of the highest slab of income, but it has a relationship with the highest slab of income. Consequently, where the income of the taxpayer is less than INR 50 lakhs, no surcharge could be levied on income tax.

Given the volume of contradictory rulings on this matter, the Assessee furnished an application for AY 2023-24 before the Hon’ble President to constitute a special bench for deciding on this issue.

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