CPC charged surcharge at the top rate on my discretionary trust's small income. Is that right?
No. The maximum marginal rate under s.164 takes the highest slab rate applicable to an individual, but surcharge is applied in a graded manner by reference to the trust's actual total income against the Finance Act thresholds. Below the first threshold, surcharge is nil.
Decided by the ITAT (ITAT Mumbai Special Bench, constituted under s.255(3) to answer a reference — the Members who composed it could not be established from any source reached in this check) on 2025-04-09, reported as [2025] 173 taxmann.com 343 / [2025] 126 ITR(T) 1 / [2025] 212 ITD 1 (Mumbai)(SB)(Trib.); IT Appeal No. 4272 (Mum.) of 2024, assessment year 2023-24. It bears on section 164, section 167B, section 2(29C) of the Income Tax Act 1961, in Charitable Trusts & Exemption matters.
CPC has been processing private discretionary trust returns by loading the top surcharge rate onto the highest slab rate regardless of income, which on a small trust income produces a demand out of all proportion to the tax. A Special Bench has now answered it, and the ruling is being followed by other benches rather than doubted, so this is usually a rectification-stage argument rather than a full appeal.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, a private discretionary trust, filed its return for assessment year 2023-24 declaring income of Rs. 4,85,290, and paid tax at the maximum marginal rate under s.164 read with s.2(29C). While processing the return the Centralised Processing Centre levied the highest rate of surcharge on the tax so computed. The Commissioner (Appeals) upheld that, holding that the definition of maximum marginal rate carried the highest rate of surcharge with it, and that the words 'if any' in s.2(29C) meant only whether the Finance Act levied a surcharge at all. The assessee appealed. An earlier coordinate Bench order in the same assessee's case for 2022-23 — IT Appeal No. 2197 (Mum.) of 2024, dated 7 October 2024 — had taken the Revenue's view, and other Benches had taken the opposite view; on the assessee's application of 22 October 2024 the President constituted a Special Bench by order of 14 November 2024 to decide the question, and five other assessees were allowed to intervene (paras 3 to 7).
The Special Bench decided a reference, not the appeal. The question referred was whether, in the case of private discretionary trusts whose income is chargeable at the maximum marginal rate, surcharge is chargeable at the highest applicable rate or at slab rates (para 1). The Bench held that surcharge is to be computed on the income-tax by reference to the slab rates prescribed under the heading 'Surcharge on income-tax' in Paragraph A, Part I of the First Schedule to the Finance Act of the relevant year, and that the maximum marginal rate under ss.164 and 167B read with s.2(29C) means the rate of tax applicable to the highest slab of income — 30 per cent under the Finance Act 2023 — with surcharge then computed on that tax according to the Schedule's own thresholds (paras 26, 27 and 32). Since the threshold for any surcharge is total income of Rs. 50 lakh, a trust below that threshold bears none (para 28). The reference was decided in favour of the assessee, and the Bench directed that 'the records may be returned back to the respective benches for deciding the appeals accordingly' (para 32). It did not itself set aside the processing adjustment; that fell to the regular Bench.
Sections 164 and 167B fix no rate; they say only that tax on total income is to be determined at the maximum marginal rate, and they say nothing about surcharge (paras 24 and 25). Section 2(29C) defines that rate as the rate of income-tax, including surcharge if any, applicable to the highest slab of income of an individual, association of persons or body of individuals as specified in the Finance Act of the relevant year; but the definition does not itself fix a rate, it sends one back to the Finance Act (para 24). Under s.2(1) of the Finance Act 2023 income-tax is charged at the rates in Paragraph A, Part I of the First Schedule and is then increased by a surcharge calculated in the manner provided there; s.2(3) carves out assessees under s.164 and s.167B, but only as to the rate of tax, not as to surcharge (para 24). Going to the Schedule, the highest slab under Item (1) is income above Rs. 10 lakh at 30 per cent, so the maximum marginal rate is 30 per cent (para 26). The Bench dealt with the word 'slab', which appears neither in s.2(1) nor in the Schedule, by reference to a Government press note of 1 December 1965 and to Circular No. 2/2018 containing the explanatory notes to the Finance Act 2017, both of which use 'slab' of income rather than of tax; s.2(29C) itself speaks of the highest slab of income (para 27). Under the heading 'Surcharge on income-tax' the rates run from 10 per cent, which bites only above Rs. 50 lakh, to 37 per cent above Rs. 5 crore, so below Rs. 50 lakh there is no surcharge at all (para 28). If the Revenue were right that 37 per cent applied regardless of quantum, the first proviso capping surcharge at 15 per cent on dividend and ss.111A/112/112A income would be otiose and clauses (a) to (e) would be meaningless for discretionary trusts — an absurd and discriminatory result (para 29). On the Revenue's reading of the words 'if any', the Bench held it superfluous: Article 265 already requires a law to authorise any levy and Article 271 empowers the Union to impose surcharge, so no surcharge can be collected without a Finance Act providing for it, and the words must be read with the computation mechanism rather than apart from it; the object of surcharge, to ask those in the highest income brackets to contribute more, points the same way (para 30). Finally, the Bench held that the Kerala and Bombay High Court decisions relied on by the Revenue, and by the earlier coordinate Bench, did not decide this question at all — they concerned what the maximum marginal rate is, not whether surcharge within it is at the highest rate (paras 31 and 32) — and noted that Anant Bajaj Trust had been recalled and that Kapur Family Trust, which followed it, had accordingly lost its relevance (para 31).
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
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Handle my notice → Ask a CA on WhatsAppNo. The maximum marginal rate under s.164 takes the highest slab rate applicable to an individual, but surcharge is applied in a graded manner by reference to the trust's actual total income against the Finance Act thresholds. Below the first threshold, surcharge is nil. This was decided by the ITAT (ITAT Mumbai Special Bench, constituted under s.255(3) to answer a reference — the Members who composed it could not be established from any source reached in this check) and bears on section 164, section 167B, section 2(29C) of the Income Tax Act 1961. It is reported as [2025] 173 taxmann.com 343 / [2025] 126 ITR(T) 1 / [2025] 212 ITD 1 (Mumbai)(SB)(Trib.); IT Appeal No. 4272 (Mum.) of 2024, assessment year 2023-24. CPC has been processing private discretionary trust returns by loading the top surcharge rate onto the highest slab rate regardless of income, which on a small trust income produces a demand out of all proportion to the tax. A Special Bench has now answered it, and the ruling is being followed by other benches rather than doubted, so this is usually a rectification-stage argument rather than a full appeal. If it applies to you, the first step is this: Pull the s.143(1) computation sheet and check whether the surcharge charged corresponds to the trust's actual total income or simply to the top rate.
The assessee, a private discretionary trust, filed its return for assessment year 2023-24 declaring income of Rs. 4,85,290, and paid tax at the maximum marginal rate under s.164 read with s.2(29C). While processing the return the Centralised Processing Centre levied the highest rate of surcharge on the tax so computed. The Commissioner (Appeals) upheld that, holding that the definition of maximum marginal rate carried the highest rate of surcharge with it, and that the words 'if any' in s.2(29C) meant only whether the Finance Act levied a surcharge at all. The assessee appealed. An earlier coordinate Bench order in the same assessee's case for 2022-23 — IT Appeal No. 2197 (Mum.) of 2024, dated 7 October 2024 — had taken the Revenue's view, and other Benches had taken the opposite view; on the assessee's application of 22 October 2024 the President constituted a Special Bench by order of 14 November 2024 to decide the question, and five other assessees were allowed to intervene (paras 3 to 7). The matter was decided on 2025-04-09 by the ITAT (ITAT Mumbai Special Bench, constituted under s.255(3) to answer a reference — the Members who composed it could not be established from any source reached in this check). On those facts the ITAT held as follows. The Special Bench decided a reference, not the appeal. The question referred was whether, in the case of private discretionary trusts whose income is chargeable at the maximum marginal rate, surcharge is chargeable at the highest applicable rate or at slab rates (para 1). The Bench held that surcharge is to be computed on the income-tax by reference to the slab rates prescribed under the heading 'Surcharge on income-tax' in Paragraph A, Part I of the First Schedule to the Finance Act of the relevant year, and that the maximum marginal rate under ss.164 and 167B read with s.2(29C) means the rate of tax applicable to the highest slab of income — 30 per cent under the Finance Act 2023 — with surcharge then computed on that tax according to the Schedule's own thresholds (paras 26, 27 and 32). Since the threshold for any surcharge is total income of Rs. 50 lakh, a trust below that threshold bears none (para 28). The reference was decided in favour of the assessee, and the Bench directed that 'the records may be returned back to the respective benches for deciding the appeals accordingly' (para 32). It did not itself set aside the processing adjustment; that fell to the regular Bench.
Sections 164 and 167B fix no rate; they say only that tax on total income is to be determined at the maximum marginal rate, and they say nothing about surcharge (paras 24 and 25). Section 2(29C) defines that rate as the rate of income-tax, including surcharge if any, applicable to the highest slab of income of an individual, association of persons or body of individuals as specified in the Finance Act of the relevant year; but the definition does not itself fix a rate, it sends one back to the Finance Act (para 24). Under s.2(1) of the Finance Act 2023 income-tax is charged at the rates in Paragraph A, Part I of the First Schedule and is then increased by a surcharge calculated in the manner provided there; s.2(3) carves out assessees under s.164 and s.167B, but only as to the rate of tax, not as to surcharge (para 24). Going to the Schedule, the highest slab under Item (1) is income above Rs. 10 lakh at 30 per cent, so the maximum marginal rate is 30 per cent (para 26). The Bench dealt with the word 'slab', which appears neither in s.2(1) nor in the Schedule, by reference to a Government press note of 1 December 1965 and to Circular No. 2/2018 containing the explanatory notes to the Finance Act 2017, both of which use 'slab' of income rather than of tax; s.2(29C) itself speaks of the highest slab of income (para 27). Under the heading 'Surcharge on income-tax' the rates run from 10 per cent, which bites only above Rs. 50 lakh, to 37 per cent above Rs. 5 crore, so below Rs. 50 lakh there is no surcharge at all (para 28). If the Revenue were right that 37 per cent applied regardless of quantum, the first proviso capping surcharge at 15 per cent on dividend and ss.111A/112/112A income would be otiose and clauses (a) to (e) would be meaningless for discretionary trusts — an absurd and discriminatory result (para 29). On the Revenue's reading of the words 'if any', the Bench held it superfluous: Article 265 already requires a law to authorise any levy and Article 271 empowers the Union to impose surcharge, so no surcharge can be collected without a Finance Act providing for it, and the words must be read with the computation mechanism rather than apart from it; the object of surcharge, to ask those in the highest income brackets to contribute more, points the same way (para 30). Finally, the Bench held that the Kerala and Bombay High Court decisions relied on by the Revenue, and by the earlier coordinate Bench, did not decide this question at all — they concerned what the maximum marginal rate is, not whether surcharge within it is at the highest rate (paras 31 and 32) — and noted that Anant Bajaj Trust had been recalled and that Kapur Family Trust, which followed it, had accordingly lost its relevance (para 31). In the words reproduced by the source cited on this page: "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"
It was decided by the ITAT on 2025-04-09 and is reported as [2025] 173 taxmann.com 343 / [2025] 126 ITR(T) 1 / [2025] 212 ITD 1 (Mumbai)(SB)(Trib.); IT Appeal No. 4272 (Mum.) of 2024, assessment year 2023-24. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 164, section 167B, section 2(29C), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Special Bench decided a reference, not the appeal. The question referred was whether, in the case of private discretionary trusts whose income is chargeable at the maximum marginal rate, surcharge is chargeable at the highest applicable rate or at slab rates (para 1). The Bench held that surcharge is to be computed on the income-tax by reference to the slab rates prescribed under the heading 'Surcharge on income-tax' in Paragraph A, Part I of the First Schedule to the Finance Act of the relevant year, and that the maximum marginal rate under ss.164 and 167B read with s.2(29C) means the rate of tax applicable to the highest slab of income — 30 per cent under the Finance Act 2023 — with surcharge then computed on that tax according to the Schedule's own thresholds (paras 26, 27 and 32). Since the threshold for any surcharge is total income of Rs. 50 lakh, a trust below that threshold bears none (para 28). The reference was decided in favour of the assessee, and the Bench directed that 'the records may be returned back to the respective benches for deciding the appeals accordingly' (para 32). It did not itself set aside the processing adjustment; that fell to the regular Bench. It arises in Charitable Trusts & Exemption matters, on section 164, section 167B, section 2(29C) of the Income Tax Act 1961, and was decided by ITAT Mumbai Special Bench, constituted under s.255(3) to answer a reference — the Members who composed it could not be established from any source reached in this check. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Frame the objection on s.2(29C): the definition picks up the Finance Act rate structure, and the surcharge thresholds are part of that structure. Do not argue policy or deterrence either way — the Bench held deterrence is not a permissible basis for construing a charging provision.
Still good law. Applied and followed. In Chanda Bharech Beneficiary Trust v. ITO [2026] 184 taxmann.com 255 (Kolkata - Trib.), IT Appeal Nos. 3060 to 3062 (Kol) of 2025, assessment years 2020-21 to 2022-23, decided 5 March 2026 by Rajesh Kumar (Accountant Member) sitting singly, the Bench recorded at para 7 that 'The case of the assessee is squarely covered by the decision of Special Bench in case of Araadhya Jain Trust', reproduced paras 21 to 32 of this order in full, and at para 8 set aside the Commissioner (Appeals) and directed the Assessing Officer not to include surcharge in the maximum rate of tax where income was below Rs. 50 lakh. That order's own case review records Araadhya Jain Trust as followed. No High Court reversal and no appellate treatment of the Special Bench order was traced. Note the position this order left behind it: it recorded that Anant Bajaj Trust, which had taken the contrary view, had been recalled, and that Kapur Family Trust, which followed it, had lost its relevance (para 31). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The text of the Special Bench order of 9 April 2025 is not set out on this page from the order itself. It rests instead on two later Tribunal orders that record and reproduce it. The first is the Division Bench order in the same appeal, ITA No. 4272/MUM/2024, assessment year 2023-24, Om Prakash Kant (Accountant Member) and Sandeep Singh Karhail (Judicial Member), pronounced 18 June 2025, which records the Special Bench order of 9 April 2025 and its citation (2025) 212 ITD 1 (Mumbai - Trib.) (SB), sets out the question referred, and disposes of the appeal by allowing it for statistical purposes. The second is Chanda Bharech Beneficiary Trust v. ITO, ITAT Kolkata, 5 March 2026, which reproduces paragraphs 21 to 32 of the Special Bench order in full; the sentence quoted on this page appears in it word for word, and a reader should know that the full sentence opens 'Thus, in the ultimate analysis, we hold, in case of Private Discretionary Trusts...'. On the locator, the reproductions disagree: one places the sentence and the direction returning the records to the respective Benches together in paragraph 32, another gives paragraph 31, and the Rajkot Bench in Manjar Discretionary Family Trust reproduces paragraphs 22 to 30 and places it after paragraph 31. Paragraph 32 is retained because it is the only reading that also accounts for the return-of-records direction. Two things remain unverified and should not be published as though they were established. The coram this page formerly carried in its bench field — a Bench designation 'K (SMC)' together with Justice C.V. Bhadang (President), Saktijit Dey (Vice President) and B.R. Baskaran (Accountant Member), with authorship attributed to Saktijit Dey — has been withdrawn and is no longer stated as fact. That designation could not be right as it stood, because SMC denotes a single-member Bench and this was a Special Bench of three; and no source available here names any Member of the Special Bench at all. Neither the Division Bench order in the same appeal nor the Kolkata Bench in Chanda Bharech, which reproduces paragraphs 21 to 32 of the Special Bench order, gives any composition or Bench designation. The bench field now records only what is established: that this was a Special Bench of the Mumbai Tribunal, constituted under s.255(3). The members must be taken from the order itself before any coram is republished here. And of the sections tagged here, s.2(29C) is confirmed inside the reproduced text; s.164 and s.167B were not, because the paragraphs before 21 are not among those reproduced, so they are retained rather than removed. This is a reference answered under s.255(3), not a disposal of the appeal; the individual assessments went back to the regular Benches, so the order establishes the proposition and not any particular outcome. It construes Paragraph A, Part I of the First Schedule to the Finance Act 2023 for assessment year 2023-24, and the Schedule is re-enacted every year, so the thresholds must be checked against the Finance Act of the year in hand. No High Court has ruled on the question, and no appellate treatment of this order was traced. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Special Bench decided a reference, not the appeal. The question referred was whether, in the case of private discretionary trusts whose income is chargeable at the maximum marginal rate, surcharge is chargeable at the highest applicable rate or at slab rates (para 1). The Bench held that surcharge is to be computed on the income-tax by reference to the slab rates prescribed under the heading 'Surcharge on income-tax' in Paragraph A, Part I of the First Schedule to the Finance Act of the relevant year, and that the maximum marginal rate under ss.164 and 167B read with s.2(29C) means the rate of tax applicable to the highest slab of income — 30 per cent under the Finance Act 2023 — with surcharge then computed on that tax according to the Schedule's own thresholds (paras 26, 27 and 32). Since the threshold for any surcharge is total income of Rs. 50 lakh, a trust below that threshold bears none (para 28). The reference was decided in favour of the assessee, and the Bench directed that 'the records may be returned back to the respective benches for deciding the appeals accordingly' (para 32). It did not itself set aside the processing adjustment; that fell to the regular Bench.
TaxSphere, “Araadhya Jain Trust v ITO”, https://taxnotice.vittsphere.com/caselaw/case/araadhya-jain-trust-v-ito-mmr/ (validity last checked 2026-08-19)
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