The Income Tax Appellate Tribunal, Bangalore, has delivered a significant ruling affirming that public sector banks are not liable to pay tax on book profits under Section 115JB, and that expenditures such as Corporate Social Responsibility (CSR) activities, depreciation on ATMs at 60%, and deductions under Section 36(1)(viii) qualify as allowable business expenses. The decision reinforces the principle that judicial precedents binding on coordinate benches and jurisdictional High Courts must govern tax assessments, even where the Department's appeals remain pending.
Background & Facts
The Dispute
The appeal arises from the assessment for the year 2016-17, wherein the Assessing Officer (AO) made multiple additions to Canara Bank’s taxable income, challenging deductions claimed under Sections 36(1)(viia), 36(1)(viii), 37, and depreciation provisions, as well as the applicability of Section 115JB. The bank, a public sector entity, filed its return declaring a taxable income of ₹21,837,848,090, which the AO increased to ₹97,276,907,662 through various disallowances. The National Faceless Appeal Centre (CIT(A)) deleted most of these additions, relying on prior favorable orders from the ITAT and the Karnataka High Court. The AO appealed all 18 grounds of disallowance.
Key Facts
- The assessee, Canara Bank, is a public sector banking company with PAN AAACC6106G.
- Return filed on 29.11.2016 for AY 2016-17.
- Scrutiny notice issued under Section 143(2) on 03.07.2017.
- Assessment order passed on 18.12.2018 by the Joint Commissioner, Large Taxpayer Unit, Bangalore.
- CIT(A) order dated 10.01.2025 partially allowed the bank’s appeal.
- Key disallowances challenged by the AO:
- ₹23,56,18,01,708 claimed under Section 36(1)(viia) for rural branch advances, reduced by AO to ₹19,07,22,64,670.
- ₹152,96,75,137 disallowed as unrealized gains on foreign exchange forward contracts.
- ₹22,47,91,880 disallowed as CSR expenditure under Section 37(1).
- ₹13,26,22,004 depreciation disallowed on ATMs (AO allowed 15% instead of 60%).
- ₹112,57,34,064 disallowed under Section 14A for interest and administrative expenses related to exempt income.
- ₹92,54,04,660 disallowed as depreciation on HTM and AFS securities.
- ₹1,21,018 disallowed as depreciation on leased assets.
- ₹600 crore claimed under Section 36(1)(viii) for special reserve, partially disallowed.
- Interest on securities not offered to tax on accrual basis.
- Applicability of Section 115JB to banking companies.
Procedural History
- 29.11.2016: Assessee filed return for AY 2016-17.
- 03.07.2017: Notice under Section 143(2) issued.
- 18.12.2018: Assessment order passed by AO.
- 10.01.2025: CIT(A) order issued, deleting most additions.
- 18.03.2026: Hearing before ITAT Bangalore.
- 15.06.2026: Judgment pronounced.
The Parties' Positions
For the Revenue (AO)
- Relied on AO’s detailed computation and prior decisions where similar claims were disallowed.
- Argued that CSR expenditure is application of income, not business expenditure, citing Sitaldas Tirathdas.
- Contended that ATMs are plant and machinery eligible for only 15% depreciation, citing ITAT’s own 2018 order.
- Asserted that Section 14A disallowance must apply under Rule 8D(2)(ii) and (iii), regardless of interest-free funds.
- Claimed Section 115JB applies to all companies, including banks, citing Explanation 3 to Section 115JB.
- Argued that interest on securities must be taxed on accrual basis, not on due date.
For the Assessee (Canara Bank)
- Relied on binding precedents from the Karnataka High Court and coordinate ITAT benches.
- Cited CIT v. NCR Corporation Ltd. for 60% depreciation on ATMs as computers.
- Cited CIT v. Canara Bank [147 taxmann.com 171] for depreciation on HTM/AFS securities.
- Cited South Indian Bank and CBDT Circular No. 18/2015 to argue that non-SLR investments are stock-in-trade.
- Cited Maxopp Investment Ltd. to argue that where interest-free funds exceed investments, no disallowance under Section 14A.
- Cited ITA No. 391, 392 & 663/Bang/2023 and ITA Nos. 111/Bang/2024 & 716/Bang/2024 to establish that Section 115JB does not apply to banks.
- Cited 61 Taxman 79 and Supreme Court in SLP No. 2805/1993 to establish that interest is taxable only on due date.
Relief Sought
The Revenue sought to restore all disallowances totaling over ₹3,000 crore, including:
- ₹23,56,18,01,708 disallowance on Section 36(1)(viia)
- ₹152,96,75,137 on unrealized forex gains
- ₹22,47,91,880 on CSR
- ₹13,26,22,004 on ATM depreciation
- ₹112,57,34,064 on Section 14A
- ₹92,54,04,660 on HTM/AFS depreciation
- ₹1,21,018 on leased assets
- ₹600 crore on special reserve
- ₹24,55,15,72,986 on interest on securities
- ₹600 crore on Section 115JB liability
The Legal Issue
The central questions were: (1) Whether Section 115JB applies to public sector banks despite their regulatory framework under the Banking Companies Act, 1970? (2) Whether CSR expenditure qualifies as allowable business expense under Section 37(1)? (3) Whether ATMs are eligible for 60% depreciation as computers under the Income-tax Rules? (4) Whether interest on securities is taxable on accrual basis or only on due date? (5) Whether Section 14A disallowance is warranted when interest-free funds exceed investments?
Arguments Presented
For the Appellant (Revenue)
The Revenue contended that the CIT(A) erred in relying on pending appeals and non-final orders. It argued that Sitaldas Tirathdas mandates disallowance of CSR as application of income, not business expenditure. It insisted that ATMs are plant and machinery under the definition in Rule 52, eligible only for 15% depreciation, and that the Karnataka High Court’s decision in NCR Corporation was distinguishable. It further argued that Section 14A must be applied mechanically under Rule 8D(2)(ii) and (iii), regardless of the assessee’s interest-free funds. On Section 115JB, it relied on Explanation 3 inserted by Finance Act, 2012, asserting that banks fall within the definition of "company" and are thus liable. It also contended that interest on securities, being business assets, must be taxed on accrual under Section 28 and ICDS principles.
For the Respondent (Assessee)
The assessee argued that binding precedents from the Karnataka High Court and coordinate ITAT benches on identical facts must prevail. It cited CIT v. Canara Bank [147 taxmann.com 171] for depreciation on HTM/AFS securities, CIT v. NCR Corporation Ltd. for 60% depreciation on ATMs, and South Indian Bank for the treatment of non-SLR investments as stock-in-trade. It emphasized that the Supreme Court in Maxopp Investment Ltd. held that where interest-free funds exceed investments, no disallowance under Section 14A is warranted. On Section 115JB, it relied on the ITAT’s own decisions for AYs 2015-16 and 2019-20, and the fact that banks are governed by the Banking Companies Act, 1970, which deems them Indian companies for tax purposes but does not subject them to book profit tax. It further cited 61 Taxman 79 and the Supreme Court’s dismissal of the Department’s SLP to establish that interest is taxable only on due date.
The Court's Analysis
The Tribunal emphasized that the doctrine of consistency and binding precedent governs tax adjudication, particularly where the facts are identical across assessment years. It held that the CIT(A) did not err in relying on decisions of the Karnataka High Court and coordinate ITAT benches, even if appeals against those decisions were pending, as no contrary decision had been rendered.
"Since the parties have shown that the facts are identical, and no contrary decision has been brought to our notice, we find no infirmity in the order of the learned CIT(A)."
On Section 36(1)(viia), the Tribunal accepted the assessee’s computation of rural branch advances, noting that the AO’s exclusion of overseas branch profits was not supported by statutory mandate and was inconsistent with prior rulings.
On unrealized forex gains, the Tribunal held that the Karnataka High Court’s dismissal of the Department’s appeal in ITA Nos. 207 and 208 of 2019 for AY 2014-15 was binding, and the AO’s reliance on Bank of Bahrain and Kuwait was misplaced.
On CSR expenditure, the Tribunal noted that the Supreme Court in Sitaldas Tirathdas dealt with charitable donations, not business-enhancing CSR activities undertaken under government guidelines. It held that the CIT(A) correctly distinguished the two, and that such expenditure, if enhancing goodwill and brand image, qualifies under Section 37(1).
On depreciation on ATMs, the Tribunal upheld the CIT(A)’s reliance on CIT v. NCR Corporation Ltd., holding that ATMs function as computers and are eligible for 60% depreciation. It distinguished note-counting machines and weighing scales, which were correctly classified as plant and machinery.
On Section 14A, the Tribunal affirmed the CIT(A)’s direction to recompute disallowance in light of Maxopp Investment Ltd. and CBDT Circular No. 18/2015, noting that where interest-free funds exceed investments, no interest disallowance is warranted. It also directed the AO to consider the distinction between SLR and non-SLR investments.
On depreciation on HTM/AFS securities, the Tribunal held that the Karnataka High Court’s decision in CIT v. Canara Bank was binding and that the AO’s reliance on CBDT Instruction No. 17 was misapplied, as the instruction did not prohibit depreciation on HTM securities.
On interest on securities, the Tribunal held that the Karnataka High Court’s decision in 61 Taxman 79, affirmed by the Supreme Court in SLP No. 2805/1993, established that interest is taxable only on the date it becomes due, not on accrual.
On Section 115JB, the Tribunal held that the provisions of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, which deem banks as Indian companies, do not automatically subject them to Section 115JB. It noted that the ITAT’s consistent view, supported by no contrary precedent, was that banks are excluded from the scope of Section 115JB.
The Verdict
The appeal filed by the Assessing Officer was dismissed in its entirety. The Tribunal upheld the CIT(A)’s order dated 10.01.2025, confirming that:
- The deduction under Section 36(1)(viia) of ₹23,56,18,01,708 is allowable.
- Unrealized gains of ₹152,96,75,137 on foreign exchange forward contracts are not taxable.
- CSR expenditure of ₹22,47,91,880 is allowable as business expenditure.
- Depreciation on ATMs is allowable at 60%, amounting to ₹13,26,22,004.
- No disallowance under Section 14A is warranted on interest component where interest-free funds exceed investments; administrative disallowance to be recomputed.
- Depreciation on HTM and AFS securities of ₹92,54,04,660 is allowable.
- Depreciation on leased assets of ₹1,21,018 is allowable.
- Deduction under Section 36(1)(viii) for special reserve is to be recomputed in accordance with the ITAT’s decision in [2017] 60 ITR (Trib) 1.
- Interest on securities is taxable only on the date it becomes due, not on accrual.
- Section 115JB is not applicable to Canara Bank.
What This Means For Similar Cases
Banking Companies Are Exempt from Section 115JB Unless Specifically Covered
- Practitioners must argue that public sector banks, governed by the Banking Companies Act, 1970, are not subject to Section 115JB unless the statute explicitly includes them.
- The ITAT’s reliance on the absence of any judicial precedent applying Section 115JB to banks is a strong precedent for future cases.
- The Finance Act, 2012, Explanation 3 does not override the specific statutory framework governing banks.
CSR Expenditure Can Be Allowed as Business Expense
- CSR activities that enhance brand image, customer goodwill, or operational efficiency may qualify under Section 37(1), even if mandated by the Companies Act, 2013.
- The distinction between charitable donations (Sitaldas Tirathdas) and business-enhancing CSR is critical.
- Banks and PSUs should maintain documentation linking CSR to business objectives.
Depreciation Rates Must Reflect Functional Use, Not Static Classification
- ATMs, if functionally equivalent to computers, are eligible for 60% depreciation regardless of prior rulings classifying them as plant and machinery.
- The functional test, not the asset category, governs depreciation rates under the Income-tax Rules.
- Practitioners must cite jurisdictional High Court decisions on asset classification to override AO’s mechanical application of rates.
Section 14A Disallowance Requires Actual Allocation, Not Mechanical Application
- Where interest-free funds exceed investments, no disallowance under Rule 8D(2)(ii) is warranted.
- The AO must examine the actual use of funds, not presume allocation.
- CBDT Circular No. 18/2015 must be applied to distinguish SLR and non-SLR investments.
Precedents Bind Even If Appeals Are Pending
- A binding decision from a jurisdictional High Court or coordinate ITAT bench governs the assessment, even if the Department has filed an appeal.
- The pendency of an appeal does not invalidate the precedent unless a higher court stays it.
- Tax officers cannot ignore settled law merely because the Department is challenging it.
Interest on Securities Taxable Only on Due Date
- The principle that interest is taxable only on the date it becomes due, not on accrual, is now firmly established for banking entities.
- This overrides the general accrual principle under Section 28 and ICDS.
- Banks must ensure their accounting policies reflect this judicial position.
