ITAT Bangalore confirms multiple income-tax reliefs for Canara Bank for AY 2016-17

Background of the dispute

The Assistant Commissioner of Income Tax challenged an appellate order of the National Faceless Appeal Centre (NFAC) relating to Assessment Year 2016-17 in the case of Canara Bank, a public sector bank. The original assessment was framed under Section 143(3) of the Income Tax Act 1961, resulting in a substantial increase in total income after various disallowances.

The Commissioner of Income Tax (Appeals) – NFAC had deleted or substantially modified several additions made by the Assessing Officer (AO). The Revenue carried the matter to the ITAT Bangalore, raising 18 separate grounds, covering issues such as:

  • Deduction under Section 36(1)(viia) read with Rule 6ABA
  • Unrealised gains on revaluation of foreign exchange forward contracts
  • Allowability of CSR expenditure and trust expenses
  • Rate of depreciation on ATMs and other machines
  • Disallowance under Section 14A read with Rule 8D
  • Depreciation on HTM/AFS/HFT securities
  • Depreciation on leased assets
  • Deduction under Section 36(1)(viii) (special reserve)
  • Taxability of interest on securities
  • Applicability of Section 115JB (MAT) to a banking company

The assessee’s counsel argued that every ground was already covered by binding precedents either of the Karnataka High Court or of coordinate benches of the ITAT in the assessee’s own earlier years. The Departmental Representative relied on the assessment order, contending that many of these issues are still being agitated by the Revenue in higher forums.

The Tribunal, after examining each ground, upheld the order of the CIT(A) in full and dismissed the Revenue’s appeal.

Deduction under Section 36(1)(viia) and application of Rule 6ABA

AO’s approach

The dispute under Ground No. 1 related to computation of deduction for provision for bad and doubtful debts under Section 36(1)(viia). The AO had:

  • Excluded profits of London and Shanghai branches from the 7.5% of total income component, and
  • Restricted the base for the 10% deduction on “aggregate average advances” under Rule 6ABA only to fresh advances, instead of total outstanding advances, and
  • Reclassified certain rural branches as urban branches based on population criteria, thereby reducing eligible rural advances.

On this basis, the AO reduced the assessee’s claim by recalculating the eligible deduction.

CIT(A)’s decision

The CIT(A) followed earlier orders of the ITAT Bangalore in the assessee’s own case, including for AY 2019-20, where similar adjustments by the AO had been rejected and the assessee’s computation had been upheld.

Tribunal’s ruling

The Tribunal noted that the very same controversy regarding inclusion of total outstanding advances (and the treatment of overseas branch profits) had already been adjudicated in favour of the assessee for earlier years, including AY 2015-16, by the jurisdictional bench. No adverse contrary authority or change in factual position was produced by the Revenue.

The Tribunal therefore sustained the CIT(A)’s order and dismissed Ground No. 1, affirming the assessee’s entitlement to deduction under Section 36(1)(viia) as claimed.

Unrealised gains on revaluation of forward contracts in foreign exchange

AO’s disallowance

Under Ground No. 2, the AO had added back unrealised gains of Rs.152,96,75,137/- arising on year-end revaluation of unmatured foreign exchange forward contracts, on the footing that:

  • Such gains had “accrued” as at the balance sheet date; and
  • The Special Bench decision in Bank of Bahrain and Kuwait [132 TTJ 550] supported taxation of such mark-to-market adjustments.

The AO also declined to grant a corresponding relief in respect of Rs.65,99,50,796/- previously disallowed in AY 2015-16 and offered to tax by the assessee in AY 2016-17.

CIT(A)’s reasoning

The CIT(A) allowed the assessee’s claim, primarily relying on:

  • Earlier ITAT Bangalore orders in the assessee’s own case for AY 2014-15 (ITA Nos. 1899 & 1900/Bang/2017), and
  • The subsequent judgment of the Karnataka High Court dated 5 December 2022 in ITA Nos. 207 & 208 of 2019, which had affirmed the ITAT’s view in favour of the assessee on this very issue.

Tribunal’s view

The Tribunal observed that:

  • The Karnataka High Court had already upheld the assessee’s stand on the treatment of unrealised gains on such forward contracts in its own earlier year.
  • The CIT(A) had consistently followed that binding jurisdictional precedent.
  • The Revenue did not produce any contrary High Court or Supreme Court ruling or demonstrate any material factual distinction.

Accordingly, the deletion of the addition of Rs.152,96,75,137/- was confirmed and Ground No. 2 was dismissed.

CSR expenditure and trust expenses

Nature of expenses and AO’s stand

Grounds Nos. 3 & 4 concerned allowability of:

  • Corporate Social Responsibility (CSR) expenses, and
  • Trust-related expenditure.

The assessee had debited CSR expenditure of Rs.32,78,19,000/- in the Profit and Loss account but had voluntarily added back Rs.10,30,27,120/-. The balance amount was claimed as deductible on the basis that these activities—such as skill development for unemployed youth, education, health care, rural development, women empowerment, financial literacy, and community awareness—were integrally connected with banking business and brand-building, particularly for a public sector bank acting under Government guidelines.

The AO rejected the claim, holding that:

  • Section 135 of the Companies Act 2013 and Explanation 2 to Section 37(1) classify CSR outlays as not incurred for business purposes, and
  • The expenditure represented mere application of income for social obligations, drawing support from Sitaldas Tirathdas [1961] 41 ITR 367 (SC).

CIT(A) and ITAT

The CIT(A) referred to a coordinate bench decision in the assessee’s own case for AY 2019-20 where similar CSR and trust expenses were allowed.