ITAT Ahmedabad grants Axis Bank relief on Section 14A, CWIP interest, capital gains and ESOP tax disputes.

May 20, 2026 : The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has granted significant relief to Axis Bank by deleting multiple tax additions made by the Income Tax Department for Assessment Years 2020-21 and 2021-22, including disallowances under Section 14A of the Income Tax Act, interest related to capital work-in-progress (CWIP), and the reclassification of long-term capital gains as business income.

In a detailed order passed by a division bench comprising Judicial Member Sanjay Garg and Accountant Member Annapurna Gupta, the Tribunal allowed the bank’s appeals while dismissing the Revenue’s cross-appeals. The ruling reinforces several established principles governing tax treatment of exempt income, capital investments, and employee stock option expenses in the banking sector.

One of the principal disputes concerned a disallowance made under Section 14A of the Income Tax Act, which deals with expenditure incurred in relation to exempt income. During the relevant assessment year, Axis Bank had earned substantial tax-exempt income and had voluntarily made a disallowance of certain administrative expenses. However, the Assessing Officer invoked Rule 8D and enhanced the disallowance substantially, resulting in an additional tax adjustment exceeding ₹20 crore.

The Tribunal observed that the issue had repeatedly arisen in the bank’s case over several assessment years and had consistently been decided in its favour by appellate authorities, including the Gujarat High Court and the Supreme Court. Referring to its earlier decisions, the ITAT noted that before invoking Rule 8D, the Assessing Officer must record clear dissatisfaction with the taxpayer’s computation of expenditure having regard to the books of account. The bench found that Axis Bank had adopted a scientific and reasonable methodology for computing the expenditure attributable to exempt income and that the Assessing Officer had failed to identify any specific defect in that methodology.

The Tribunal reiterated that “the formula provided in Rule 8D is to be applied only in the circumstance that the assessee’s calculation of disallowance appears to the Assessing Officer to be incorrect having regard to its books of accounts.” Since that statutory requirement had not been satisfied, the Tribunal held that the invocation of Rule 8D was legally unsustainable and directed deletion of the disallowance.

The bench also considered the issue of interest disallowance under the proviso to Section 36(1)(iii) concerning capital work-in-progress. The tax department had argued that interest attributable to CWIP should be capitalised until the relevant assets were put to use and therefore could not be claimed as a deduction. The Assessing Officer consequently disallowed interest expenditure of more than ₹10 crore.

Rejecting the Revenue’s position, the Tribunal held that Axis Bank possessed substantial interest-free funds far exceeding its investment in CWIP. Relying on settled judicial principles, the bench observed that where sufficient own funds are available, a presumption arises that such investments are financed from those interest-free funds rather than borrowed capital. The Tribunal noted that the bank’s interest-free funds exceeded ₹1 lakh crore while the CWIP investment was only around ₹109 crore. Accordingly, it concluded that no interest expenditure could be attributed to CWIP and ordered deletion of the disallowance.

A major issue in the appeal related to the tax treatment of gains arising from the sale of shares in Max Life Insurance Company and investments in venture capital funds. Axis Bank had declared the gains as long-term capital gains and paid tax at the concessional rate applicable to such income. The tax authorities, however, treated the gains as business income on the ground that investments made by banks form part of their banking business.

The Tribunal disagreed with that approach and held that the Revenue had incorrectly relied on the Supreme Court’s decision in Nawanshahar Central Cooperative Bank. According to the bench, that judgment dealt with investments made pursuant to statutory banking requirements and could not be treated as laying down a universal rule that all investments held by banks automatically constitute business assets.

The ITAT examined the nature of the investments and found that the stake in Max Life Insurance and investments in venture capital funds were strategic and long-term in character, intended for capital appreciation rather than routine banking operations. The Tribunal also noted that in previous assessment years the Income Tax Department itself had accepted similar gains and losses from identical investments as capital gains or capital losses. Applying the principle of consistency, the bench held that the Revenue could not arbitrarily alter its stand in the absence of any change in facts or law.

The Tribunal therefore directed the Assessing Officer to accept the gains as taxable under the head “Capital Gains” instead of “Profits and Gains of Business or Profession.” The ruling is significant for banks and financial institutions that maintain separate portfolios for strategic investments and trading assets, as it affirms that not every investment held by a bank necessarily forms part of its business stock-in-trade.

The Revenue’s appeals were also rejected. One of the grounds challenged the deduction claimed by Axis Bank in respect of Employee Stock Option Plan (ESOP) expenses amounting to nearly ₹198 crore. The Tribunal observed that identical claims had already been upheld in the bank’s own cases for earlier years and found no reason to depart from that settled position. It accordingly upheld the appellate authority’s decision allowing the deduction.

Another Revenue challenge concerned taxation of interest on non-performing assets (NPAs). The department sought to tax notional interest based on the provisions of Rule 6EA, whereas the bank had followed Reserve Bank of India guidelines for NPA recognition. The Tribunal noted that the same issue had been decided in favour of Axis Bank in earlier years and dismissed the Revenue’s appeal, thereby affirming the relief granted by the Commissioner (Appeals).

The judgment is likely to have wider implications for the banking industry, particularly in relation to Section 14A disallowances, treatment of strategic investments, capital work-in-progress financing, ESOP deductions, and taxation of NPAs. The decision underscores that tax authorities cannot mechanically invoke Rule 8D, disregard established judicial precedents, or recharacterise investment income without examining the true nature and purpose of the underlying assets. It also reinforces the principle that consistency in tax administration is essential where the facts and legal position remain unchanged across assessment years.

Case Reference: Axis Bank Limited v. Assistant Commissioner of Income Tax, ITA Nos. 611 & 612/Ahd/2025 and ACIT v. Axis Bank Limited, ITA Nos. 563 & 564/Ahd/2025