Key Tax Rulings for the Banking Sector: Analysis of Bank of India vs. ACIT (ITAT Mumbai) case

Date: 09.01.2026

In a significant development for the financial services industry, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) recently delivered a comprehensive ruling in the case of Bank of India vs. Assistant Commissioner of Income Tax (Assessment Year 2013-14). The decision touches upon several critical pillars of bank taxation in India, including the applicability of MAT, the nuances of Section 14A disallowances, and the interpretation of Foreign Tax Credits (FTC).

This ruling 2026-VIL-40-ITAT-MUM provides much-needed clarity on how statutory provisions should be harmonized with the unique operational nature of banking institutions.

1. Section 14A: Shares as Stock-in-Trade

One of the most litigated areas in Indian tax law is Section 14A, which deals with disallowing expenditure incurred in relation to exempt income. For banks, the question often arises: what happens when exempt dividend income is earned from shares held as stock-in-trade rather than investments?

The ITAT, following earlier precedents, held that no disallowance under Section 14A is warranted when shares are held as stock-in-trade. The reasoning is clear: the primary intent of a bank holding these shares is for business operations. Any dividend earned is merely incidental and does not transform the nature of the business expenditure into one incurred for earning exempt income.

2. The MAT Exemption for Public Sector Banks

A pivotal highlight of this case was the applicability of Section 115JB (Minimum Alternate Tax or MAT). The Tribunal reaffirmed that the provisions of Section 115JB are not applicable to banks constituted as a "corresponding new bank" under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.

This is a major win for public sector banks, reinforcing the principle that MAT was not intended to be a blanket levy on all corporate entities, especially those governed by specialized regulatory and accounting frameworks like the Banking Regulation Act.

3. Foreign Tax Credit (FTC) and Avoiding Double Taxation

The case delved deep into the interpretation of Double Taxation Avoidance Agreements (DTAAs) and OECD commentaries regarding foreign branch income. The ITAT addressed a complex scenario: Can an assessee carry forward and set off foreign tax credit when the foreign income was originally offset by domestic losses?

The Tribunal ruled in favor of the Bank, emphasizing that the primary objective of tax treaties is to avoid double disadvantage. It held that the bank is entitled to claim FTC in the current year when the reduced losses from earlier years are set off against current profits. This ensures that the income is not taxed twice—once in the source country and again in India through the reduction of available loss offsets.

4. Computation of Deduction u/s 36(1)(viia)

Section 36(1)(viia) provides for a deduction in respect of provisions for bad and doubtful debts. The dispute centered on whether the "7.5% of total income" should be calculated before or after setting off brought forward losses.

The ITAT clarified that for this specific deduction, 'total income' refers to the business income before deducting the claim under Section 36(1)(viia) and Chapter VI-A deductions. Crucially, it ruled that brought forward losses should not be deducted while arriving at this figure. This interpretation allows banks to maximize the statutory relief intended for managing credit risk.

Summary of Key Takeaways

Issue	ITAT Mumbai Ruling
Section 14A	No disallowance for shares held as stock-in-trade.
MAT (Sec 115JB)	Not applicable to corresponding new banks (Public Sector Banks).
Foreign Tax Credit	Allowed even if foreign income was originally offset by losses, to avoid double taxation.
Sec 36(1)(viia)	Computed on income before setting off brought forward losses.
Interest u/s 244A	Directed for re-computation based on established judicial principles.

Conclusion

The Bank of India vs. ACIT ruling is a landmark for the banking industry. By focusing on the "substance over form" and the specific legislative intent behind banking-related tax provisions, the ITAT has provided a roadmap for navigating complex multi-jurisdictional and regulatory tax issues. For tax professionals, this case serves as a reminder of the importance of aligning domestic tax claims with international treaty principles and industry-specific exemptions.

Disclaimer: This blog post is for informational purposes only and does not constitute legal or tax advice.