The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) has held that gains earned by Axis Bank from the sale of strategic investments and venture capital fund units amounting to ₹234.82 crore cannot be treated as business income and must instead be taxed under the head “Capital Gains.” 

The bench of  Sanjay Garg (Judicial Member) and Annapurna Gupta (Accountant Member) has ruled that not every investment made by a banking company forms part of its banking business and recognized that banks can maintain separate investment and trading portfolios. 

The dispute arose for Assessment Year 2020-21 when Axis Bank sold shares of Max New York Life Insurance Co. Ltd. and investments in venture capital funds, earning gains of ₹234.82 crore. The bank reported the income as long-term capital gains and paid tax at the applicable concessional rate of 20% after indexation. 

However, the Assessing Officer (AO) treated the gains as business income on the ground that investments made by banking entities are intrinsically linked to their banking business. Relying on the Supreme Court’s decision in CIT v. Nawanshahar Central Cooperative Bank Ltd., the Revenue concluded that income arising from such investments should be taxed as “Profits and Gains of Business or Profession.” 

Axis Bank contended that the investments in question were not made in the ordinary course of banking business or for trading purposes. It argued that its investment in Max Life was a strategic investment that provided significant influence, voting rights and board representation. Similarly, investments in venture capital funds were made for long-term capital appreciation and were managed by fund managers, with the bank having no active role in day-to-day management. 

The bank also relied on CBDT Instruction dated 2 May 2016, which provides that gains arising from the transfer of unlisted shares should ordinarily be treated as capital gains irrespective of the holding period to reduce litigation and ensure consistency. Since the shares of Max Life and the underlying investments of the venture capital funds were unlisted, Axis Bank argued that the instruction squarely supported its position. 

Before the Tribunal, Axis Bank placed significant reliance on the Supreme Court’s decision in Bank of Rajasthan Ltd. v. CIT (2024). The bank argued that the Supreme Court had recognized that banks can hold investments either as stock-in-trade or as long-term investments depending on the facts of each case. The Court had observed that certain categories of securities are treated as stock-in-trade, while others may constitute investments held for long-term purposes. 

The bank further pointed out that in earlier assessment years, the Income Tax Department had consistently accepted gains and losses arising from similar investments, including shares of Max Life Insurance and venture capital funds, as capital gains or capital losses. 

The Tribunal found merit in the bank’s submissions and held that the Revenue had incorrectly interpreted the Supreme Court’s ruling in Nawanshahar Central Cooperative Bank Ltd. According to the Tribunal, that judgment was rendered in the context of statutory investments mandated by law for carrying on banking operations. It did not establish a blanket principle that every investment made by a bank must automatically be treated as part of its banking business. 

The Bench observed that Axis Bank’s investments in Max Life and venture capital funds were made for strategic and long-term appreciation purposes rather than to satisfy statutory banking requirements. Therefore, the factual foundation of the Revenue’s reliance on Nawanshahar was absent in the present case. 

The Tribunal also emphasized that the Department had accepted identical claims in earlier years. It noted that even in revision proceedings under Section 263, the Principal Commissioner had taken the view that only income arising from statutory or SLR-related investments should be treated as business income. In the absence of any change in facts or law, the department could not adopt a contrary stand in the impugned assessment year. 

The Tribunal held that the investments were made for strategic and long-term purposes and not in the course of carrying on banking business. Consequently, the gains arising from their sale were rightly offered under the heading “Capital Gains.” 

The Tribunal set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to accept the bank’s claim. 

Membership Required to Access Case Details & Order Copy

To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.

Read More: Filing an Appeal Before GSTAT? Here Are the Key Clarifications You Need to Know