Supreme Court Refuses To Interfere With Relief To Karnataka Bank In HTM Investment Income Tax Dispute

The Supreme Court on Monday declined to interfere with Karnataka Bank Ltd's tax relief in a dispute over deduction for diminution in the value of its held-to-maturity (HTM) investments, which are securities that banks buy with the intention of holding until maturity rather than trading.

A Bench of Justices Manoj Misra and Manmohan dismissed the Revenue's special leave petition against the Karnataka High Court's August 2025 judgment that had upheld relief granted to the bank.

“We do not find a good ground to interfere with the impugned order/judgment in exercise of our jurisdiction under Article 136 of the Constitution of India. Accordingly, the special leave petition stands dismissed,” the Court observed.

The dispute concerned Assessment Year 2004-05, in which Karnataka Bank had claimed deduction of about ₹22.44 crore towards depreciation or diminution in the value of its HTM investment portfolio.

The tax department had disallowed the claim on the ground that such investments were in the nature of investments and not stock-in-trade, and therefore not eligible for the deduction claimed.

The bank succeeded before the appellate commissioner, who held that it was entitled to the deduction, subject to verification of the computation and valuation methodology.

The Income Tax Appellate Tribunal in February 2024 upheld that relief, noting that the issue was already covered by earlier decisions in Karnataka Bank's own case and directing the assessing officer to verify the correctness of the quantum of depreciation, the method of valuation adopted and consistency in its application.

The Revenue then approached the Karnataka High Court, arguing that the Tribunal had erred in allowing the claim and contending, among other things, that depreciation could not be allowed without adjusting appreciation in other securities.

The High Court, however, refused to interfere. It held that the core issues raised by the Revenue were already covered by its earlier ruling in Karnataka Bank Ltd v. Assistant Commissioner of Income Tax, which had decided the issue in the bank's favour.

On the Revenue's argument relating to netting off appreciation in other securities, the High Court said the issue had not been raised before the tribunal and therefore could not be urged for the first time in appeal. It nevertheless left it open to the Revenue to pursue such a remedy before the Tribunal in accordance with law, if permissible.

Challenging that ruling, the Revenue moved the Supreme Court, which on Monday declined to interfere, bringing the litigation to a close for now.