Kerala High Court has delivered a significant judgment clarifying the interplay between Section 16(3) and Section 17(4) of the Central Goods and Services Tax (CGST) Act, 2017, particularly in the context of banking companies availing input tax credit (ITC) and claiming depreciation under the Income Tax Act, 1961.
The petitions before the Court arose from show cause notices and an order-in-original issued to banking companies, challenging their entitlement to ITC on capital goods where a portion of the tax component had been capitalized and depreciation claimed. The core issue was whether, after opting for the special regime under Section 17(4) of the CGST Act (which allows banking companies to claim 50% of eligible ITC), claiming depreciation on the lapsed (unavailed) portion of the tax component would render the entire ITC ineligible under Section 16(3).
The Department contended that Section 16(3) imposes a complete prohibition on availing ITC for any tax component on which depreciation is claimed, regardless of whether ITC was actually availed for that portion. The petitioners argued that the restriction should apply only to the portion of the tax component for which both ITC and depreciation are claimed, and not to the lapsed portion under Section 17(4), as no double benefit arises in such cases.
Justice Ziyad Rahman A.A., after examining the statutory scheme, held that the prohibition in Section 16(3) is limited to “the said tax component” on which depreciation is claimed. The Court emphasized that the legislative intent behind Section 16(3) is to prevent double benefit—availing both ITC and depreciation on the same tax component. Where a banking company, by exercising the option under Section 17(4), claims ITC only on 50% of the eligible amount and lapses the remaining 50%, claiming depreciation on the lapsed portion does not result in double benefit, as no ITC is availed for that portion.
The Court further reasoned that the scheme under Section 17(4) creates a legal fiction, treating the lapsed 50% as attributable to exempt supplies, akin to the mechanism under Section 17(2). Therefore, the restriction under Section 16(3) cannot be extended to the lapsed portion, and any prohibition must be confined to the tax component for which both ITC and depreciation are claimed.
Accordingly, the Kerala High Court quashed the impugned show cause notices and the order-in-original to the extent they imposed a blanket prohibition under Section 16(3) on the entire tax component, rather than limiting it to the portion on which depreciation was actually claimed. The Court also clarified that the petitioner in one of the writ petitions remains free to pursue statutory remedies for other unrelated disputes, with the limitation period adjusted to account for the pendency of the writ petition.
This judgment provides important clarity for banking and financial institutions regarding the scope of Section 16(3) of the CGST Act and the correct approach to availing ITC when depreciation is claimed on capital goods.
Case Reported at:
Case Name: South Indian Bank Ltd. v. Joint Director Directorate General of GST Intelligence and Anr.
Case Citation: (2026) taxcode.in 698 HC
