Depreciation on Unavailed ITC Does Not Bar Credit U/s 16(3): Kerala High Court

The Kerala High Court has ruled that banking companies opting for the 50% Input Tax Credit (ITC) mechanism under Section 17(4) of the Central Goods and Services Tax (CGST) Act cannot be denied ITC merely because depreciation was claimed on the tax component corresponding to the unavailed portion of credit. The bench of Justice Ziyad Rahman A.A. has quashed show cause notices issued by the Directorate General of GST Intelligence (DGGI) against The South Indian Bank Ltd. and The Federal Bank Ltd. and held that Section 16(3) of the CGST Act only prohibits ITC on the specific tax component on which depreciation has been claimed and cannot be extended to the entire tax component. The petitions arose from GST proceedings initiated against the banks by the Directorate General of GST Intelligence. The authorities alleged that the banks had wrongly availed input tax credit on capital goods while also claiming depreciation on the tax component of those assets under the provisions of the Income Tax Act, 1961. According to the department, such depreciation triggered the prohibition contained in Section 16(3) of the CGST Act, which bars ITC where depreciation is claimed on the tax component of the cost of capital goods. The banks, however, contended that they had opted for the special mechanism available to banking companies under Section 17(4) of the CGST Act. Under this provision, banks are allowed to avail only 50% of the eligible ITC, while the remaining 50% automatically lapses. They argued that depreciation was claimed only on the portion of tax for which ITC was not availed. The central question before the Court was whether claiming depreciation on the unavailed portion of GST under Section 17(4) would render the taxpayer ineligible for ITC on the remaining portion under Section 16(3) of the CGST Act. The Court examined the interplay between Sections 16(3), 17(2), and 17(4) of the CGST Act along with Rule 38 of the CGST Rules governing ITC availment by banking institutions. The court noted that the prohibition under Section 16(3) is intended to prevent double benefit—namely, claiming both input tax credit under GST law and depreciation on the same tax component under the Income Tax Act. However, the Court emphasized that such a double benefit does not arise in cases where depreciation is claimed only on the portion of tax for which ITC was not availed. The Court explained that when a bank chooses the option under Section 17(4), the law creates a statutory mechanism where only 50% of the eligible ITC can be claimed, while the remaining portion lapses. This unavailed portion effectively represents tax attributable to exempt supplies under the deeming scheme of Section 17. Therefore, the Court held that Section 16(3) cannot be interpreted to deny ITC on the entire tax component simply because depreciation was claimed on the portion of tax for which ITC was not availed. The High Court held that the prohibition in Section 16(3) applies only to the specific tax component on which depreciation is claimed. Claiming depreciation on the unavailed portion of ITC under Section 17(4) does not amount to claiming double benefit. The GST authorities cannot deny ITC on the entire tax component merely because depreciation was claimed on the portion that had already lapsed under the statutory scheme. The Court observed that interpreting the provision otherwise would result in an unreasonable restriction and misapplication of the statute. The Court quashed the show cause notices issued to the banks under Section 74 of the CGST Act and set aside the Order-in-Original in one of the petitions to the extent it denied ITC based on Section 16(3) for the unavailed portion of tax. The Court also clarified that the petitioner in the matter challenging the adjudication order would be free to pursue statutory appellate remedies for other issues contained in the order, with the limitation period being appropriately excluded. Case Details Case Title: M/S. The South Indian Bank Ltd. Versus Joint Director, Directorate General Of GST Intelligence Citation: JURISHOUR-247-HC-2026(Ker) Case No.: WP(C) NO. 29087 OF 2025 Date: 18/02/2026 Counsel For Petitioner: Shaji Thomas Counsel For Respondent: Abraham Joseph Markos Click Here To Read Order Read More: NCLT Rejects Shikhar Dhawan’s Insolvency Plea Against Legends League Operator

Depreciation on Unavailed ITC Does Not Bar Credit U/s 16(3): Kerala High Court

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