The Hon’ble Kerala High Court, in the case of M/s South Indian Bank Ltd. v. Joint Director, Directorate General of GST Intelligence [Writ Petition (Civil) No. 29087 of 2025 dated February 18, 2026], along with two connected matters namely, The Federal Bank Ltd. v. The Joint Director, Directorate General of GST Intelligence [Writ Petition (Civil) No. 24348 of 2025] and M/s South Indian Bank Ltd. v. Additional Commissioner of Central Tax & Central Excise [Writ Petition (Civil) No. 23546 of 2024], examined the prevalent connection between Input Tax Credit (ITC) and Income Tax depreciation, particularly considering the case of banking industries, Financial Companies, Non-Banking Financial Companies (NBFCs). The Court addressed this issue in the specific context of banking companies, financial institutions, and NBFCs, and held that claiming depreciation on the unavailed portion of the tax credit does not disentitle the assessee from claiming ITC on the remaining portion, where no depreciation has been claimed.
Facts:
M/s South Indian Bank Ltd. and The Federal Bank Ltd. (“the Petitioners”) are banking companies that challenged the Show Cause Notices (“the SCNs”) issued under Section 74 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) in W.P.(C) No. 29087/2025 and W.P.(C) No. 24348/2025, as well as an Order-in-Original (“the OIO”) passed under Section 73 of the CGST Act in W.P.(C) No. 23546/2024.
The common issue that arose across these writ petitions was concerning the eligibility of ITC on a portion of the tax component on which depreciation had been claimed under the Income-tax Act.
Proceedings were initiated based on information received from the Directorate General of GST Intelligence (DGGI), Kochi Zonal Unit, indicating that several banking companies were availing ITC on capital goods in alleged contravention of Sections 16(3) and 17(4) of the CGST Act. This led to investigations and the subsequent initiation of proceedings against the Petitioners.
The Petitioners had opted for the scheme under Section 17(4) of the CGST Act, whereby 50% of the eligible ITC was availed, and the remaining 50% was not availed and instead capitalised, with depreciation claimed on such portion under the Income-tax Act.
The Department contended that once depreciation was claimed on the tax component, Section 16(3) of the CGST Act was attracted, thereby rendering the entire ITC ineligible, as the provision imposes a prohibition on claiming ITC where depreciation has been claimed.
Aggrieved by this interpretation, the Petitioners approached the High Court, challenging the validity of the SCNs and the OIO.
Issue:
Whether the Availment of ITC in respect of the Tax component on which the Petitioners have claimed depreciation under the provisions of the Income Tax Act was wrongful and violative of section 16(3) of the CGST Act?
Held:
The Hon’ble Kerala High Court undertook a careful and contextual interpretation of Sections 16(3), 17(2), and 17(4) of the CGST Act, read with Rule 38 of the Central Goods and Services Rules, 2017 (“the CGST Rules”), and made the following key observations:
- The Court noted that Rule 38 of the CGST Rules prescribes the mechanism for exercising the option under Section 17(4) of the CGST Act, which allows banking companies and financial institutions to avail a standardised 50% of eligible ITC in lieu of undertaking the complex apportionment exercise under Section 17(2) of the CGST Act.
- It was emphasised that the restriction under Section 16(3) of the CGST Act applies specifically to “said tax component” on which depreciation has been claimed. This phrase, according to the Court, is crucial and limits the scope of the prohibition only to that portion of the tax component where dual benefit is actually availed.
- The Court reaffirmed that the underlying objective of Section 16(3) of the CGST Act is to prevent double benefit, i.e., simultaneous availment of ITC and depreciation on the same tax component. However, in the present case, no such double benefit arose in respect of the portion of tax on which ITC was not claimed.
- Drawing a conceptual parallel between Sections 17(2) and 17(4) of the CGST Act, the Court observed that the 50% ITC restriction under Section 17(4) of the CGST Act operates as a statutory approximation of exempt supplies. In effect, the remaining 50%, on which ITC is not availed, is treated akin to input tax attributable to exempt supplies, where credit is ordinarily disallowed.
- Therefore, just as depreciation claimed on inputs attributable to exempt supplies does not attract the bar under Section 16(3) of the CGST Act, a similar treatment must extend to cases falling under Section 17(4) of the CGST Act. Any contrary interpretation would result in an unreasonable and artificial classification.
- The Court categorically held that claiming depreciation on the unavailed portion of ITC cannot result in the denial of ITC on the entire tax component. The restriction under Section 16(3) of the CGST Act must be confined only to the portion on which depreciation has been claimed.
- Further, the Court observed that the unavailed 50% of ITC under Section 17(4) of the CGST Act, effectively “lapses” and ceases to retain the character of input tax credit. Consequently, such lapsed credit cannot be brought within the ambit of Section 16(3) of the CGST Act, which applies only to a “tax component” capable of being claimed as ITC.
- Accordingly, the Court quashed the impugned SCNs in W.P.(C) Nos. 29087/2025 and 24348/2025, and set aside the OIO in W.P.(C) No. 23546/2024 to the extent it imposed a restriction under Section 16(3) of the CGST Act on the unavailed portion of ITC. Liberty was granted to the Petitioners to pursue statutory remedies in respect of other issues.
Our Comments:
Section 17(2) of the CGST Act restricts ITC to the extent attributable to taxable and zero-rated supplies, disallowing credit for exempt supplies. Section 17(4) of the CGST Act, read with Rule 38 of the CGST Rules, introduces a special mechanism for banking companies and financial institutions, allowing them to avail 50% of the eligible ITC, with the remaining portion lapsing and requiring reversal in Form GSTR-3B.
In this framework, the portion of tax on which ITC is not availed cannot logically fall within the mischief of Section 16(3) of the CGST Act, since no dual benefit arises. The prohibition under Section 16(3) of the CGST Act is clearly intended to prevent dual benefit, presently, ITC under GST and depreciation under income tax, on the same tax component.
The Court’s interpretation reinforces a principled and purposive reading of fiscal statutes, ensuring that statutory provisions are not expanded beyond their intended scope to create unintended hardship. By confining the restriction strictly to the portion where depreciation is claimed, the ruling avoids a disproportionate denial of ITC.
Additionally, the recognition that lapsed ITC under Section 17(4) of the CGST Act does not retain the character of “tax component” for credit purposes is a significant clarification, as it prevents the artificial extension of restrictive provisions to amounts that are no longer eligible for credit.
This judgment is likely to have broader implications for the banking and financial sector, where the mechanism under Section 17(4) of the CGST Act is widely adopted, and provides much-needed clarity against aggressive interpretations by the Department.
Relevant Provisions:
Section 16 – Eligibility and conditions for taking input tax credit, CGST Act, 2017
(3) Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed.
Section 17 – Apportionment of credit and blocked credits, CGST Act, 2017
(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
(4) A banking company or a financial institution including a nonbanking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances shall have the option to either comply with the provisions of subsection (2), or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:
PROVIDED that the option once exercised shall not be withdrawn during the remaining part of the financial year:
PROVIDED FURTHER that the restriction of fifty per cent shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.
Rule 38 – Claim of credit by a banking company or a financial institution, CGST Rules, 2017
A banking company or a financial institution, including a nonbanking financial company, engaged in the supply of services by way of accepting deposits or extending loans or advances that chooses not to comply with the provisions of sub-section (2) of section 17, in accordance with the option permitted under sub-section (4) of that section, shall follow the following procedure, namely,-
(a) the said company or institution shall not avail the credit of,-
(i) the tax paid on inputs and input services that are used for non-business purposes; and
(ii) the credit attributable to the supplies specified in sub-section (5) of section 17;
(b) the said company or institution shall avail the credit of tax paid on inputs and input services referred to in the second proviso to sub-section (4) of section 17 and not covered under clause (a);
(c) fifty per cent. of the remaining amount of input tax shall be the input tax credit admissible to the company or the institution and the balance amount of input tax credit shall be reversed in FORM GSTR-3B.
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