Depreciation vs ITC for Banks under Section 17(4): Kerala High Court’s Key Ruling Explained

Background and Context

Input Tax Credit (ITC) on capital goods becomes particularly complex for banking companies, financial institutions, and NBFCs because a large part of their income is exempt from GST (e.g., interest on loans). To simplify ITC computations, such entities often opt for the special regime under Section 17(4) of the Central Goods and Services Tax Act, 2017 (CGST Act), instead of undertaking detailed apportionment under Section 17(2).

In a significant judgment, the Kerala High Court in M/s South Indian Bank Ltd. v. Joint Director, Directorate General of GST Intelligence, along with the connected matters The Federal Bank Ltd. v. The Joint Director, Directorate General of GST Intelligence [W.P.(C) No. 24348 of 2025] and M/s South Indian Bank Ltd. v. Additional Commissioner of Central Tax & Central Excise [W.P.(C) No. 23546 of 2024], examined the interplay between:

  • ITC under the CGST Act, and
  • Depreciation under the Income-tax Act, 1961,

with specific reference to entities covered by Section 17(4) such as banking companies and NBFCs.

The core dispute was whether claiming depreciation on the tax component that is not availed as ITC (because it lapses under Section 17(4)) would disentitle the assessee from availing ITC on the remaining 50% on which no depreciation is claimed.

The High Court has categorically held that it does not.

Facts of the Case

Parties and Proceedings

  1. Petitioners

    • M/s South Indian Bank Ltd. – a banking company with pan-India operations.
    • The Federal Bank Ltd. – another banking company.

  2. Impugned Actions

    • In W.P.(C) No. 29087/2025 and W.P.(C) No. 24348/2025, the assessee-banks challenged:
      • Show Cause Notices (SCNs) issued under Section 74 of the CGST Act.
    • In W.P.(C) No. 23546/2024, South Indian Bank Ltd. challenged:
      • An Order-in-Original (OIO) passed under Section 73 of the CGST Act.

The common question running through all three writ petitions was the eligibility of ITC where a part of the tax component on capital goods was subjected to depreciation under the Income-tax Act, 1961.

Department’s Investigation

  • Proceedings were triggered based on inputs from the Directorate General of GST Intelligence (DGGI), Kochi Zonal Unit.
  • The Intelligence wing reported that many banking companies were:
    • Availing ITC on capital goods
    • Allegedly in contravention of Section 16(3) and Section 17(4) of the CGST Act.

Assessees’ ITC Position

The assessees had:

  • Chosen the special option available to banking companies and financial institutions under Section 17(4) of the CGST Act.
  • In line with that option:
    • They availed 50% of the eligible ITC on inputs, capital goods and input services every month.
    • The remaining 50% of eligible ITC was not availed and was treated as lapsed.
    • That unavailed portion (the lapsed 50%) was capitalised in the books as part of the cost of capital goods.
    • Depreciation under the Income-tax Act, 1961 was claimed on this capitalised portion.

Department’s Stand

The Department argued as follows:

  • Once depreciation is claimed on any part of the tax component relating to capital goods:
    • Section 16(3) of the CGST Act is triggered.
    • Under this provision, if depreciation is claimed on the tax component under the Income-tax Act, 1961, ITC on “the said tax component” is not allowed.
  • According to the Department, this prohibition should be read to invalidate ITC on the entire tax component, even the part on which depreciation has not been claimed.
  • On that basis, the SCNs and the OIO alleged wrongful availment of ITC by the Petitioners.

Aggrieved, the assessees invoked the writ jurisdiction of the Kerala High Court.

Whether ITC availed on the portion of tax component on which no depreciation was claimed under the Income-tax Act, 1961 becomes ineligible merely because depreciation was claimed on the unavailed (lapsed) portion of the tax component, in light of Section 16(3) of the CGST Act?

Statutory Framework Considered

1. Section 16(3) – CGST Act

The Court reproduced and relied on Section 16(3), which provides:

“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.”

Key expression highlighted by the Court: “the said tax component”.

2. Section 17(2) and Section 17(4) – CGST Act

Relevant extracts: