Kerala HC holds bank’s eligibility of 50% ITC cannot be denied where IT depreciation is claimed w.r.t balance ineligible ITC

 This Tax Alert summarizes a recent ruling of the Kerala High Court (HC) ^[1] on the eligibility of banking companies opting for Section 17(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) to avail 50% of input tax credit (ITC), where depreciation has been claimed under the Income tax Act, 1961 (IT Act) on the remaining portion corresponding to the foregone ITC.

The key observations of the HC are:

• The sole purpose of the restriction under Section 16(3) is to prevent double benefit, namely availing ITC under the CGST Act and claiming depreciation under the Income tax Act on the same tax component. Where depreciation is claimed on the portion of tax for which no ITC was availed, no such double benefit arises.
• The expression “the said tax component” in Section 16(3) applies only to the specific tax component on which depreciation is claimed and cannot be automatically extended to the entire amount of tax paid.
• Under Section 17(4), the law fixes 50% of ITC as relatable to exempt supplies by a deeming fiction. Since Section 16(3) does not apply where depreciation is claimed on ITC in respect of exempt supplies, extending the same to the un-availed portion of ITC under Section 17(4) would be unreasonable.
• Alternatively, once the 50% ITC lapses, it ceases to have the character of a “tax component”, therefore, does not attract the bar under Section 16(3).

Accordingly, HC set aside the impugned orders to the extent they invoked Section 16(3) in respect of the 50% tax component on which no depreciation had been claimed by the petitioners.

Comments:

• This ruling is significant in the context of banking sector, where several taxpayers have received show cause notices and audit objections on the issue. The judgment may help the taxpayers to defend their case.

Entities that have already reversed ITC pursuant to departmental objections may consider re evaluating their position, subject to limitation period and procedural safeguards