Banks’ 50% ITC on Capital Goods Cannot Be Denied | HC

Case Details: South Indian Bank Ltd. vs. Additional Commissioner of Central Tax & Central Excise - [2026] 187 taxmann.com 1004 (Kerala)

Judiciary and Counsel Details

• Ziyad Rahman A.A., J.
• Shaji Thomas, Thomaskutty Sebastian & Gautham B. Baburaj, Advs. for the Petitioner.
• Sreelal N. Warrier, SC & P.T. Dinesh, Adv. for the Respondent.

Facts of the Case

The petitioners, being banking companies, had opted for the special mechanism under section 17(4) of the CGST Act, under which only 50% of eligible ITC on inputs, input services and capital goods was availed and the remaining 50% lapsed. The lapsed portion was capitalised in the books and depreciation was claimed under the Income-tax Act. The Department alleged that once depreciation was claimed on the tax component of capital goods, section 16(3) barred ITC on the entire tax component and consequently issued show cause notices and passed adjudication orders.

High Court Held

The Kerala High Court held that section 16(3) prohibits ITC only on “the said tax component” on which depreciation is actually claimed. Since the petitioners had not availed ITC on the lapsed 50% portion under section 17(4), there was no question of double benefit in respect of that portion. The Court observed that the unavailed 50% credit loses its character as ITC once it lapses and therefore does not attract the restriction under section 16(3). Accordingly, the Court quashed the impugned notices and orders to the extent they denied the eligible 50% ITC already availed by the petitioners.