Denial Of Input Tax Credit Limited To Depreciated Portion: Kerala High Court

The Kerala High Court on 18 February clarified that Section 16(3) of the CGST Act bars input tax credit only on the part of a capital good's tax component where depreciation is claimed, not on the whole tax component.

Justice Ziyad Rahman A A quashed the show-cause notices issued to banking companies that had denied input tax credit on the entire tax component solely because depreciation was claimed on the unavailed portion.

The Bench observed:

“as far as prohibition contemplated under Sec.16(3) in availing the input tax credit is concerned, it could be made applicable only in respect of the “the said tax component” for which the depreciation is claimed by the tax payer and, such restriction cannot be brought into force, in respect of the portion of the input tax for which no depreciation is claimed, as contemplated under Sec.17(4).”

Banking companies challenged show-cause notices that denied input tax credit (ITC) on the entire tax component of capital goods when depreciation was claimed.

Their Senior Counsel submitted that, under Section 17(4) of the CGST Act, banking companies can claim ITC up to 50% of the eligible credit, as an alternative to the normal procedure under Section 17(2). He explained that Section 17(2) allows ITC only to the extent attributable to taxable supplies, including zero-rated supplies, and not for exempt supplies.

The Senior Standing Counsel for the Revenue opposed this, arguing that Section 16(3) imposes a complete prohibition on claiming ITC for the tax component on which depreciation is claimed.

The Court noted that if depreciation claimed for exempt supplies does not attract the prohibition under Section 16(3), then applying the same restriction to the unavailed portion of ITC under Section 17(4) would amount to unreasonable classification. It observed that the unavailed ITC cannot be treated as a tax component for the purpose of claiming credit.

The Court concluded that “since the unavailed credit under Section 17(4) becomes lapsed, it will not attract the prohibition under Section 16(3), as depreciation has to be claimed upon the tax component of the cost of capital goods.”

Accordingly, the Court quashed the show-cause notices issued to the petitioners.

For the Appellants: Advocates Shaji Thomas, Thomaskutty Sebastian, Gautham B. Baburaj, Abraham Joseph Markos, Isaac Thomas and P.G. Chandapillai Abraham

For the Respondents: Sreelal N. Warrier, Senior Standing Counsel (GST Intelligence), P.T. Dinesh, P.R. Sreejith and Swathykrishna K., CGC.