2014 (6) TMI 1028 - HC - Income Tax

Depreciation on leased assets - ownership on machinery - HELD THAT - In the instant case admittedly the machinery is owned by the assessee. The assessee had leased that machinery to its customers. That is the business the assessee is carrying on and therefore the judgment of the Apex Court 2013 (1) TMI 344 - SUPREME COURT reversing the judgment of this Court in M/s ICDS Limited equally applies to the facts of this case and therefore the order passed by the tribunal disallowing the depreciation claimed is liable to be set-aside. Disallowance of lease equalization reserve - HELD THAT - The previous year involved in the case is 31.3.1998 and the assessment year is from 1.4.1998 to 31.3.1999. In order to over come such claim by Finance Act No.2/2009 which came into effect from 1.4.1998 clause (g) was substituted to explanation to Section 115JA of the Act. This Court had an occasion to consider the said question in the case of THE COMMISSIONER OF INCOME TAX vs WEIZMANN HOMES LTD. 2013 (5) TMI 123 - KARNATAKA HIGH COURT wherein as held said amount has not been included in the book profit. It was unascertained liability. Even this amount is earmarked as provision for diminution in the value of any asset for the purpose of arriving at the book profit for the purpose of Section 115JA which ought to have been included. The Assessing Authority was justified in adding the said amount to the book profit. Both the Appellate Authorities committed a serious error in deleting the said amount. It is contrary to the statutory provision. That portion of the order of Tribunal requires to be set aside and accordingly it is hereby set aside and the substantial question of law is answered in favour of Revenue and against the assessee.

Summary

Issues involved:
1. Claim of depreciation on leased assets
2. Lease equalization reserve

Analysis:

Issue 1: Claim of depreciation on leased assets
The assessee, a Public Limited Company engaged in non-banking finance and hire purchase, claimed depreciation on assets leased to educational institutions controlled by the same group. The transactions involved self-cancelling mechanisms to avail depreciation benefits without tax liability. Previous judgments upheld such claims, but the tribunal disallowed the depreciation claim for the assessment year. The Apex Court clarified that Section 32 requires asset usage for business purposes, not necessarily by the assessee itself. As the assessee leased machinery to customers as part of its business, the depreciation claim was justified. The tribunal's decision disallowing depreciation was set aside based on the Apex Court's ruling.

Issue 2: Lease equalization reserve
Regarding the lease equalization reserve claim, the Finance Act No.2/2009 amended the explanation to Section 115JA of the Act, impacting companies' total income computation. The Court referred to a previous case where provisions for diminution in asset value were to be included in book profit for tax assessment. In the present case, an amount set aside for contingencies was not included in book profit, contrary to statutory provisions. The Assessing Authority rightly added this amount to book profit, but the Appellate Authorities erred in deleting it. The tribunal's decision to disallow the lease equalization reserve was upheld as per the amended law, with no errors found in the tribunal's ruling on this matter.

In conclusion, the appeal was partly allowed, granting the assessee the benefit of depreciation claimed while affirming the tribunal's order in all other aspects.