Supreme Court clarifies depreciation rules for leased assets, upholds business use as basis.

The Supreme Court allowed the appeal in part, upholding the assessee's claim for depreciation on leased assets. The Court clarified that asset usage for business purposes, not necessarily by the assessee itself, justified the depreciation claim. However, the Court upheld the tribunal's decision disallowing the lease equalization reserve claim, as per the amended law. The appeal was granted in part, with the assessee benefiting from the depreciation claim while the tribunal's ruling on the lease equalization reserve was affirmed.

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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.

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