depreciation

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suneet (Querist)
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29 March 2009 what will be the depreciation in case of ?????

1. hire purchase system

2. instalment payment system

pleaese refer circular 9 of 1943

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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29 March 2009 allowed in case of installment purchase and allowed in case of HP is some condition specified :
the case of assets under the hire purchase system the allowance
for depreciation would under Circular No. 9 of 1943 R. Dis. No. 27(4) I.T. 43 dated 23-3-
1943, be granted as follows :
1. In every case of payment purporting to be for hire purchase, production of the
agreement under which the payment is made would be insisted upon by the
department.
2. Where the effect of an agreement is that the ownership of the asset is at once
transferred on the lessee the transaction should be regarded as one of purchase by
instalments and consequently no deduction in respect of the hire amount should be
made. This principle will be applicable in a case where the lessor obtains a right to
sue for arrears of instalments but has no right to recover the asset back from the
lessee. Depreciation in such cases should be allowed to the lessee on the hire
purchase price determined in accordance with the terms of hire purchase agreement.
3. Where the terms of an agreement provide that the asset shall eventually become the
property of the hirer or confer on the hirer an option to purchase an asset, the
transaction should be regarded as one of hire purchase. In such case, periodical
payments made by the hirer should for all tax purposes be regarded as made up of
(i) the consideration for hirer which will be allowed as a deduction in assessment,
Profits and Gains of Business or Profession 6.13
and (ii) payment on account of the purchase price, to be treated as capital outlay and
depreciation being allowed to the lessee on the initial value namely, the amount for
which the hired assets would have been sold for cash at the date of the agreement.
The allowance to be made in respect of the hire should be the amount of the
difference between the aggregate amount of the periodical payments under the
agreement and the initial value as stated above. The amount of this allowance should
be spread over the duration of the agreement evenly. If, however, agreement is
terminated either by outright purchase of the asset or by its return to the seller, the
deduction should cease as from the date of termination of agreement.
For the purpose of allowing depreciation an assessee claiming deduction in respect of the
assets acquired on hire purchase would be required to furnish a certificate from the seller
or any other suitable documentary evidence in respect of the initial value or the cash price
of the asset. In cases where no such certificate or other evidence is furnished the initial
value of the assets should be arrived at by computing the present value of the amount
payable under the agreement at an appropriate per centum. For the purpose of allowing
depreciation the question whether in a particular case the assessee is the owner of the
hired asset or not is to be decided on a consideration of all the facts and circumstances of
each case and the terms of the hire purchase agreement. Where the hired asset is
originally purchased by the assessee and is registered in his name, the mere fact that the
payment of the price is spread over the specified period and is made in instalments to suit
the needs of the purchaser does not disentitle the assessee from claiming depreciation in
respect of the asset, since the assessee would be the real owner although the payment of
purchase price is made subsequent to the date of acquisition of the asset itself