allowance of depreciation on leased asset

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srikanth (Querist)
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14 September 2009 Hi all,
As per AS 19 leased asset whcih fall under finace lease category can be captalisaed and can provide depreciation on that asset...So whether depreciation on this kind of leased assets will be allowed as deduction or not.. as per Incomce tax act 1956

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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14 September 2009 Leased assets - Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee the transaction should be regarded as one of purchase by instalments and no deduction in respect of â€˜hireâ€™ should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.

Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of :

a. consideration for hire, to be allowed as a deduction in the assessment, and

b. payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of agreement).

The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial value, the amount of this allowance being spread evenly over the term of the agreement - Circular : No. 9 [R. Dis. No. 27(4)-IT/43], dated 23-3-1943.

Finance Lease Agreements - Effect of publication of Accounting Standards on allowability of depreciation - The New Accounting Standard on â€˜Leasesâ€™ issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act - Circular No. 2/2001, dated 9-2-2001