30 December 2012
In case an asset is purchased under a hire-purchase scheme, the depreciation is available to the hirer (the user of the asset). But if it is taken on lease, depreciation is allowed to the lessor (the financer). Hence, acquiring an asset on hire purchase is a better option than acquiring the same under lease, if the intention is to avail deduction for depreciation.
However, in a lease, although a lessee (the user) loses the benefit of depreciation, he can treat the lease rentals as an expense and reduce his taxable income accordingly. The decision to go in for lease or hire purchase should depend on when the asset will be put to use, the rate of depreciation available on the asset and the cash flow position of the user, among others.
Majority of judgments are in favour of the view that the depreciation is allowable in respect of assets acquired on hire purchase basis.
The Apex Court in Mysore Minerals Ltd. v. CIT (1999) 239 ITR 775 (SC)
In the case of hire purchase the person who has taken the assets on hire purchase basis has the possession and the uses the assets for the purposes of his business or profession. Further as long as the hirer discharges his obligation, he has an uninterrupted right over the assets and the person giving the asset on hire purchase basis is eventfully to lose all rights, title and interest in them.
Therefore, so long as the hirer has possession of asset, he is discharging his obligation, he only is entitled to depreciation
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