If a entity does capital expenditure on the machine whose ownership is not with entity i.e. it is not owned by the entity.
Then can depreciation can be claimed on the ecapital expenditure done by entity.
13 Replies
praveen
(Chartered Accountant)
(6971 Points)
Replied 29 April 2010
Firstly tell me how a company is charging depreciation on an asset which the company does not own
Secondly how is the company making an expenditure on an asset which it does not own.
CA Manish K Dhoot
(CA, B. Com, NCFM, CPCM)
(5015 Points)
Replied 29 April 2010
If machinery is taken on lease/rent then any capital expenditure made by lessee will not be eligible for depreciation
DT Fundas - Tarun rustagi
( Author)
(1150 Points)
Replied 29 April 2010
if the company does not own the assets then he can nt claim depreciation on that and according to income tax law lessor is entitled to claim dp. on leased assets.
PULKIT KAPOOR
(CA )
(74 Points)
Replied 29 April 2010
the first & the foremost requirement to claim dep is to possess the ownership on the respective asset.
DT Fundas - Tarun rustagi
( Author)
(1150 Points)
Replied 29 April 2010
i hope u got the answer very clear dear harish
PRADEEP REDDY
(CHARTERED ACCOUNTANT)
(664 Points)
Replied 29 April 2010
if asset take on lease and if that lease is finance lease then depreciation is allowed for lessee
PRADEEP REDDY
(CHARTERED ACCOUNTANT)
(664 Points)
Replied 29 April 2010
in case of finance lease lesse can claim depreciation even though he is not owner
Dhruvesh Shah
(partner)
(443 Points)
Replied 30 April 2010
| Originally posted by : Harish Bhootra | ||
 |
If a entity does capital expenditure on the machine whose ownership is not with entity i.e. it is not owned by the entity. Then can depreciation can be claimed on the ecapital expenditure done by entity. |
 |
If There is MOU between both the Co. and the owner about the asset and if the owner is not claiming Dapreciation then co. cna claim Dep.
priyanka bathwal
(student)
(160 Points)
Replied 30 April 2010
In the following cases the depreciation can be claimed without ownership:-
1. In case of financial lease where at the end of lease period the property is transferred to the lessee.
2. In case of hire purchase agreement as per substance over form the hire purchaser charges depreciation without ownership as he become owner only after payment of last instalment.
sandeepverma
(don't make exuse for study)
(304 Points)
Replied 30 April 2010
CAN NOT CHARGE DEPRECIATION IF YOU HAVE NOT OWNERSHIP OF ASSET
FIRST BASIC CONDITION FOR CLAIMING DEP.
! OWNER OF ASSET(OTHER THAN LEASE CASE)
(Guest)
| As per IT Act,1961 | ||||||||
| Conditions for claiming depreciation | ||||||||
| Assets must be owned and used for the purpose of business or profession | ||||||||
| during the Previous year. | ||||||||
| Stress -Ownership | ||||||||
| Beneficial ownership is more important than legal ownership. | ||||||||
| Assessee need not be a registered owner, even a beneficial owner | ||||||||
| can claim depreciation. | ||||||||
| Co-owner | ||||||||
| In case of joint ownership, depreciation is allowed on proportionate basis. | ||||||||
| Property acquired on hire purchase | ||||||||
| In case of hire purchase, the buyer can claim depreciation eventhough | ||||||||
| he does not get legal title of the asset till he pays the last instalment. | ||||||||
| Capital expenditure on a property by the lessee. | ||||||||
| Where an assessee being a lessee of a property incurs any capital expenditure | ||||||||
| by way of improvement,extension,super construction etc., on a building being used for | ||||||||
| his business or profession, he is entitled to depreciation in respect of such capital | ||||||||
| expenditure. | ||||||||
| Sec.53A of transfer of property act. | ||||||||
| Possessor of an immovable proprty u/s. 53A of transfer of property act | ||||||||
| can claim depreciation eventhough he is not the registered owner of the property. | ||||||||
| As per AS-19 | ||||||||
| Assuming entity acquired a machinery on lease(finance lease). | ||||||||
| The accounting of finance leases is based on the substance rather than | ||||||||
| form of transaction. | ||||||||
| Based on this principle, the lessee(being the owner in substance) capitalises the lease equipment | ||||||||
| as fixed assets and can claim depreciation. | ||||||||
| So, the entity can claim depreciation for capital expenditure incurred on machinery. | ||||||||
Regards
K.ilayaraja
(Guest)
| Originally posted by : priyanka bathwal | ||
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| I appreciate u r answer, | |||||||||
| Explanation for point No.1 of your answer. | |||||||||
| A finance lease transfers substantially all the risks and rewards incidental to ownership. | |||||||||
| Title may or may not eventually be transferred to the lessee. | |||||||||
| Criteria for finance lease. | |||||||||
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(i.e) Situations which would normally lead to a lease being classified as a finance lease. | ||||||||
| 1) | The lease transfers ownership of the asset to the lessee by the end of the lease term. | ||||||||
| 2) | The lessee has the option to purchase the asset at a price which is expected to be sufficiently | ||||||||
| lower than the fair value at the date the option becomes exercisable such that, | |||||||||
| at the inception of the lease, it is reasonably certain that option will be exercised. | |||||||||
| (Also known as a bargain purchase option). | |||||||||
| 3 | )The lease term is for the major part of the economic life of the asset even if title is | ||||||||
| not transferred. | |||||||||
| 4 | )At the inception of the lease, the present value of the minimum lease payments amounts to at least | ||||||||
| substantially all of tha fair value of the leased asset. | |||||||||
| 5 | )The leased asset is of a specialised nature such that only the lesses can use it without major | ||||||||
| modifications being made. | |||||||||
| Situations which individually or in combination could also lead to | |||||||||
| a lease being classified as a finance lease. | |||||||||
| 6 | )If the lessee can cancel the lease, the lessor's losses associated with the cancellation | ||||||||
| are borne by the lessee. | |||||||||
| 7 | )Gains or losses from the fluctuation in the fair value of the residual fall to the lessee. | ||||||||
| 8 | )The lessee can continue the lease for a secondary period at a rent | ||||||||
| which is substantially lower than market rent. | |||||||||
| Stress : | |||||||||
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The first five criteria are determinative in nature. | ||||||||
| (i.e) If any one is met the conclusion would be that the lease is a finance lease. | |||||||||
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| For Example : | |||||||||
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Where ownership of the asset is transferred to the lessee at the end of the lease | ||||||||
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term, the lease is a finance lease. | ||||||||
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Even if the ownership continues with the lessor at the end of the lease term, | ||||||||
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the lease would be classified as a finance lease if the lease term was for | ||||||||
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a major part of the economic life of the asset. | ||||||||
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Ex. | ||||||||
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a PC which is leased for 5 years, where ownership is not transferred | ||||||||
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to the lessee at the end of the lease term, would still be a finance lease. | ||||||||
| The Last 3 criteria are suggestive in nature. | |||||||||
| May lead to classification as a finance lease, but not necessarily so. | |||||||||
| Ex. | |||||||||
| Where gains or loss from the fluctuation of the residual value is born by the lessee, | |||||||||
| it may indicate that the lessee in sustance is the owner | |||||||||
| (because he suffers the risks and enjoys the rewards) therefore the lease is a finance lease. | |||||||||
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Regards K.ilayaraja. |
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Kapil Dev Gupta
(Chartered Accountants)
(60 Points)
Replied 04 May 2010
IF assets is on lease than it can otherwise not.
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