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Depreciation on Leased Assets given on finance lease (AS 19)

Mahesh Goyal (Service) (38 Points)

02 August 2007

Dear Friends,

We have given some truckes on hire purchase with agreed terms that title will transfer after 10 years after paying Re 1.This is covered under AS 19 as finance lease.

I want to know that can we claim the depreciation on trucks in income tax ? Lessees are not claiming depreciation on assets.

Income tax will allow depreciation or not? One of my friends was saying that in one calcutta high court decision, depreciaion can be claim on these assets.

Pls. confirm....Very important matter.

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10 Replies

Srivathsan Rangarajan (Chartered Accountant) (66 Points)
Replied 02 August 2007

As far as Income tax act is concerned there is no difference between an operating lease and finance lease both from lessor's and lessee's point of view. The lessor is entitled to depreciation and the lessee is entitled to claim the lease rental as deduction.... Mind you only the real owner is entitled to depreciation under the IT Act (by default).........

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Late CA Sampat Jain (Chartered Accountant) (4772 Points)
Replied 03 August 2007

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 ‘hire’ 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

D.C AHUJA (CONSULTANT) (120 Points)
Replied 03 August 2007

I feel that if lesesee is showing truck income at percentage basis which includes the value of the depriciation and in that case depriciaion is deemed to be allowed and if so no depriciation will go to you.Please check this aspect also.

Mahesh Goyal (Service) (38 Points)
Replied 07 August 2007

Can we claim the depreciation on the trucks which are given on hire purchase to lessee under finance lease? Pls. give the case law or section or any referance...

Mahesh Goyal (Service) (38 Points)
Replied 08 August 2007

Boss. I do agree with you. you give the referance or case law to weighen this aspect.

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CA Manish Iyer (Chartered Accountant) (127 Points)
Replied 09 August 2007

U can claim depreciation in Income Tax Act. For income tax purpose, u will have to make some significant adjustments to your Profit & Loss Account.

(Guest)

Hi Mahesh, CBDT has long ago clarified the impugned issue vide a circular. I states that classifying an asset as a Finance Lease persuant to AS 19 issued by the ICAI dealing assets acquired on lease basis does not affect the allowability of depreciation under the INCOME TAX ACT. Hence, the lessor of the asset would avail the depreciation against the lease rentals. The lessee would avail deduction of lease rentals paid (and NOT the depreciation notwithstanding that the asset is appeaing in the lessee,s balance sheet persuant to AS 19. This may entail creation of defferd tax asset or liability, as the case may be.

(Guest)

Dear Sir, In the case of IFCI v/s CIT, IFCI was disallowed Depreciation on the leased assets as lessor on the grounds that the assets were let out as a pure financing arrangement. Hence no depreciation can be claimed by lessor merely as a financer of the assets. Any Inputs. Urgent Plzzzzzzzz...............

NITIN (GM FINANCE) (23 Points)
Replied 12 November 2010

I have few questions on HUF

Can the members of HUF gift to HUF? If yes then is there any limit? What is the tax implications?

Whether Outsiders can gift to HUF? What is the tax free limit?

Praveenraj Puthran (Student-CA Final) (32 Points)
Replied 26 October 2015

In the case of I.C.D.S Ltd V/s CIT(2013),Supreme court held that taxpayer(I.C.D.S Ltd) can claim depreciation on the asset which it is hired or leased out in the course of business.

Thanks