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lease depriciation

08 February 2010

can we claim depriciation of a financial lease in income tax if yes how if no then why???? as AS-19 allows it but do income tax also allows it

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Amir (Learner) (4016 Points)
Replied 08 February 2010

Dear Ankit,

Depreciation on lease assets will depend upon conditions under Income Tax.

The reason is what AS -19 specifies is only for "Accounting purposes" & "Income Tax is dependent on provisions & not on accounting treatments" -

Brother, there are so many examples of different treatments under Accounts & Income Tax - this is not the only one

There is a circular to that affect -

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 2/2001

Further there is another Circular

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