As per the Income tax Act, Guidance notes thereto, Accounting Standard, and various decided cases, depreciation claim on fixed asset under Financial Lease is entitled to Lessee and not the Lessor even though the legal owner of the asset is the lessor on the grounds of substance over form that the lessee is the true real owner as rights to risks and rewards vest with the lessee.
Nevertheless. in SFM, under leasing decisions, benefit of tax shield on depreciation is provided to the lessor. In my view this is a serious contradiction. Can this issue be solved?
13 Replies
vipin
(chartered accountant student)
(70 Points)
Replied 21 March 2018
In SFM it is a Financial decision
Nivedita Singh
(228 Points)
Replied 21 March 2018
Yes, but financial decision cannot override law, especially one relating to tax.
Divakar
(Student CA Final )
(11857 Points)
Replied 22 March 2018
@ Nivedita mam.... Plz refer section 32(1) of income tax act... In case of lease agreement lessor is owner of the assets and depreciation allowed to lessor and not the lessee.... It is pertinent to note that mere options to purchase the same at the termination of the lease does not mean that there is any present right for the lessee over the leased assets, except the right except the right to use assets....... In section 32 for claiming depreciation eligible asset owned and used by the assessee
Divakar
(Student CA Final )
(11857 Points)
Replied 22 March 2018
Its okk... U r welcome... Accounting and tax perspective is different.... In case of hire purchasing agreement they allow depreciation to asset owner in income tax act and lease case is different
Divakar
(Student CA Final )
(11857 Points)
Replied 22 March 2018
Reason being for that depreciation is not allowed to lessee is that if depreciation is also allowed to lessse then he get double tax shield one on lease rental and other on depreciation also.... When someone claiming depreciation then how he can claim tax shield on lease rental for same assets.... And from the perspective of lessor his entire lease income is taxable in that case... Hope u agreed with my view
Nivedita Singh
(228 Points)
Replied 22 March 2018
Yes sir, understood the logic. I was confused when I came across some case laws where the lessee was considered as true owner under principle of substance over form. Agree with your point.
Divakar
(Student CA Final )
(11857 Points)
Replied 22 March 2018
Ya that is the case of when lessee constructed building on vacant lease himself.... In that case he is entitled to get depreciation.... That is the case of vacant land on lease and building constructed by lessee.... Hope ur confusion now clear... And here is no sir😀😀😀
Nivedita Singh
(228 Points)
Replied 22 March 2018
there was a case on plant and machinery given on financial lease too. Nevertheless, confusion cleared. Thanks again
Divakar
(Student CA Final )
(11857 Points)
Replied 22 March 2018
Hmmm... Controversy is always in income tax... U can't do anything about that
Nivedita Singh
(228 Points)
Replied 26 March 2018
I noticed and would like to draw your attention that lessee does not claim tax shield on lease rental but only on finance charge right?
Divakar
(Student CA Final )
(11857 Points)
Replied 26 March 2018
Getting tax shield on lease rental and not finance charge only.... Lease rental charged in profit and loss account and it is revenue expenditure.... Plz talk about tax perspective and not accounting perspective... In income tax lease rental is allowed as deduction
Nivedita Singh
(228 Points)
Replied 26 March 2018
yes, sorry. should remember as divide and rule depn and rent
Recent Topics
- Urgent doubt on GST
- Profit or Loss on Sale of Assets Accounting treatm
- Clarification on RCM on Rent Payment for QRMP Deal
- Reclaimed itc in gstr9
- Gamification in Accounting Software: Boosting Enga
- I want to knw Hsn code and gst rate of resin produ
- Schedule FA clarification
- Income tax on freelance income from crypto
- ITC temporary reversal and reclaim
- Query on Transactions
Related Threads
CAclubindia
