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Tax treatment of leased asset

16 February 2009

Asset of Rs. 2,00,000/- was purchased on lease by down payment of Rs. 1,00,000/- and rest in monthly installments of Rs.10,000/- (including interest of Rs. 2,000/-).

How much deduction to be allowed under Income Tax Law-

Depreciation and Interest.
Amount of installments paid.

If second is to be allowed as deduction please state the treatment of down payment. Whether to treat it as installment and claim deduction or capitalize it.

Please help with reference to Circular No. 2/2001 dated 09/02/2001 by CBDT.

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3 Replies

Ashish M (Chartered Accountant) (2731 Points)
Replied 16 February 2009

U said asset is purchased on lease.............??? asset is either purchased or leased or rented..............?? it can be that asset is purchased on hire purchase basis.......because only land is leased............

coming to ur query.........depreciation shall be allowed on Rs.2 lakh and the interest of Rs.2000 is revenue expenditure..........and both can be claimed as deduction..........since installments r contribution towards capital expenditure only, it can't be allowed as deduction............Below is the cicular u referred.........In income tax, the depreciation is allowed to the lessor (owner of the asset) and not the the lessee.....in ur query since the asset is purchased.....the depreciation and interest deduction will be allowed to the buyer only..installments hve no tax treatment..they r capital payments........

Circular : No. 2/2001, dated 9-2-2001.

"234. Finance Lease Agreements - Effect of publication of Accounting Standards on allowability of depreciation

1. Under the Income-tax Act in all leasing transactions, the owner of the asset is entitled to the depreciation if the same is used in the business, under section 32 of the Income-tax Act. The ownership of the asset is determined by the terms of contract between the lessor and the lessee.

2. The Central Board of Direct Taxes vide Instruction No. 1978 dated 31st December, 1999 [F.No. 225/190/98/IT(A-II)] has laid down the line of investigation in such cases. In cases where assets are factually non-existent, having been created by hawala transaction, the question of allowance of depreciation does not arise. In cases of sale and lease-back of assets without any alteration in the situation of assets and its working, the denial of depreciation claimed has to be considered keeping in view the principle laid down by the Supreme Court in the case of McDowell & Co. Limited.

3. It has come to the notice of the Board that the New Accounting Standard on ‘Leases’ issued by the Institute of Chartered Accountants of India require capitalization of the asset by the lessees in financial lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act."

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RcorpIndia (CMA) (128 Points)
Replied 21 November 2011

kindly solve this query please.. this is urgent...

If a plant is purchased by the assessee and given out on rent or lease to another party, would depreciation in this case be allowed to the assessee.

Is circular no. 2 of 2001 dt. 9-2-2001 applicable in this case?

or is it that this circular talks only of leased out land or buildings ?

Kindly clarify.

Thanks.

Z ( ) (2965 Points)
Replied 21 November 2011

For accounting puprose, according to the provisions of AS-19 ,lessee is allowed to claim depriciation

AS-19 applies to BOTH hire purchase and lease agreements

Para 4 of AS-19 states

The definition of a lease includes agreements for the hire of an asset
which contain a provision giving the hirer an option to acquire title to the
asset upon the fulfillment of agreed conditions. These agreements are
commonly known as hire purchase agreements. Hire purchase agreements
include agreements under which the property in the asset is to pass to the
hirer on the payment of the last instalment and the hirer has a right to
terminate the agreement at any time before the property so passes.

CBDT circular has overriding effect on AS-19 for tax purposes

For income tax purpose no matter what the nature of lease is (operating or financing), lessor is allowed to claim depriciation.

If plant ,machinery and furniture and taken on HIRE then rent payable is allowed u/s 37(1) .

Depriciation to lessee will be allowed if all the hire purchase installment have been paid and lessor has derived a valid legal title of the asset i.e ownership is transferred.

IF asset is acquired on INSTALLMENT BASIS (where lessor can sue for arrears but can not recover asset . In other words where the ownership is transfered to the lesse) the HIRE CHARGES WILL NOT be allowed but DEPRICIATION is allowed to the lessess on entire purchase price. (owner is entitled to depriciation and since ownership has been transferred therefore he can claim depriciation)

If under the agreement (lease or hire) the lessee has an OPTION or compulsions to Purchase the asset, the transaction will be considered as HIRE PURCHASE TRANSACTION (i.e finance lease which includes the clause of either compulsory buying or an option of buying, is also covered) Then consideration for hire is allowed to be deducted for tax purposes and any amount paid to the lessor/hireor for purchasing the asset (if any) other than consideration for hire (i.e installemnt) shoulld be capitalized and depriciation is allowed

for eg. 2 parties entered into other than operating lease agreement and all the charges have been paid then they are allowed as deduction , but if the lessee has ADDITIONALY paid some amount for ACQUIRING THE TITLE OF THE ASSET , then such amount is to be capitalized and depriciation can be claimed.

Deduction ceases from the date of the termination of agreement (if there is any termination of agreement)

For an assesse to claim this deduction a certificate from vendor of the initial amount should be submitted.

@ Rashmi

In the given case assesse is the owner of the asset , therefore for tax purpose , he can claim depriciation

For accounting purpose lessee is allowed to claim depriciation