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Expenditure on capital goods in rental business

Manoj Punjabi (Accountant) (219 Points)

10 December 2016

Sir

We spend large amount on purchase of Hospital / Surgical Equipment (can say capital goods). then equipment is given on hire to customers.

Query: Can we claim this amount spent on equipment as expense in profil/loss account

whether this is expense or asset.

how can we claim this as expense?

if it is to be treated as asset, then how much can we claim as expense?

Please help

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3 Replies

Harshit Kabra (INVESTOR) (Student CA final) (1113 Points)
Replied 10 December 2016

Dear manoj ,

if u do like this business ,Then u are being in nature of leasing business.

where ur business should be accounted As per AS-19 ACCOUNTING FOR LEASE.

for more info, pls read AS-19 for better understanding.

thnks

ankita gandhi (student) (5908 Points)
Replied 10 December 2016

Yes agreed to Harshit

Sanjay S (Chartered Accountant) (1375 Points)
Replied 11 December 2016

Since you have given out the machinery on hire, you are the lessor. Your customer will be the Lessee.

Firstly, I am going to assume that by saying HIRE, you were not refering to HIRE PURCHASE (Ownership gets transferred if its HP); ie., the lessee (your customer) does not have a right to purchase the machinery at end of lease period.

TAXATION ASPECT:

Now, coming to the Income Tax provisions, A lessee is not entitled claim depreciation thereon as he does not own the plant.

I. If your business is leasing: The lessor can, however, claim depreciation on the assets leased out by him if he is engaged in the business of leasing out the assets. Lease income will be taxed under PGBP head of income.

II. If your business is not leasing: Section 57 of the Income Tax act 1961, provides that if the lessor (Your entity) is not in the business of leasing, then such lease income is taxable as "Income from Other Sources" and depreciation computed as per section 32 of said Act shall be allowed.

ACCOUNTING ASPECT:

If its not a HIRE PURCHASE transaction, then you can account the same as an asset in your books of accounts and claim the depreciation accordingly. You may also refer to AS-19 only IF the same is applicable to your entity. Check applicability.

PS. The whole procedure is different if you were referring to a HIRE PURCHASE txn.

Hope this clarifies the issue.

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