Tax Consultation (US and India)
2970 Points
Joined September 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