what will be the depreciation

the case of assets under the hire purchase system the allowance

for depreciation would under Circular No. 9 of 1943 R. Dis. No. 27(4) I.T. 43 dated 23-3-

1943, be granted as follows :

1. In every case of payment purporting to be for hire purchase, production of the

agreement under which the payment is made would be insisted upon by the

department.

2. Where the effect of an agreement is that the ownership of the asset is at once

transferred on the lessee the transaction should be regarded as one of purchase by

instalments and consequently no deduction in respect of the hire amount should be

made. This principle will be applicable in a case where the lessor obtains a right to

sue for arrears of instalments but has no right to recover the asset back from the

lessee. Depreciation in such cases should be allowed to the lessee on the hire

purchase price determined in accordance with the terms of hire purchase agreement.

3. Where the terms of an agreement provide that the asset shall eventually become the

property of the hirer or confer on the hirer an option to purchase an asset, the

transaction should be regarded as one of hire purchase. In such case, periodical

payments made by the hirer should for all tax purposes be regarded as made up of

(i) the consideration for hirer which will be allowed as a deduction in assessment,

Profits and Gains of Business or Profession 6.13

and (ii) payment on account of the purchase price, to be treated as capital outlay and

depreciation being allowed to the lessee on the initial value namely, the amount for

which the hired assets would have been sold for cash at the date of the agreement.

The allowance to be made in respect of the hire should be the amount of the

difference between the aggregate amount of the periodical payments under the

agreement and the initial value as stated above. The amount of this allowance should

be spread over the duration of the agreement evenly. If, however, agreement is

terminated either by outright purchase of the asset or by its return to the seller, the

deduction should cease as from the date of termination of agreement.

For the purpose of allowing depreciation an assessee claiming deduction in respect of the

assets acquired on hire purchase would be required to furnish a certificate from the seller

or any other suitable documentary evidence in respect of the initial value or the cash price

of the asset. In cases where no such certificate or other evidence is furnished the initial

value of the assets should be arrived at by computing the present value of the amount

payable under the agreement at an appropriate per centum. For the purpose of allowing

depreciation the question whether in a particular case the assessee is the owner of the

hired asset or not is to be decided on a consideration of all the facts and circumstances of

each case and the terms of the hire purchase agreement. Where the hired asset is

originally purchased by the assessee and is registered in his name, the mere fact that the

payment of the price is spread over the specified period and is made in instalments to suit

the needs of the purchaser does not disentitle the assessee from claiming depreciation in

respect of the asset, since the assessee would be the real owner although the payment of

purchase price is made subsequent to the date of acquisition of the asset itself.