query based on hire purchase

[praveen]

hi,
i have a query regarding hire purchase:
Can depreciation be claimed by hire purchaser (buyer) on the asset taken on hire purchase basis ?

Please support your answer with some evidence


Regards
Praveen

[camanojgupta]

cBDT HAS CLARIFIED AS UNDER IN THIS REGARD
The following instructions are issued for dealing with cases in which an asset is being acquired under, on what is known as, a hire-purchase agreement :
(i) In every case of payment purporting to be for hire-purchase, production of the agreement under which the payment is made should be insisted on.
(ii) Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee (e.g., where the lessor obtains a right to sue for arrear instalments but no right to recovery of the asset) the transaction should be regarded as one of purchase by instalments and no deduction in respect of "hire" should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.
(iii) Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire-purchase. In such cases the periodical payments made by the hirer should, for tax purposes, be regarded as made up of :
(a) consideration for hire, to be allowed as a deduction in the assessment; and
(b) payment on account of purchase, to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of the agreement).
The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial value (as described above), the amount of this allowance being spread evenly over the term of the agreement. If, however, the agreement was terminated either by out-right purchase of the equipment or its return to the owner, the deduction should cease as from the date of the termination.
An assessee claiming this deduction should be asked to furnish a certificate from the vendor or other satisfactory evidence, of the initial value (as described above). Where no certificate or satisfactory evidence is forthcoming, the initial value should be ar-rived at by computing the present value of the amount payable under the agreement at an appropriate rate per centum.—Vide Circular No. 9 of 1943, dt. 23-3-1943 reiterated by Instruction No. 1097, dt. 19-9-1977.
YOU CAN ALSO RELY ON THE FOLLWOING JUDGMENTS

In Addl. CIT v. General Industries Corporation (1985) 155 ITR 430 (Del), it was held that, in view of the Board Circular issued in 1943 and consequent instructions issued in 1959 and 1963 , depreciation could be allowed on assets acquired on hire-purchase.  CIT v. Steel Rolling Mills of Hindusthan (P) Ltd. (1987) 164 ITR 633 (Cal)In ITO v. New
Sutlej Transport Co. (P) Ltd. (1986) 20 TLR 181 (Asr-Trib),
Deputy CST v. M.K. Jinachandran (Minor) (1994) 205 ITR 328 (Ker)
Tirrichanvah Co. Ltd. v. Dy. CIT (2002) 253 ITR (AT) 56 (Cal-Trib).
Karimjee (P) Ltd. v. ITO (2007) 17 (II) ITCL 309 (Mum 'A'-Trib) : (2007) 15 SOT 128 (Mum-Trib)
CA MANOJ GUPTA
JODHPUR
09828510543

[satyanveshi]

Please see the following circular issued in this regard in the year 1943 wherein depreciation can be allowed in hire purchase transactions. Circular No. 9 [R. Dis. No. 27(4)-IT/43], dt. 23-3-1943

The following instructions are issued for dealing with cases in which an asset is being acquired under on what is known as hire-purchase agreement :

1. In every case of payment purporting to be for hire-purchase, production of the agreement under which the payment is made should be insisted on.

2. Where the effect of an agreement is that the ownership of the subject is at once transferred to the lessee (e.g., where the lessor obtains a right to sue for arrear instalments but no right to recovery of the asset), the transaction should be regarded as one of purchase by instalments and no deduction in respect of 'hire' should be made. Depreciation should be allowed to the lessee on the entire purchase price as per the agreement.

3. Where the terms of the agreement provide that the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment, the transaction should be regarded as one of hire purchase. In such cases the periodical payments made by the hirer should for tax purposes be regarded as made up of :

(a) Consideration for hire, to be allowed as a deduction in the assessment, and

(b) payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value (i.e., the amount for which the hired subject would have been sold for cash at the date of agreement).

The allowance to be made in respect of hire should be the difference between the aggregate amount of the periodical payments under the agreement and the initial value (as described above), the amount of this allowance being spread evenly over the term of the agreement. If, however, the agreement was terminated either by the outright purchase of equipment or of its return to the owner, the deduction should cease as from the date of the termination.

An assessee claiming this deduction should be asked to furnish a certificate, from the vendor or other satisfactory evidence, of the initial value (as described above). Where no certificate or satisfactory evidence is forthcoming, the initial value should be arrived at by computing the present value of the amount payable under the agreement at an appropriate rate per centum; in doubtful cases the facts should be reported to the Board.
These principles are once again reiterated in the case law reported in 53 DTR 102 also

[ashutosh majumdar]

Excellent answers. I had the same thought in mind but couldn't recollect the law! Anyway thanks for refreshing my memory as well  ;)