Depreciation on Finance Lease

[Pankaj]

Who will be able to claim depreciation on Finance Lease?

CBDT in circulars 9/1943 and 2/2001 has clarified that there is no difference between Operating Lease and Financial lease and thus accordingly lessor is entiled to depreciation. But we have opposite ruling of Apex court in Asea Brown Boveri's case ( though not on a tax related matter) and ITAT Mumbai ruling in the case of Marico Industries. Further this matter was pending before the Special Bench, Mumbai. Any one can also update me on this case also.

Further what is the implication of Finance Lease as per the Draft DTC.

[ashutosh majumdar]

Well I am also tracking this issue.

The matter is still pending before the Special Bench.

In the meanwhile in CIT vs. Punjab State Electricity Board (Punjab & Haryana High Court) and CIT vs. Cosmo Films Ltd (Delhi High Court), SLBs were held to be OK. Association of Leasing & Financial Service Companies vs. UOI (Supreme Court) also has a bearing because the difference between Op lease & Finance lease is explained.

I haven't studied the DTC yet  :-[ Hope it will never come into law  ;) Maybe enlightened seniors here will care to educate us on the DTC  ;D

[camanoj2104]

As per clause 34 of the DTC Bill, the amount of business expenditure shall be the aggregate of the operating expenditure, finance charges and capital allowances. Clause 37 further seeks to provide that the amount of capital allowances shall be the aggregate of the amount in respect of depreciation of business capital assets, initial depreciation of business capital assets, terminal allowance, scientific research and development allowance and deferred revenue expenditure allowance.

The said clause further provides that the depreciation, initial depreciation or terminal allowance shall be allowed in respect of any business capital asset if the asset is owned, wholly or partly, by the person, and used for the purposes of the business of the person. However, the condition of ownership, whether whole or in part, shall not apply in the case of a business capital asset being capital expenditure on any building which is held by the person under a lease or other right of occupancy. A business capital asset shall be deemed to be owned by the person if he is a lessee in terms of a financial lease.

Thus the DTC Bill seeks to clarify that assets acquired under a 'financial lease' shall be regarded as owned by the lessee and depreciation shall be allowed to him.

Clause 314(101) of the DTC Bill, 2010 defines the term financial lease. Accordingly, "financial lease" with its grammatical variations, means a lease transaction where--

(a) a contract for lease is entered into between two parties for leasing of a specific asset;

(b) such contract is for use and occupation of the asset by the lessee;

(c) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and

(d) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment.