Tax Planning of
Leasing & HirePurchase
(Group-V)
By
Rakesh Dhimmar
Nilesh Patel
Ashish Sakariya
Jigna Thakkar
To
Varun Dhingra
Distinguish between HP and Lease
Point of Difference
Ownership transfer
HP
Transferred after the payment of
Lease
Never transferred
last installment
Depreciation claim for tax
purpose
Hirer entitled to claim
Lessor claims depreciation
depreciation for tax purpose
for tax purpose
Tax benefit
Only interest component in Hire
Complete lease rent is
purchase installment is allowed tax allowed for tax deduction
deduction and not portion of
principle amount
Benefit of scrap value
Hirer can enjoy the benefit of
scrap value
Lessee cannot enjoy the
benefit of scrap value,
because he/she is not the
owner of asset
Amount of finance
Relative low when compared to
leasing
Huge amount is involved
Maintenance of the asset
Hirer has to spent money on
maintenance
If the lease is finance lease,2
lessee pays maintenance cost,
INTRODUCTION
One of the important management decisions while adopting
corporate tax
planning is a decision whether to take an office and
other assets on ownership basis or to take them on lease.
However, in recent years entrepreneurs have been found to be
resorting to getting the plant and machinery as well as office and
other buildings. On lease basis particularly when there is paucity of
funds with the lessee company.
The company which acquire the various assets like office
buildings, factory buildings, plant and machinery, etc. becomes
entitled to depreciation on the same together with the right to claim
the interest as a deduction if borrowed funds are used in their
acquisition whereas the hiring charges or lease money payment is
allowed as a deduction in the case of a company which takes these
assets on lease basis
BETTER TO HAVE OWN BUSINESS PREMISES
RATHER THAN A RENTED ONE
A company carrying on business at the premises owned by itself is not
required to pay any income tax.
Thus, assesses who have money or funds to spare and who have income
in the high income brackets would find it beneficial, from the income tax
point of view, to own the business premises rather than to carryon business
in rented premises.
This is a fact that if a company owns a building for the purpose of
business or 'profession it gives the directors a great mental satisfaction.
Besides, the value of such property appreciates very fast. In addition to
these benefits, the company is also entitled to claim full deduction in
respect of actual repairs carried out to such business premises.
The amount of insurance charges, rent, rates and taxes in respect of such
buildings is also allowed to be deducted in full under Section 30 of the
Act.1961
The entire interest on loan taken by the company to finance the ownership
of premises is available as deduction under Section 36.
FULL DEDUCTION IS ADMISSIBLE IN RESPECT
OF REPAIRS TO RENTED PREMISES
It is provided in Section 30 of the Income Tax Act, that where the
business premises ate occupied by an assessee as a tenant the rent
paid for such premises is allowed as deduction.
If he has undertaken to bear the cost of repair the amount incurred
on such account is also admissible as a deduction.
The company can get the deduction in respect of such repairs not
under the provisions of Section 30, but under Section 37 of the
Income Tax Act in respect of expenditure incurred wholly
necessarily and exclusively for the purpose of the business.
(a) Cost of reconstruction of a chimney which was regarded as a
subsidiary part of the factory premises.
(b) Expenses of renovating the flooring.
(c) Cost of fitting new bodies in trucks used in transport business which
was small in comparison with total cost.
In the following cases, the expenditure on repairs has been held by the
courts of law to be not falling under the category of "current repairs"
and thus has been held to be inadmissible as a deduction in the
computation of taxable business income:
(1) Substitution by a superior kind of rails in place of the existing ones, e.g.
steel rail in place of iron rails, etc.
2) Expenditure on changing some of the cables of a flour mill plant.
(3) Expenses on reroofing of labour's quarters by using new tiles in place of
old ones.
(4) Expenses on extensive renovation of a cinema house, designed to
increase its value and running capacity.
(5) Construction of a new chimney in place of the old one.
(6) Construction of a new reservoir.
(7) Construction of a new embankment when the old one has subsided.
SPEND MONEY ON REPAIRS TO YOUR OWN BUSINESS PREMISES
AND GET FULL DEDUCTION
Under the provisions of Section 30 of the Income Tax Act, a company is entitled to get
fuII deduction in respect of the amount paid by it in respect of current repairs to the
premises which are owned by it.
It is for the company, as a prudent business house, to use its discretion and make its
office or chambers or shop very beautiful. Instead of ordinary whitewash on the wall, it
may use the best available plastic emulsion paint. The extra cost on such work would be
allowed to be deducted in full.
The extra cost on such work would be allowed to be deducted in full, Thus where
company is in the Higher Income Bracket i.e. A private trading company liable to pay
income tax @ 40%.
It can adopt proper tax planning in the matter of repairs to its own business premises
HOW TO FURNISH THE BUSINESS
OFFICES AT THE COST OF
INCOME TAX
• Costly furniture and fittings of a lasting value, the
expenditure whereof amounts to capital expenditure can
also be incurred' by a company and all full advantage can
be taken in the matter of claim of depreciation @ 10% in
respect thereof.
• . Any assessee can get full deduction regarding the cost
of beautiful furniture, wooden paneling, electrical fittings
wall to wall carpet flooring, etc. in the form of
depreciation over a number of years.
• Thus, it is desirable for the companies to adopt proper
tax planning and furnish their office in a beautiful manner
and claim proper depreciation and enjoy working.
Depreciation
•
•
•
•
•
Furniture and fitting
Plant and Machinery
Mobile
Electronic fitting
Computer
10%
15%
15%
10%
60%
IT IS BETTER TO HAVE PLANT AND
MACHINERY AND OTHER ASSETS ON LEASE
BASIS IN SOME CASES.
• Such items of plant and machinery like
Bulldozer,tractor,trucks, etc., are generally taken
on lease basis.
• Likewise, for enabling a better check on the repair,
maintenance, etc. of the vehicles, many companies
take motorcars on lease basis, particularly when
they are in use for office or personal purpose by
the directors and senior executives.
• Thus in such a case, actual expenditure incurred
by the company on a payment of hire charges is
allowed as a full deduction.
TAX PLANNING ASPECTS REGARDING CLAIM OF
DEPRECIATION IN THE CASE OF ASSETS ACQUIRED
ON HIRE-PURCHASE BASIS
• In the case of a property obtained by a company under a
hire-purchase agreement if the company becomes the
owner of the property, under the terms and conditions of
such agreement, the company would become entitled to
claim depreciation thereon.
• In the past where development rebate and investment
allowance were allowed to the tax payers on plant and
machinery, they would have become entitled to claim the
same.
• However, whether the assessee is the owner for the
purpose of claim of depreciation etc. depends on the
consideration of all the facts circumstances of the case and
the terms of the 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 upon.
(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 arrears of 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 payment 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.
(4) 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.
(5) 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.
CONCLUSION
• From the foregoing discussion regarding
tax planning aspects of ownership or hirepurchase and leasing it became clear that
a company can adopt proper tax planning
in the circumstances best suitable to it so
that it may get the maximum deduction in
respect of tile depreciation or the hiring
or leasing charges paid by it and also for
the current repairs and maintenance in
respect of the leased assets.