Land
Priya
(Querist) 05 April 2013
This query is : Resolved
Can a person claim depreciation on land on lease without transferring ownership???if yes how??otherwise what is the other way out??please suggest??huge confusion
Nadeem Qureshi
(Expert) 05 April 2013
Dear Priya
which type of land is this?
state full facts
Priya
(Querist) 05 April 2013
Lease hold.The Lessor wants to transfer the tax benefit but not the ownership.But as far as I knw transfer of ownership is the main criteria for lease hold land
CA Ayush Agrawal
(Expert) 05 April 2013
Transfer of possession is main criteria in income tax act.
next is no depreciation is charged on land.
Priya
(Querist) 05 April 2013
Yup...i agree...but is there any other alternative apart from lease to derive it benefit without transferring ownership
CA Ayush Agrawal
(Expert) 05 April 2013
Priyaji,
you cant charge depreciation on lease land.
but you can amortize lease premium paid for lease period.
and it is allowable under income tax act.
Priya
(Querist) 05 April 2013
Thanks for your valuable suggestions...but still my query is the lessor dont want to transfer the total ownership of the land...however the lessee wants to get the income tax benifit.
That means if I dnt pass the ownership ,lessee will not get the benefit.
And the lessor is not ready to pass on the ownership...big trouble...
if there is anyother option than lease
Priya
(Querist) 05 April 2013
Thanks for your valuable suggestions...but still my query is the lessor dont want to transfer the total ownership of the land...however the lessee wants to get the income tax benefit.
That means if I dnt pass the ownership ,lessee will not get the benefit.
And the lessor is not ready to pass on the ownership...big trouble...
if there is anyother option than lease
CA Ayush Agrawal
(Expert) 05 April 2013
you can transfer as "Hire purchase with bargain option to buy"..in that tax will give depreciation to leasee...
In a recent landmark decision of Marico Industries, a Mumbai Tribunal held that in a finance lease it is the lessee who becomes the owner of the assets for all economic purposes and therefore the depreciation on the leased asset shall be available to the lessee and not the lessor.
On the other hand, a land mark Supreme Court judgment in 1999 in the case of Mysore Minerals clarified that the condition of ownership must be assigned a wider meaning — any one in possession of property in his own title exercising such dominion over the property as would enable others being excluded and having right would be the owner. The fact that a formal deed was not executed and registered under the law would not be of relevance. In one stroke, the apex court diluted the definition of ownership and took a liberal view. Of course, the law was subsequently amended to provide that insofar as the condition for legal ownership of an immovable property is concerned.
CA Ayush Agrawal
(Expert) 05 April 2013
Under the Income Tax law, two most important conditions for tax depreciation claim pertain to ownership and usage of the asset. As is the case on any other contentious matter, history is replete with judicial pronouncements by courts on this subject. Though the condition on usage is more or less a settled issue, ownership condition still continues to keep the judiciary engaged particularly as new models of businesses are evolving. Entitlement of depreciation in a lease transaction has witnessed the maximum debate in recent times. The moot question being who shall be eligible to claim depreciation in a lease transaction — whether the lessor (person who hires or leases the asset for a consideration) or the lessee (who hires for business use).Before we dwell on leasing transactions, I must add that the issue on hire purchase is a law which has been settled way back in 1943. An administrative circular clarifies that where the terms of agreement provide that the asset shall eventually become the property of the hirer or confer on the hirer an option to buy the asset, the transaction shall be regarded as one of hire-purchase and he would be entitled to depreciation. The administrative guideline was predominantly dealing with a situation of a movable asset, though, without any specific reference.
On the other hand, a land mark Supreme Court judgment in 1999 in the case of Mysore Minerals clarified that the condition of ownership must be assigned a wider meaning — any one in possession of property in his own title exercising such dominion over the property as would enable others being excluded and having right would be the owner. The fact that a formal deed was not executed and registered under the law would not be of relevance. In one stroke, the apex court diluted the definition of ownership and took a liberal view. Of course, the law was subsequently amended to provide that insofar as the condition for legal ownership of an immovable property is concerned.
In common parlance, a lease is understood as hiring of an asset for a periodic payment; parties involved in the transaction are classified as lessor and lessee whilst the periodic payment to be made by lessee is termed as lease rental. From an accounting standpoint, simplistically, lease can be classified in three forms – finance lease, operating lease and hire purchase. A lease is classified as a finance lease if it is for the entire economic life of the asset and under the lease arrangement all risks and rewards incidental to the ownership of the asset is transferred to the lessee.
The International Accounting Standards Committee defines finance lease as an arrangement where all the risks and rewards incident to ownership of an asset are with the lessee. Any lease other than a finance lease is operating lease. On the other hand, if under the lease agreement, the lessee/hirer has an option to acquire the asset at the end of the identified lease period, such arrangement shall classify as hire purchase. Interestingly, the last part of definition is in conformity with the 1943 Board guideline, thereby suggesting the wisdom of the Indian administration.
Admittedly, the line of distinction between a finance lease and a hire purchase is blurred and leaves a lot to interpretation. Interestingly, the interpretation of various forms of lease has been ratified and applied by different courts from time to time; the determination of whether a lease is a finance lease or operating lease or is in the nature of a hire purchase arrangement depends on the facts and substance of the transaction rather than the form of such arrangement. Indian Accounting Standard 19 on `Leases’ provide that in case of an operating lease, the lessor shall be eligible to claim depreciation in respect of leased asset; whereas in a finance lease the lessee becomes the economic owner of the asset and, therefore, should be entitled to claim depreciation on the leased asset.
Under the Income tax Act, 1961, a tax payer is eligible to claim depreciation on an asset provided the asset is owned by such person and is being used for the purpose of his business. There is plethora of precedents where the claim of depreciation has been denied by tax authorities in case either or both of these tests are not met.
The twin tests of `ownership’ and `use’ for claiming depreciation become even more critical in lease transactions, wherein the owner of the assets foregoes the possession and use of the asset; whilst the assets is used by lessee for his business.
The principles governing eligibility of lessor to claim tax depreciation under the lease arrangement is enunciated by administrative guidance issued by the CBDT in circulars 9/1943 and 2/2001. These circulars do not distinguish between the two kinds of lease arrangements and provides that in a lease, other than a hire purchase, the lessor is eligible to claim depreciation, provided the tests of `ownership’ and `use of the asset’ are satisfied. The circulars indirectly shows the thumbs down to accounting treatment of lease by providing that classification of asset in accordance with Accounting Standard 19 will not have implications on the allowance of depreciation to the lessor under the income tax laws.
After the issuance of administrative guidance on depreciation in leasing transcations, there is no ambiguity insofar as depreciation in an operating lease situation is concerned. On the contrary, in case of finance lease there has been prolonged controversy over the determination of ownership of the leased asset and therefore the eligibility of lessor to claim depreciation on the asset leased under a finance lease arrangement.
The principles for claiming tax depreciation provided unique planning opportunity to taxpayers and throw the issue open for varying interpretation.
Increasingly, finance companies began funding purchase of asset under a finance lease arrangement. This mechanism enabled the financing companies to reduce their taxable income base by claiming depreciation as deduction against the income.
In other instances, the owner of the assets resorted to sale-and- lease back mechanism with the objective of realising value from tax depreciation on the asset by enabling the buyer (or lessor) claim depreciation on inflated cost of asset.
However, in most such instances, the courts have held the transaction was a colorable device to evade taxes and disallowed the deprecation claim. Though the eligibility of a lessor to claim depreciation in finance lease has been a matter of debate courts have become increasingly alert on misuse of tax depreciation shield under the garb of finance lease.
In a recent landmark decision of Marico Industries, a Mumbai Tribunal held that in a finance lease it is the lessee who becomes the owner of the assets for all economic purposes and therefore the depreciation on the leased asset shall be available to the lessee and not the lessor.
The Tribunal applied the principles enunciated by the Apex court in Asea Brown Boveri’s case (though not on a tax related matter) wherein the court held that a finance lease is essentially a financing arrangement whereby the lessee assumed the ownership of the asset in as much as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use of occupation of the property, bears the wear and tear and takes the risk of loss or damage.The decision of the Tribunal could well prove to be a turning point insofar as the claim of depreciation in a finance lease in concerned. Though the decision of Tribunal is not the last word on the question of law; nevertheless the ruling could take away the heat from long drawn debate over availability of depreciation in a finance lease.
Whilst the finality on the issue would need more time, tax payers and tax advisers would anxiously await the Supreme Court’s decision, which is soon expected to hear a sizeable bundle of appeals arising out of inconsistent High Court decisions. I would hope that the court would lay down principles, taking into consideration the inconsistency in the past decisions and align the decision (to some extent) with definitions under the Indian and International accounting standards. Of course, the facts of each individual case would be the deciding factor in each judgment.
prabhakar singh
(Expert) 05 April 2013
Well! priya as well Ayush !
i do not know much about tax laws to speak about.
But one thing is clear to me that any
property has two elements one is "ownership"
and the other is"possession".And an owner has right to part either both or only "possession".When an owner chooses to pass only possession for a consideration called"rent",the transaction is called"lease".
But when owner agrees to pass "title as well as possession"for a lump sum consideration,whether paid or promised to be paid then such transaction is called"sale".
And where in cases a sale is agreed with condition that 'consideration agreed 'would be payable in "in regular installment"for which owner has 'parted possession' but 'ownership' with a reservation that any default in the payment would take him to reenter restoring back to his original position then it is called 'hire purchase transaction' wherein ownership or title passess only when hire purchaser successfully pays periodically upto last installment.
The only thing i am unaware how tax authorities treat all these for taxing purposes.
Raj Kumar Makkad
(Expert) 06 April 2013
As per discussion made above in the light of judgment of Hon'ble Supreme Court of India, the possession is already with the lessee hence he is entitled to claim the desired benefit. No ownership is going to be transferred and no fresh agreement qua conditional sale etc, is required to be executed and registered.
Priya
(Querist) 06 April 2013
Dear Seniors Thanks For your valuable suggestions, its really pleasant to have words from you ............but can you throw some light on Hire purchase with bargain option to buy.
Priya
(Querist) 06 April 2013
Further its a issue of land...so can we hire purchase it
prabhakar singh
(Expert) 06 April 2013
Any immoveable property can be transferred only the way TRANSFER OF PROPERTY ACT LAYS>.
CA Ayush Agrawal
(Expert) 06 April 2013
Dear Priya,
Go with this CBDT circular.
http://india-financing.com/cbdtcircular.htm
CA Ayush Agrawal
(Expert) 06 April 2013
Kindly Check with this link also.
http://www.ey.com/Publication/vwLUAssets/EY_Tax_Alert_SB_rules_that_lessor_is_not_entitled_to_depreciation/$FILE/
EY_Tax_Alert_SB_rules_that_lessor_is_not_entitled_to_depreciation.pdf
prabhakar singh
(Expert) 06 April 2013
Ayush !You would need to learn to bear here answers given just for answer's sake.
Priya
(Querist) 06 April 2013
Sorry but i m not coming to the conclusion,,,whether i can or cannot and in what way..
prabhakar singh
(Expert) 06 April 2013
Well Priya!
I told you about my inability to advice about tax problem.
I can just speak that if owner agrees to sale title and possession by a deed valued for it's entire value and stamp duty paid accordingly on the whole value and deed got registered then there is nothing in law which prohibits vendor or vendee to agree over the mode of payment of consideration with consequential default clauses.
Priya
(Querist) 06 April 2013
I appreciate ur views sir but unfortunately the person is not ready to give his title and the lessee really wants to enjoy the tax benefit so ...we will have draw a conclusion....
CA Ayush Agrawal
(Expert) 06 April 2013
Ok...
Now I want to conclude this discussion.
Relevant Case Law:
Industrial Finance Coprn. of India v. CIT [2005] 4 SOT 223 (Delhi)
If the leasing arrangement is a mere finance arrangement i.e. the lessor is only providing the funds for acquisition of asset and the asset for all purpose is the property of the lessee. Then the depreciation is available in the hands of the lessee.
Relevant Case law:
CIT v. Shree Rajasthan Syntex Ltd. [2008] 217 CTR (Raj.) 209.
However, in the case of operating lease i.e. where the arrangement provides that asset will be returned to the lessor in the same condition as it was given except wear and tear then the depreciation will be allowed in the hands of lessor.
Priya
(Querist) 06 April 2013
Thanks For you suggestions..Finally its solved :)
Ganesh babu
(Expert) 15 May 2013
As per accounting standard 6 depreciation
depreciation can be charged on fixed asset if it is depreciable asset
as land has unlimited life which is not included in the definition of depreciable asset given by as6 of ICAI
it can be clearly said that DEPRECIATION CANNOT CLAIM ON THIS LAND
