Tax Planning of Leasing & Hire-

Purchase(Group-V)

By

Rakesh Dhimmar Nilesh PatelAshish SakariyaJigna Thakkar To

Varun Dhingra

2

Distinguish between HP and Lease

Point of Difference HP Lease

Ownership transfer Transferred after the payment of last installment

Never transferred

Depreciation claim for tax purpose

Hirer entitled to claim depreciation for tax purpose

Lessor claims depreciation for tax purpose

Tax benefit Only interest component in Hire purchase installment is allowed tax deduction and not portion of principle amount

Complete lease rent is allowed for tax deduction

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, lessee pays maintenance cost, otherwise lesser 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.1961The entire interest on loan taken by the company to finance the ownership of premises is available as deduction under Section 36.

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.

FULL DEDUCTION IS ADMISSIBLE IN RESPECT OF REPAIRS TO RENTED PREMISES

(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 10%• Plant and Machinery 15%• Mobile 15%• Electronic fitting 10%• Computer 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 hire-purchase 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.