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If I put 3,000 miles a year on my car, that’s a lot. If I buy them, it just

doesn’t make sense, so I lease them, and my company writes the whole car expense off. Don Felder

Introduction1. Leasing is an agreement or arrangement whereby the right to use such goods for any purpose is transferred by one person to another, whether for a specified or non-specified period for cash or deferred payment or without transferring the absolute ownership. In simple terms, it is a method of acquiring an asset without buying it but for a definite period. However, a lease does not include hire purchase or any other instalment system. The lease deed or agreement plays a crucial role to know whether such an agreement creates a lease or not. To determine whether the agreement creates a lease or a license the test of exclusive possession is very much significant as the Supreme Court held in Sohan Lal Naraindas v. Laxmidas Raghunath Gadit [1971] 1 SCC 276. Indian leasing industry components comprise of varied players including specialized leasing companies, Banks and their exclusive leasing subsidiaries, financial institutions. India’s first corporate form of leasing company was incorporated on 10th September, 1973 under the name and style of First Leasing Company of India Limited in the erstwhile Madras province. The First Leasing and a few other leasing companies are generally engaged in the business of leasing, hire-purchase, consumer-finance transactions. These companies are becoming an alternative source of financing for the industry, consumers and traders alike. With the ever-growing economy coupled with industrial activity, the demand for capital goods is increasing sharply. Since inadequate loan, financial support in the form of investment from banks and financial institutions,

PRABHAKAR K S Proprietor,

Shree Tax Chambers

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the leasing and hire-purchase industries are helping in bridging the gap between the need and availability of the capital.

Income Tax Perspective2. Whether the Income-tax Act, 1961 defines the key terms ‘lease’, lessor, lessee? No., for authoritative definitions one can refer to section 105 of the Transfer of Property Act, 1882 where it has defined the term lease in the context of immovable property as a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. One more authority, Black’s Law Dictionary defines the term as authority to do a particular act or series of acts upon another’s land without possessing any estate therein. The essential characteristics of a lease can be summed up as transfer of an interest, parties to a lease, subject matter of the lease, duration of the lease and most important thing is consideration. The Hon’ble Supreme Court in CIT v. Shaan Finance (P.) Ltd. [1998] 97 Taxman 435/231 ITR 308 held that leasing of machinery to third parties is merely a license and it does not amount to transfer. For the purpose of accounting, lease can be classified into two categories-one as a Finance lease and another one Operating lease. Finance lease is a lease where lessor transfers incidental risks and possible rewards to the lessee substantially without parting with the ownership of the asset whereas in the case of operating lease which does not transfer such risks and rewards substantially, these aspects have been dealt with under Accounting Standard 19 (AS-19) to Accounting for leases. Tax implications on financial and operating leases impact differently. The existing provisions are silent on financial lease even as the Central Board of Direct Taxes and the Supreme Court had held that it was the lessor who could claim depreciation under financial lease agreements.

3. Certain ‘Leasing Activities’ under the income tax law perspective3.1 Leasing Activities:

3.1-1 Mines - Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC) held that receipts and payments incurred while acquiring or disposing of leasing mines are in the nature of capital expenditure. The Hon’ble Supreme Court in R.B. Seth Moolchand Suganchand v. CIT [1972] 86 ITR 647 held that expenditure incurred for obtaining the right to acquire raw material could be revenue expenditure. Expenditure incurred towards stamp duty for renewal of mining lease held as revenue expenditure in CIT v. Panyam Cements & Mineral Industries Ltd. [1997] 228 ITR 212 (AP). A few more authoritative case laws with respect to capital expenditure were – CIT v. Chengalvaroya Mudaliar [1937] 5 ITR 70 (Mad.), Stow Bardolph Gravel Co. Ltd. v. Poole [1955] 27 ITR 146 (CA), Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC), Ford & Macdonald Ltd. v. CIT [1964] 54 ITR 133 (All.) and Chintalapudi Ranganayakalu v. CIT [1964] 51 ITR 276 (AP).

A Few more authoritative case laws with respect to revenue expenditure are – Param Nand Haveli Ram. In re., [1945] 13 ITR 157 (Lah), Travancore Miners Co. Ltd. v. CIT [1955] 28 ITR 505 (Trav. - Coch.), Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC). Shanker Dass Sethi & Sons v. CIT [1985] 23 Taxman 310 [1986] 157 ITR 770 (Delhi) and Bikaner Gypsums Ltd. v CIT [1990] 53 Taxman 279/[1991] 187 ITR 39 (SC).

3.1-2 Cinema Hall - In Green v. Favorite Cinemas Ltd. [1930] 15 TC 390 (KB), the assessee took a lease of a fully equipped cinema hall for a period of twenty years. In addition to rent, assessee agreed to pay a premium by annual instalments. Whether such premium can be treated as capital in nature? Yes, expenditure incurred due to improvements is in permanent nature would be capital in nature as held in Rupang Private Ltd. v. CIT [1976] 104 ITR 469 (Ori). However, expenditure for a

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short-term venture, say, lease for a shorter period, painting of the hall were held to be of revenue expenditure. In one such interesting case, CIT v. Vasant Screens [1980] 124 ITR 835 (Bom.), the Hon’ble Bombay High court held that non-reimbursed part of expenditure as capital in nature and non-taxable.

3.1-3 Royalty for raw materials - In Mewar Sugar Mills Ltd. v. CIT [1973] 87 ITR 400 (SC) it was held that royalty paid on the price of goods manufactured by the assessee as allowable business expenditure. In Climate Systems India Ltd. v. CIT [2009] 185 Taxman 139/319 ITR 113 (Delhi), payment of royalty for technical services at a percentage of domestic and exports sales were held as deductible. In CIT v. Oracle India (P.) Ltd. [2011] 11 taxmann.com 139/199 Taxman 181 (Mag.) (Delhi) royalties were incurred wholly for the purpose of business held as admissible. Lease rentals paid to a non-resident for use of aircraft for the purpose of a business carried on in India by a resident or non-resident payer is royalty, hence, taxable in India.

3.1-4 Aircrafts - Indian company engaged in the business of operation of aircrafts should have acquired aircrafts on lease on or before 1st April, 2007. Thus, two conditions acquired under lease agreement and date of acquisition are required to be satisfied. Relevant case laws were AFT Trust-Sub 1 v. Chairman CBDT [2005] 144 Taxman 907/277 ITR 244 (Delhi) and Go Airlines (P.) Ltd. v. UOI [2012] 24 taxmann.com 306/209 Taxman 329/[2013] 356 ITR 333 (Delhi). Since India is world’s third largest domestic aviation market, the Central Government in its latest Union Budget for 2019-20 is planning to make India a hub of financing aircraft purchases and leasing of planes.

3.1-5 Commercial Assets - Income earned from the exploitation of commercial assets either directly or indirectly will be treated as a business income. However, the question of particular letting is business or not should be decided on the facts of each case. The Hon’ble Calcutta High Court in Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 lays certain

principals to decide a particular letting is a business or not -

(a) There must be an evidence on the ex-ploitation of commercial asset,

(b) Lessor’s intention during the period of the lease the asset leased out must remain same and treated as a commercial asset,

(c) Lessor’s intention must be ascertained from the cumulative effect of all the terms of the lease.

In CIT v. Arvind kumar Odhavji [1995] 213 ITR 551, the Hon’ble Bombay High Court ruled that rental income earned from sub-leasing of a property shall be assessed under the head Income from other sources. The Hon’ble Calcutta ruled in similar lines in the case of Mukherjee Estates (P.) Ltd v. CIT [2000] 113 Taxman 313/244 ITR 1 wherein income from letting out space for hoardings for advertisement purposes may be rent, however, same should be assessed under income from other sources instead of income from house property.

The Hon’ble Supreme Court’s decisions, CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451, Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC), New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC) will be helpful to ascertain whether certain income from lease of a commercial asset is a business income or not?

Conclusion4. Acquiring assets under lease term are gaining traction slowly in India. As far as tax laws are concerned, it is expected that the proposed Direct Taxes Code will bring some certainty on the tax treatment of a financial lease. To attract much needed capital and investment domestically as well as in foreign, the Central Government should bring in suitable policy changes under company law, foreign exchange management law, and special economic zones under Customs Law.

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