LEASING

DEFINITION
A

lease is a contract whereby the owner of an asset

(the lessor) grants to another person (the lessee)
exclusive right to use the asset for an agreed period of
time, in return for the payment of a rent (called lease
rental).
Capital assets
like land, buildings, equipments,
machinery, vehicles are the usual assets which are
generally acquired on lease basis.
The lessor remains the owner of the asset, but the
possession and economic use of the asset is vested in
the lessee

Main Elements of Leasing

Valid

Contract of Leasing
Delivery of Goods
Purpose
Consideration
Return of the Goods
Ownership

TYPES OF LEASE
AGREEMENTS

Financial Lease
In

case of a financial lease, the lessor remains the

owner of the leased asset during the lease period,
but does not undertake its necessary
maintenance.
The rental received by the lessor fully amortises
the cost of the equipment and earns a profit for
him.
These leases are non-cancellable.
Ultimately, the ownership of the leased asset may
be transferred to the lessee at an agreed price.

 The

lessor thus acts as a financier

only and earns a return on his
investment in the leased asset by
way of rentals.
Financial leases are for the major
part of the useful life of the asset.

Operating Lease
An

operating lease stands in contrast to the

financial lease in almost all aspects.
This lease agreement gives to the lessee
only a limited right to use the asset.
The lessor is responsible for the upkeep
and maintenance of the asset.
The lessee is not given any uplift to
purchase the asset at the end of the lease
period.

 Normally

the lease is for a short period

and even otherwise is revocable at a
short notice.
Mines, Computers hardware, trucks and
automobiles are found suitable for
operating lease because the rate of
obsolescence is very high in this kind of
assets.

Sale and Lease Back

It

is lease arrangement wherein the lessee

who already owns the assets, sells the same
to the lessor, and thereafter takes the same
asset from him on lease basis.
Under
this
arrangement,
the
lessee
immediately recovers the value of his already
owned assets from the lessor.
Thereafter, the lessee makes payment of the
lease rentals periodically as usual.

 Such

a lease arrangement enhances the

liquid resources of the lessee immediately,
which can be utilised otherwise to meet his
working capital requirements or to purchase
another asset on cash payment basis.
This type of lease is an alternative to a
mortgage of the assets

Leveraged Lease
Under

leveraged leasing arrangement,

a third party is involved beside lessor
and lessee.

 The

lessor borrows a part of the purchase cost (say

80%) of the asset from the third party i.e., lender
and the asset so purchased is held as security
against the loan.
The lender is paid off from the lease rentals directly
by the lessee and the surplus after meeting the
claims of the lender goes to the lessor.
The lessor, the owner of the asset is entitled to
depreciation allowance associated with the asset.

DIRECT LEASING
Under

direct leasing, a firm acquires the right

to use an asset from the manufacturer directly.
The ownership of the asset leased out remains
with the manufacturer itself.
The major types of direct lessor include
manufacturers,
finance
companies,
independent lease companies, special purpose
leasing companies etc

LEGAL ASPECTS OF LEASING

1) The lessor has the duty to deliver the asset to
the lessee, to legally authorise the lessee to use
the asset and to leave the asset in peaceful
possession of the lessee during the lease
period.
2) The lessee has the obligation to pay the lease
rentals as specified in the lease agreement, to
protect the lessors title, to take reasonable care
of the asset, and to return the leased asset on
the expiry of the lease period.

ACCOUNTING TREATMENT OF
LEASE
Presently the accounting treatment of lease
transactions in India is as follows:
The leased asset is shown on the balance sheet
of the lessor.
Depreciation and other tax shields associated
with the leased asset are claimed by the lessor.
The entire lease rental is treated as income in
the books of the lessor and as expense in the
books of the lessee.

INCOME TAX PROVISION

RELATING TO LEASING
The principal tax provisions relating to leasing as
follows:
The lessee can claim lease rentals as taxdeductible expenses.
The lease rentals received by the lessor are
taxable under the head of Profits and Gains of
Business or Profession.
The lessor can claim investment allowance
(this may be doubtful) and deprecation the
investment made in leased assets.

SALES TAX PROVISIONS

PERTAINING TO LEASING
The major sale tax provisions relevant for leasing are as
follows:
The lessor is not entitled for the concessional rate of
central sales tax because the asset purchased for leasing
is meant neither for resale nor for the use of manufacture.
The 46th amendment Act has brought lease transitions
under the purview of sale and has empowered the
central and state government to levy sales tax on lease
transactions. While the central Sales tax has yet to be
amended in this respect, several state governments have
amended their sales tax laws to impose sales tax on lease
transactions.

 According

to a recent supreme court

ruling, the place of signing the lease
agreement would decide the taxing
jurisdictions of the lease and not in the
state where the goods are put to use.

Advantages of Leasing to
Lessee
a) Easy source of finance
b) Saving of Capital
c) No Risk of Technological Obsolescence
d) Improvement in Liquidity
e) Efficient Maintenance Services
f) Low Administrative and Transactions Costs
g) Benefit of Tax Shield

Limitations of Leasing for

Lessee
Higher

Cost
Loss of ownership incentives
Penalties on termination of lease
Loss of Salvage value of the asset.
No change in asset

Advantages of Leasing to
Lessor
Higher

profits
Tax benefits
Quick returns
Increased sales

Limitations of leasing to
lessor
High

risk of obsolescence
Competitive market
Price level changes
Management of cash flows
Long term investment

CONCEPT AND MEANING OF HIRE

PURCHASE
Hire

purchase is a type of installment

credit under which the hire purchaser,
called the hirer, agrees to take the
goods on hire at a stated rental, which
is inclusive of the repayment of
principal as well as interest, with an
option to purchase

DIFFERENCE BETWEEN LEASE FINANCING

AND HIRE PURCHASE