2. Meaning of Lease
• James C.Van Horne-
“Lease is a contract whereby the owner of
an asset (lessor) grants to another party
(lessee) the exclusive right to use the asset
usually for an agreed period of time in
return for the payment of rent.”
3. • Leasing is a process by which a firm can
obtain the use of a certain fixed asset for
which it must make a series of contractual
periodic tax deductible payments (lease
rentals).
4. Parties in Leasing
• Lessor: is the owner of the asset that is
being leased.
• Lessee: is the receiver of the services of
the asset under a lease contract.
5. Types of leasing
• 1. Financial Lease
• 2. Operating Lease
• 3. Leverage Lease
• 4. Cross Border Lease and
• 5. Sale and lease back
6. Financial Lease
• A financial lease is also known as Capital
lease, Long-term lease, Net Lease and
Close lease. In a financial lease, the lessee
selects the equipments, settles the price
and terms of sale and arranges with a
leasing company to buy it. He enters into a
irrevocable and non-cancelable contractual
agreement with the leasing company.
7. • Lessee uses the equipment exclusively,
maintains it, insures and avails of the after
sales service and warranty backing it. He
bears the risk.
• Ex.- High cost office equipment, diesel
generators, machine tools, textile
machinery, containers etc.
8. Operating lease
• It is also known as Service lease, Short
term lease or True lease or Wet lease. In
this lease, the contractual period between
lessor and lessee is less than the full
expected economic life of equipment. This
means that the lease is for a limited period,
may be a month, six months, a year or few
years.
9. • The risk of obsolescence is enforced on the
lessor who will also bear the cost of
maintenance and other relevant
expenditure.
• Ex.- Computers, copy machines and other
office equipment, vehicle.
10. Distinction between a financial lease and
operating lease
Characteristics Financial Lease Operating Lease
The asset leased out may be
The asset leased out is use-
Specificity used commonly by a number of
specific for the lessee
users in sequence
The risks and rewards
The lessee bears the risks and
associated with the use of the
Ownership Risks rewards associated with the use
asset leased is borne by the
of the asset leased
lessor
The lessee bears the of The lessor bears the risks of
Obsolescence Risk
obsolescence obsolescence
Cancelability Can’t be cancelled Cancelled
11. Distinction between a financial lease and
operating lease
Lease Period Long time Short time
The cost of repairs and
Maintenance maintenance are borne by Borne by the lessor
the lessee
It is a full pay-out lease,
It is usually a non-pay out lease,
where a single lessee
as the lessor is in the business of
Pay-out repays the cost of the
leasing the asset to various users
asset, together with the
several times
interest
12. Leverage lease
• A leverage lease is used for financing those
assets which require huge capital outlay.
• The leverage lease agreement involves
three parties, the lessee, the lessor and the
lender.
• The lessor acquires the assets as per the
terms of the lease agreement but finances
only a part of total investment, say 20% to
50%.
13. SALE AND LEASE
BACK
• Under this type of lease, a firm which has
an asset sells it to the leasing company and
gets it back on lease.
• The asset is generally sold at its market
value. The firm receives the sale price in
cash and gets the right to use the asset
during the lease period.
14. CROSS BORDER
LEASE
• Cross border lease is international leasing
and is known as transnational leasing.
• It relates to a lease transaction between a
lessor and lessee domiciled in different
countries and includes exports leasing.
• Ex.- Air bus or air crafts etc.
15. Legislative frameworks
• As there is no separate statute for
equipment leasing in India, the provision
relating to bailment in the Indian Contract
Act govern equipment leasing agreements.
16. • u/s 148 “The delivery of goods by one
person to another, for some purpose, upon
a contract that they shall, when the
purpose is accomplished, be returned or
otherwise disposed off according to the
directions of the person delivering them.
The person delivering the goods is called
the ‘bailer’ and the person to whom they
are delivered is called the ‘bailee’.”
17. Legal implications
• For the lessor has the duty to deliver the
asset to the lessee, to legally authorize the
lessee to use the asset, and to leave the
asset in peaceful possession of the lessee
during the currency of the agreement.
18. • For the lessee has the obligation to pau the
lease rentals as specified in the lease
agreement, to protect the lessor’s title, to
take reasonable care of the asset, and to
return the leased asset on the expiry of the
lease period.
19. Matters on Depreciation
• The depreciation of leased assets should be
on a basis consistent with the normal
depreciation policy of the lessor for similar
assets.
1. The depreciation recognized in the
statement of profit and loss for the period.
2. Impairment losses recognized in the
statement of profit and loss for the period.
3. Impairment losses reversed in the
statement of profit and loss for the period.
20. MATTERS ON TAX
• Income tax provision relating to leasing
• Sales tax provisions pertaining to leasing
21. • Income tax provision relating to
leasing
• 1. The lessee can claim lease rentals as tax-
deductible expenses.
• 2. The lease rentals received by the lessor
are taxable under the head of ‘Profits and
Gains of Business or Profession’.
• 3. The lessor can claim investment
allowance and depreciation on the
investment made in leased assets.
22. • Sales tax provisions pertaining to
leasing
• Sales tax consists of the Central Sales Tax
Act 1957(CST) enacted by the
Government of India and Sales Tax Acts
(STAs) of the various states. The CST deals
with the levy and collection of sales tax on
the inter-state sale of goods only. The tax
on sale of goods with in state (intra-state
sale) is governed by the provisions of the
respective STAs.
23. • In other words, as per the present
framework, a lease transaction attracts
sales-tax at 3 stages:
1. Purchase of equipment by lessor,
2. Transfer of the right to a lessee to use
the equipment for a lease rentals, and
3. Sale of asset by the lessor at the end of
the lease period.
