Mechanics of Leasing

Legal aspects

The Indian Contract Act rescue provisions regulate equipment leasing agreements as well as section 148
of the Indian Contract Act describes bailing as:

The transfer of goods by one person to another, for some reason, on a contract that they are returned
or otherwise disposed of in compliance with the instructions of the deliverer when the reason is
accomplished.

The responsibilities of the lessor and the lessee are identical to those of the bailor and the bailee as
defined in the provisions of sections 150 and 168 of the Indian Contract Act, since the equipment lease
transaction is regarded as a bailment contract. These rules basically have the following repercussions for
the lessor and for the lessee.

1.The lessor is obliged to supply the asset to the lessee, to legally allow the lessee to use the asset, and t
o leave the asset in the lessee 's peaceful possession in the currency of the agreement. 

2. The lessor has an obligation to pay the rentals as stated in the lease agreement, to protect the title of
the lessor, to take good care of the asset, and to return the rented asset at the expiry of the lease term.

Contents of lease agreement are:

1.Description and cost of equipment
2.Commencement date for lease contract.
3.Amount of lease rentals
4.Mode of Payments
5.Fixed period of lease, renewal options and the terms during secondary period as to the amount of
lease rentals or purchase option.
6.Guarantee for payment of lease rental by lessee.
7.Variation of lease rentals.
8.Termination of lease agreement in the event of certain occurrences.

Under the Registration Act, leases of property of more than one year need to be registered. The stamp
duty payable depends on the rates prevailing in the respective States.

Accounting & Taxation aspects of lease

The tax treatment of lease transactions in India is based on whether the lease qualifies as a lease or will

be treated as a hire-purchase transaction. If the transaction is treated as a lease, the lessor shall be
eligible for depreciation on the asset. The entire lease rentals will be taxed as income of the lessor.

As per AS-19, following are the accounting treatment in the books of lessor and lessee −

Operating Lease
In the books of Lessor −

 Assets should be treated as the fixed assets in the Balance sheet of a lessor.
 Rental income should be treated as an income in the Profit and Loss account.
 Depreciation should be treated as expenses and should be debited from the Profit & Loss
account.
 An initial cost can be deferred to the lease period of the asset or may be booked as expenses in
the year, in which actually incurred.
 Depreciation will be charged as per AS-6.

In the books of Lessee −

 Lessee should treat a rental payment as expenses in the profit and loss account.
 Finance Lease
 In case where lease is able to secure for lessor the recovery of his capital outlays plus a
reasonable return on the fund invested during the lease period is called financing lease. Finance
lease in non-cancellable contract and also, lessor is not responsible for any expenses and taxes
of the leased asset.

Finance Lease

In the books of Lessor −

 Total value of the investment plus income receivable on it will be treated as receivables in the
Balance sheet.
 Direct expenses may be directly debited from the profit and Loss account in the year of
expenses incurred or may be deferred up to the lease period.

In the books of Lessee −

 Initial direct cost will be treated as an asset.

 Fair value of the leased assets should be considered as an asset and a liability in the finance
lease.
 It is an appropriate to show liability separately in the Balance sheet.