Assessment of Hire Purchaser (Hirer)

According to circular issued by the Central Board of Direct Taxes in 1943 and a number of court rulings, the hirer is entitled to (a) the tax shield on depreciation, calculated with reference to the cash purchase price and (b) the tax shield on the consideration for hire (total charge for credit). In other words, though the hire is not the owner of the asset, he is entitled to claim depreciation as a deduction on the entire purchase price. Similarly, he can claim deduction on account of consideration of hire, that is, finance charge. The finance is the difference between the hire purchase price and the cash price. The amount of finance charge to be deducted each year is to be spread evenly over the agreement. No method is specified for evenly distributing the finance charge. The hire can choose one of the alternatives, namely, (1) level equal distribution, or (2) distribution on the basis of sum of years digits method or (3) rate of return method.

If the hire purchase agreement does not materialize and is terminated by return of the asset to the owner (hire vendor), no deduction is allowed in respect of finance charge after the date of termination. If the agreement is terminated by outright purchase of the equipment, the deduction similarly ceases from its date of termination. Finally, the consider is viewed as a rental charge rather than interest. Therefore, if the agreement contract expressly provides for the option of purchasing the time or of returning the same before the total amount is paid, no deduction of tax at source is to he made from the consideration of hire paid to the owner.

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