Meaning of Financial lease :
As per AS-19 of ICAI, a finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset [If all risks and rewards are transferred, it will be an outright sale and not a lease]. As per AS-19 of ICAI, ‘Operating lease’ is a lease other than a finance lease.
A financial lease is one where the lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. – – In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase
of assets or equipment or the machinery is by the borrower. For all practical purposes, the borrower becomes the owner of property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the
one who gets the property insured. He remains liable for payment of taxes and other charges and indemnity. He cannot recover from lessor any of the above mentioned expenses. The period of lease extends over and covers the entire life of property for which it may remain useful, divided either into one term or divided into two terms, with clause for renewal. In either case, the lease is non-cancelable – Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India AIR 2005 SC 17 = 154 Taxman 512 = 2004 AIR SCW 6198 = 56 SCL 21 (SC).
In hire purchase or financial leasing, there are two different and distinct transactions, viz. the financing transaction and the equipment leasing/hire purchase transaction. The former is exigible for service tax under section 66 of Finance Act, 1994 whereas the latter would be exigible to local tax/VAT. – – A financial lease transfers all the risks and rewards incidental to ownership, even though the title may or may not be eventually.
An operating lease is other than finance lease. – – Equipment lease is a form of long-term financing – Association of Leasing and Financial Services v. UOI (2010) 7 taxmann.com 740 = 35 VST 549 (SC 3 member bench)
Almost entire finance in financial lease – The financial lease can finance entire cost of asset. Practically, the lessor collects some amount as ‘security deposit’ from lessee, which may be 10% to 25%. Thus, actual financing of asset is about 75% to 90%.