MEANING OF LEASE

A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals).
The important feature of a lease contract is separation of the ownership of the asset from its usage.

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Term of lease – It is the period for which the agreement of the lease remains in operation. be of the lessee’s choice.There are two parties to a contract of lease financing. Ownership separated from user. the lessor and the lessee.The asset. The asset must. the asset reverts to the lessor.ELEMENTS IN LEASE STRUCTURE  Parties to the contract .The essence of a lease-financing contract is that during the lease tenure. however. ownership of the asset vests with the lessor and its use is allowed to the lessee. equipment or property is the subject matter of a contract of lease financing. On the expiry of the tenure. 2    . Every lease should have a definite period otherwise it will be legally inoperative. Asset.

TYPES OF LEASE Lease agreements are basically of two types: (a) Operating lease (b) Financial lease The other variations in lease agreements are (c) Sale and lease back (d) Leveraged leasing (e) Direct leasing. 3 .

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. 4     . Normally the lease is for a short period and even otherwise is revocable at a short notice. an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease.OPERATING LEASE  This lease agreement gives to the lessee only a limited right to use the asset. Thus. for example. An operating lease is commonly used to acquire equipment on a relatively short-term basis.

FINANCE LEASE  Financial lease. non-cancellable lease contracts The lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost or gives an option to the lessee to purchase the asset at the expiry of the lease period The lease agreement is irrevocable In India.    5 . also known as ‘capital lease’ are Long-term. financial leases are very popular with highcost and high technology equipment.

This is nothing but a paper transaction.SALE AND LEASE BACK It is a sub-part of finance lease. However. the owner of an asset sells the asset to a party (the buyer). Sale and lease back transaction is suitable for those assets. say land. 6 . the assets are not physically exchanged but it all happens in records only. who in turn leases back the same asset to the owner in consideration of lease rentals. under this arrangement. Under this. The advantage of this method is that the lessee can satisfy himself completely regarding the quality of the asset and after possession of the asset convert the sale into a lease arrangement. which are not subjected depreciation but appreciation.

e. 7 .LEVERAGED LEASE Under leveraged leasing arrangement. 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. a third party is involved beside lessor and lessee. the owner of the asset is entitled to depreciation allowance associated with the asset. The lessor. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i..

The major types of direct lessor include manufacturers. The ownership of the asset leased out remains with the manufacturer itself.DIRECT LEASE Under direct leasing. independent lease companies. a firm acquires the right to use an asset from the manufacturer directly. finance companies. special purpose leasing companies etc 8 .

marine equipments or containers. electronic equipment or vehicles remains an infinitesimal fraction of global trade in these goods. cross-border leasing is popular in certain products like aircrafts. The legal environment for cross-border lease transactions is fairly clear in India. as highlighted in the following slides: 9 .CROSS-BORDER LEASE TRANSACTIONS In India. But leasing of general-purpose machinery.

Lessor’s ownership rights are supreme. where the Supreme Court ordered repossession of the aircraft by the cross-border lessor owing to rental defaults by the lessee. In circular number 16.An example of a cross-border lessor seeking to enforce rights against an Indian lessee was the East West Airlines case. even in the case of cross-border lessors .CROSS-BORDER LEASE TRANSACTIONS  RBI has expressly allowed cross-border leases . dated 14 September 1996. RBI clarified that the import of capital goods under financial leases would be considered on par with external commercial borrowings (ECBs).The Reserve Bank of India (RBI) has expressly permitted crossborder lease transactions.  10 .

a Supreme Court ruling in the case of Narang Dairy Industries.CROSS-BORDER LEASE TRANSACTIONS  Tax laws generally respect the form of the transaction Indian tax laws have generally accepted the form of lease transactions. but the general attitude is that the form should be accepted unless the substance is revealing enough. and the ruling of the Bombay Tribunal in the Centre for Monitoring of Indian Economy case holding a lease to be a purchase by the lessee) against the form. 11  . The Central Board of Direct Taxes clarified that just because a lease is a financial lease. regarding a lease as a mode of transfer. there will be no disallowance of depreciation to the lessor. There have been some rulings (notably.