Legal Aspects of

A “lease” is defined as a
contract between a lessor
and a lessee for the hire of
a specific asset for a specific
period on payment of
specified rentals.
  LEGISLATIVE
FRAMEWORK
• Lease is defined under TOPA(Transfer of property act) 1882 & Indian registration act 1899 but
relates to lease of immovable property.
• No exclusive legislation to regulate equipment lease in India as act 1972 for hire purchase is
there.
• But lease resembles closely to “bailment” under Indian contract act 1872.
• Bailment is delivery of goods by one person to other for some purpose upon a contract that
they shall ,when the purpose is accomplished , return or dispose off the property.
• Bailor resembles to lessor & Bailee to lessee.
 Essentially these provisions have the following
implications for the lessor and the lessee.

1.) 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.

2) The lessor has the obligation to pay 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.
 Structure of Leasing Industry
The present structure of leasing industry in
India consists of :
(1) Private Sector Leasing and
Private sector leasing consists of:
(2) Public Sector Leasing.
I. Pure Leasing Companies.
II. Hire Purchase and Finance Companies and
III. Subsidiaries of Manufacturing Group Companies.

Public sector leasing organization are divided into:

i. Leasing divisions of financial institutions.
ii. Subsidiaries of public sector banks.
iii. Other public sector leasing organizations.
 LEASE DOCUMENTATION
• Lessee submits proposal to lessor which contains:
• Brief history
• Financial statements of last 3 years
• Projected financial statements of next 3-5 years
• Existing long term debt obligations, lease & hp commitments
• Information about equipment to be leased & place of installation

• If proposal is approved by lessor it is communicated to lessee through

letter of offer.
• Letter of offer is to be accepted by Assesse by passing Board resolution &
Authorizing a person to sign all agreements.
 CONT.
• Where lease facility is in form of lease line , then Master agreement is made.
• Registration under Indian registration act is optional.

• According to Exim policy for import lease:

• MOA must include lease as objective.
• lessee must have net worth of 1 crore.
• lessee ( except psu ) must be listed.

• According to RBI if bank is participant:

• Bank must hold 51 % paid up capital of subsidiary.
• Bank’s investment in subsidiaries doing leasing cannot exceed 10 % of its
paid up capital & free reserves.
Contents of lease
• No Uniform Format
• Description Clause
• description of lessor, lessee equipment & its location
• Period Clause
• tenure of lease & option of renewal
• Rental Clause
• amount of rental , periodicity mode of payment , rental pattern , initial
deposit , penal charge
• Insurance Clause
• Surrender Clause
 CONT..
• Manufacturer’s Warranty Clause
• Entitles lessee the benefit of warranty provided by manufacturer /supplier.
• Ownership Clause
• No right would be passed on to lessee during lease & He cannot sell that assets to anyone else.

• Equipment Delivery Clause

• lessee should be responsible for taking delivery & possession

• Repairs & Alteration Clause

• Cost to be borne by lessee

• Default & Arbitration

• Miscellaneous Clause
• Exemption Clause
 TAX ASPECTS OF
LEASING
Lessor:
 Deduction of depreciation from taxable income.

 Income from lease rentals is taxable under “Profits and

Gains of Business and Profession”

 Deductible expenses: o Depreciation

o Rent, rates, taxes, repairs and insurance.
o Amortization of preliminary expenses.
o Interest on borrowed capital Bad debts.
o All expenses incurred in furtherance of business Entertainment
expenses (with a cap).
o Travel expenses (as per approved norms).
 Lessee:
 Allowability of lease rentals –
oAllowed as normal business expenditure if they are not i. of capital nature,
oPersonal expense and relates only to the business purpose.

 Deductibility of Incidental Expenses–

oRepairs, Maintenance, Insurance, Finance Charges,…(Incidental)
oInstallation expense (revenue expense in the year of incurrence)
  MCQs
1) Lease is Define Under:
a) Indian Registration act,1899 b) Transfer of Property act, 1882
c) Both a&b d) None from the above

2) Private sector leasing does not consist:

a) Pure Leasing Companies. b) Subsidiaries of Manufacturing Group Companies
c) Hire Purchase and Finance Companies and d) Subsidiaries of private sector Bank

3) Lessee Submitted Financial statement of________ last years?

a)4 years b) 5 years
c) 3 years d) 6 years
4) Rental Clause doesn't includes:
a) Amount of Rental b)Rental Location
c) Rental pattern d) Penal Charges

5) Letter of Offer is accepted by Assess by Passing a:

a) Special Resolution b)Normal Resolution
c) Board Resolution d) Ordinary Resolution

6) Where lease facility is in form of lease line , then_______________is made?

a) Master Agreement b)lease Agreement
c) Hire Purchase Agreement d) Bailment Agreement

7) Which one is not a content of lease?

a) Exemption clause b) Repair and Alteration clause
c) Surrender clause d) Location clause
8) Tick the Deductible expenses of the Lessor in Taxable income?
a) Depreciation b) Travel Expenses c) Telephone expenses
d) Repairs Expenses e) Entertainment Expenses f) Food expenses

9) Exim policy for import lease must includes:

a) Lessee Must have net worth of 1crore b) lessee must hold 51 % paid up capital of subsidiary
c) AOA should Include Lease as a Objective d) MOA should include the lessee bank account details

10) The present structure of leasing industry in India consists of :

a) Public& Private sector leasing b) Public & Foreign sector leasing
c) Private sector leasing d) Private & Foreign Sector leasing
 Answers:
1) C
2) D
3) C
4) B
5) C
6) A
7) D
8) A, B, D, E
9) A
10)A