Economy & Nation Exclusive
GAAR provisions not to hit leasing transactions

According to the draft guidelines on the General Anti-Avoidance Rules (GAAR), leasing transactions will not be hit by its provisions and only circular leasing

The draft guidelines on General Anti-Avoidance Tax Rules (GAAR) were released on Thursday, 28 June 2012. The guidelines are only draft guidelines and have been put out for receiving wide-ranging feedback and for discussion purposes only. The guidelines are framed by a committee constituted by the Central Board of Direct Taxes (CBDT) constituted under the chairmanship of the Director General of the Income Tax (International Taxation) for formulating the guidelines for proper implementation of GAAR. The guidelines are available at

Example six of the draft guidelines quoted below:

"Facts:  A choice made by a company between leasing an asset and purchasing the same asset.  The company would claim deduction for leasing rentals rather than depreciation if it had their own asset. Would the lease rent payment be disallowed as expense under GAAR?

Interpretation: GAAR provisions, would not, prima facie, apply to a decision of leasing (as against purchase of an asset). However, if it is a case of circular leasing, i.e. the taxpayer leases out an asset and through various sub-leases, takes it back on lease, thus creating a tax benefit without any change in economic substance, the revenue department would examine the matter for invoking GAAR provisions."
As written in the title of this note-nothing can be more specific than this. A normal leasing transaction, whether operating lease or financial lease, whether have economic substance or not, whether entered into for obtaining tax benefits or not-would not attract the provisions of GAAR u/s 101 of Income Tax Act. Only "sale and lease back" can be examined and questioned by the revenue authorities.
It was felt by the committee that-terms like, "misuse or abuse", "bona fide purpose" and "lacks commercial substance" may be explained by illustrations. The illustrations stated are, of course only an indicative list and not an exhaustive list.

The given example of leasing-can be treated as equivalent to keeping a leasing transaction (except a "sale and lease back" or a circular leasing)-under the negative list to which GAAR provisions will not apply.

So, the questions on allowability of depreciation to lessee in case of financial lease, allowability of depreciation to the lessor in case of operating lease, allowability of lease rental as expense, economic substance of leasing of assets by a holding company to its subsidiary company, etc, would continue to be governed by the existing provisions of the IT Act and the previously decided cases on similar transactions.
It is a well accepted fact (also accepted by the lawmakers as is illustrated by putting an example on leasing) that so far the tax effect of a lease transaction is concerned, any person who buys the asset will get the same capital allowance.

Further, talking about operating lease and financial lease-the substance of an operating lease is leasing and not financing, and this is established by the accounting standard on lease accounting. And hence, it has to be admitted that an operating lease is not merely a financial arrangement. Irrespective of whom the lessor is, given the depreciation structure, there will be a tax shelter available to the lessor in case of operating lease. If this was to be viewed as a tax avoidance transaction, every lease transaction will become a tax avoidance transaction. Rather every purchase of asset will also become a tax avoidance transaction, as the capital allowance will be available in that case as well.

The given example in the draft guidelines goes well with the true spirit of law and is welcomed by all.

(The writer can be contacted at [email protected])



Dayananda Kamath k

5 years ago

this is the starting point for currprion. when a law has already been passed by parliament it has be to be applied to all equally. why somebody else will deside who is or what type of transactions are to be gives rise to lobbying.and in the present state of government based on the clout opf lobbyiest the law will be amended in such a way that the principle or purpose of the law will be defeated and a law which is beneficial to the vested interest will be implimented. and only an equally powerful other party challenges in court, which may take anytime from 5 to 10 years to settle these people will make their money. and the govt will hold only and adverse judgement which can not serve any pupose at that time. this is the conspiracy hatched so far in this country to create black money. and super rich. and our parlimentarians to show that they are powerful bring in a law which is retrospective effect and make everybody guilty. so that continue to milk the situation to the hilt.

Cairn sells 3.5% in India unit for over Rs2,000 crore

The Edinburgh-based parent had assured the Indian government that it would retain about 22% stake in its Indian arm, but in less than a year, the company has decided to sell off all its shareholding in Cairn India


New Delhi: British major Cairn Energy, which had last year sold majority stake in its Indian unit to mining group Vedanta, today sold 3.5% for over Rs2,000 crore in an open market deal, reports PTI.

It had 21.8% stake in Cairn India before today’s deal.

Cairn Energy sold 6.67 crore shares, or 3.5% of the Indian company’s equity, for about $360 million (over Rs2,000 crore), the company said in a press statement here.

The Edinburgh-based firm had in the run up to seeking government approvals for selling 40% of its stake in Cairn India to Vedanta claimed that it will retain about 22% interest in the company to give it “the strength and flexibility to explore new opportunities for delivering transformational growth”.

But in less than a year from receiving all approvals, the company has decided to sell off all its shareholding in Cairn India and exit the country.

“At the general meeting of the company held on 17 May 2012, shareholders authorised the board to dispose of all or part of Cairn’s residual interest in Cairn India,” the statement said.

Cairn Energy said it “has reached an agreement with Citi to complete an on-market sale of a total of 66,758,864 shares in Cairn India, representing approximately a 3.5% shareholding in Cairn India”.

Following the sale, Cairn Energy retains an about 18.3% shareholding in Cairn India.


Indian stocks shoot up as bulls warm up to local and global factors

A sharp decline in oil price, temporary resolution to the Euro crisis, updgrades by foreign broking houses have emboldened the bulls. Now, will the PM deliver?

Indian stocks have turned bullish thanks to the fact that several stars have lined up to create a positive environment for stocks. Unlike a few previous occasions when either the domestic or global conditions have been bullish, this time, both local and global factors are looking positive. The big boost to stocks today came from abroad, specifically the two-day summit in Brussels which began on Thursday, 28 June 2012 where the European leaders began searching for ways to turn around the continent's economy. The European leaders came up with a plan for a single financial supervisory mechanism for the European region to help stabilize markets. European Commission President Herman van Rompuy said at a press conference early Friday that the mechanism will involve the European Central Bank and that there will be the possibility of direct recapitalization for European banks. The direct recapitalization of banks will take place without increasing a country's budget deficit.

Financial assistance will be provided by the European Financial Stability Facility (EFSF) until the European Stability Mechanism (ESM), a future permanent bailout fund, becomes available. Loans will be transferred from the EFSF to ESM without a change in seniority of the debt.  Europe is trying to do what's necessary in order to break the negative cycle for the region, he said.

The market has interpreted this very positively assuming that liquidity and capital constraints of the banks are over. In a step towards easing the funding problems on fund-distressed countries, the leaders of the 17-nation currency bloc agreed that euro-area rescue funds could be used for sovereign debt purchases without forcing countries to adopt extra austerity measures.

Countries that requested bond support from the rescue fund would have to sign a memorandum of understanding setting out their existing policy commitments and agreeing a timetable. "We are opening the possibility to countries that are behaving well to make use of financial stability instruments in order to reassure markets and to get again some stability around some of the sovereign bonds of our member states," Van Rompuy said.

Enthused by this, Hang Seng was up by over 400 points and Nikkei closed 1.5% higher. The Sensex was among the biggest gainers in Asia-the same with the Hang Seng. European stocks have turned even more bullish. Germany's DAX rose by 2.5% at the time of writing while CAC40 rose 2.4%. The US stocks futures were trading higher, with Dow showing a 125 point rise and S&P futures gaining 16.6 points.

In markets, when it rains, it can pour. While the global environment has turned favourable-albeit temporary-the local conditions have started improving too and this would be a bigger reason for the rally to continue. One of the best things that could have happened was the exit of Pranab Mukherjee from the ministry of finance where he had made a mess of capital market regulations, tax laws, disinvestment and fiscal deficit. While prime minister Dr Manmohan Singh has been doing a lousy job too, he holds the finance charge now under pretty trying circumstances, similar to 1991. One of the first things he has done is to cut petrol prices. The Prime Minister's Office has also been quoted by The Hindu Business Line as saying that the General Anti Avoidances Rules (GAAR) put out by "officials in the Finance Ministry" have not been seen by the Prime Minister. The guidelines are merely in the nature of a draft that has been put in the public domain for "discussion and comment'. This clarification comes close on the heels of categorical official statements to the effect that from April next year, GAAR will target foreign institutional investors (FIIs) that make use of double taxation avoidance treaties.

The market is not expecting too many positive events to happen which is why there has been no rally so far. Remember, today's rally was entirely caused by the action in Europe. On top of this, even if the PM takes some steps, marketmen will warmly embrace that as a bullish sign. This does not mean that the fundamentals have changed in a very basic way. They haven't, but the valuation possibly discounts all current negative news. In fact, Morgan Stanley has just upgraded Indian stocks to "equal weight" after being 'underweight' since the first quarter of 2011, saying India is now trading at a price to book multiple of 2.1x, close to the trough valuations of 2.0x in the 2002 and 2008 cycles.

"This is an indicator of the extent to which the Indian market is already pricing in the adverse global environment and the current domestic situation of high inflation and slower trend GDP growth," it said. Morgan Stanley adds Indian stocks tend to perform well versus MSCI emerging market indexes after a period of oil price declines. The upgrade comes after Deutsche Bank and JP Morgan upgraded Indian stocks to 'overweight' from 'neutral'.


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