Full Judgment Text
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CASE NO.:
Appeal (civil) 3574 of 1998
PETITIONER:
Asea Brown Boveri Ltd.
RESPONDENT:
Industrial Finance Corporation of India & ors.
DATE OF JUDGMENT: 01//4\001@\006
BENCH:
October 27, 2004
JUDGMENT:
J U D G M E N T
R.C. Lahoti, CJI
This is an appeal under Section 10 of the Special Courts
(Trial of Offences Relating to Transactions in Securities) Act,
1992 (hereinafter ’the Act’, for short), feeling aggrieved by an
order dated 28.7.1998 whereby rejecting an objection petition
preferred by the appellant, the Special Court has directed the
appellant to hand over possession of all the 56 cars to the
custodian within one week from the date of the order.
The Industrial Finance Corporation of India (hereinafter
’IFCI’, for short) is a Corporation constituted under the Industrial
Finance Corporation of India Act, 1948 and carries on the
business of financing moneys to various borrowers. Vide
agreement dated 4.12.1990, the appellant entered into a Lease
Finance Agreement with M/s. Fairgrowth Financial Services
Limited (hereinafter ’Fairgrowth’, for short), the respondent No.
3. Pursuant to the letter of offer dated 26.7.1990 under this
lease finance agreement, the appellant had taken lease finance
of total 57 cars out of which one car was foreclosed in or about
January, 1992, leaving 56 cars under lease finance with the
appellant.
The case of the appellant as regards these 56 cars and the
relationship of the appellant and respondent No. 3 in so far as
these cars are concerned is stated as follows. The Appellant
Company deposited total security amount on the 56 cars of Rs.
20,97,447.25 paise. The total rental payable by the Appellant
Company for 5-year period amounted to Rs. 85,35,379/-. The
total purchase price of 56 cars is Rs. 84,80,664/-. As per the
terms of the lease finance agreement mutually agreed into by
the parties, the Appellant Company was required to pay 25% of
the purchase price of the cars as security deposit carrying
interest @ 5% per annum compounded half yearly, a lease
management fee of 1% and lease rental of Rs. 15/- per
thousand Rupees per month of the cash price of the assets which
was later revised to Rs. 16/- per thousand Rupees per month by
a subsequent letter."
It is further alleged that it was the tacit understanding
between the parties that the cars were to be transferred to the
Appellant Company at the end of initial lease period of 5 years
for which the parties agreed in their agreement by stating that
the terminal fee will be 20%, meaning thereby that on payment
of 20% of the cost price of the cars the said cars would be
transferred by the Lessee Company to the Appellant Company or
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their nominee. The term terminal fee is a well known term in
Lease Finance Transaction and has no other connotation than the
amount payable for transfer of the leased asset. This lease
finance agreement was entered into on 4th December, 1990."
Fairgrowth became a notified party under sub-Section (2)
of Section 3 of the Act due to certain illegal transactions covering
the period between 1.4.1991 and 6.6.1992. The transaction
entered into on 4.12.1990 pursuant to letter of offer dated
26.11.1990 is not referable to the period during which the
alleged illegal transactions were entered into by Fairgrowth.
The Central Government appointed IFCI as the custodian,
under sub-Section (1) of Section 3 of the Act, over the
properties belonging to Fairgrowth. The Appellant Company
continued to make payment to IFCI in place of Fairgrowth as per
lease finance agreement. An amount of Rs. 30,96,948.30 paise
was paid by the appellant to Fairgrowth till December, 1992. An
amount of Rs.44,61,273/- was paid by the appellant to the
custodian IFCI. Thus the total lease rentals actually paid by the
appellant company are Rs.75,31,842/- till May, 1997 whereas
the rentals which were payable by the appellant company were
Rs.85,34,379/- only.
According to the appellant company under lease finance
agreement, it had made a security deposit with Fairgrowth on
which an interest of 5% per annum compounded half yearly was
to be paid. The appellant made a communication to the
custodian clarifying that the appellant would be entitled under
the agreement to the amounts on account of security deposit
and interest accrued thereon at the time of buyback or purchase
of lease assets by the appellant. On 9.4.1997, the appellant
forwarded a cheque of Rs. 17,800/- in full and final settlement of
dues under lease finance agreement dated 4.12.1990.
According to the appellant, the payment of this amount squared
up fully and finally its liability for payment subject to adjustment
of security deposit and interest agreed thereon and all that
remained to be done thereafter was to transfer the said 56 cars
in favour of the appellant company after cancellation of the
hypothecation which obligation was to be discharged by the
custodian which had taken over the properties of Fairgrowth.
A perusal of the detailed order passed by the Special Court
shows that the Special Court refused to treat the transaction
between the appellant and Fairgrowth as one of lease finance
and instead treated it to be a transaction of lease only i.e. the
appellant holding 56 cars as lessee of Fairgrowth. The principal
reason which prevailed according to the Special Court is that in
its application, the appellant had stated the transaction to be of
"lease" and not of "lease finance". Thus the Special Court has
rigidly applied the rules of pleadings but a perusal of the order
shows that there has been no effort to scrutinize and interpret
the documents evidencing the transaction so as to determine the
real nature thereof.
This appeal was filed on 31.7.1998. On 3.8.1998, the
court passed an interim order protecting the possession of the
appellant over the 56 cars.
On being noticed, the custodian has in its response filed a
calculation sheet prepared by a Chartered Accountant appointed
by the Special Court and, according to his calculation, an amount
of Rs. 6,48,370/- was due and payable by the appellant to the
respondent No. 3. as per the agreement entered into between
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the parties. A perusal of this calculation sheet shows that the
main factor responsible for the variation in the ultimate figure of
balance payable is attributable to an amount of Rs.4,89,923/-
being sales tax calculated @5% on the amount of total lease
rent including terminal fee which figure of sales tax the
chartered accountant feels is leviable on the transaction and
hence payable by the appellant. This is a highly debatable issue
but need not detain us. Whether or not this amount is held to
be due and payable by the appellant, it will not change the
nature of transaction. The correctness of the calculation has
been disputed in the rejoinder filed on behalf of the appellant
wherein it is submitted that all sums due and payable under the
lease finance agreement dated 4.12.1990 were already paid and
nothing was due and payable at all to any of the respondents by
the appellant. Even 20% terminal fee, as purchase price of the
56 cars, had been paid and nothing had remained to be done
except termination of hypothecation and transferring on paper of
the ownership of the cars to the appellant which was only a
matter of formality necessarily flowing from the obligation of
respondent No. 3 under the agreement and accounts having
already squared up. The documents show that the registration
of the cars since inception stands in the name of the appellant.
During the course of hearing before this Court, it was
conceded at the Bar that so far as the transaction between the
respondent No. 3 and the appellant as evidenced by the
agreement dated 4.12.1990 is concerned, it is a transaction of
lease finance and the rights and obligations of the parties have
to be worked out accordingly.
We have heard at length, the learned counsel for the
parties. We also requested Shri Uday U. Lalit, Senior Advocate,
to assist the Court by pointing out the correct position of law
centering around lease finance transactions. We place on record
our appreciation of the assistance rendered by the learned senior
counsel, Shri Uday U. Lalit.
What is a lease finance? According to Dictionary of
Accounting & Finance by R. Brockington (Pitman Publishing,
Universal Book Traders, 1996 at page 136) :-
"A Finance 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. SSAP 23 required that assets held under
a finance lease be treated on the balance sheet
in the same way, as if they had been
purchased and a loan had been taken out to
enable this."
(emphasis supplied)
In Lease Financing & Hire Purchase by Dr. J.C. Verma (4th
Edition, 1999 at p.33), Financial Lease has been so defined :-
"Financial lease is a long-term lease on fixed
assets, it may not be cancelled by either party.
It is a source of long-term funds and serves as
an alternative of long-term debt financing. In
financial lease, the leasing company buys the
equipment and leases it out to the use of a
person known as the lessee. It is a full payout
lease involving obligatory payment by the
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lessee to the lessor that exceeds the purchase
price of the leased property and finance cost.
Financial lease has been defined by
International Accounting Standards Committee
as "a lease that transfers substantially all the
risks and rewards incident to ownership of an
asset. Title may or may not eventually be
transferred." Lessor is only a financier and is
not interested in the assets. This is the reason
that financial lease is known as full payout
lease where contract is irrevocable for the
primary lease period and the rentals payable
during which period are supposed to be
adequate to recover the total investment in the
asset made by the lessor."
(emphasis supplied)
According to Lease Financing & Hire Purchase by Vinod
Kothari (Second Edition, 1986, at pp. 6 & 7), a finance lease,
also called a capital lease, is nothing but a loan in disguise. It is
only an exchange of money and does not result into creation of
economic services other than that of intermediation. The
learned author has quoted T.M. Clark, one of the most authentic
writers on the subject who defines lease and operating lease in
the undergoing words :-
"A financial lease is a contract involving
payment over an obligatory period of specified
sums sufficient in total to amortise the capital
outlay of the lessor and give some profit."
"An operating lease is any other type of lease \026
that is to say, where the asset is not wholly
amortised during the non-cancellable period, if
any, of the lease and where the lessor does not
rely for his profit on the rentals in the non-
cancellable period."
The features of the financial lease, according to the
learned author are as under :
"1.The asset is use-specific and is selected for the
lessee specifically. Usually, the lessee is allowed
to select it himself.
2. The risks and rewards incident to ownership are
passed on to the lessee. The lessor only remains
the legal owner of the asset.
3.Therefore, the lessee bears the risk of
obsolescence.
4. The lessor is interested in his rentals and not in
the asset. He must get his principal back along
with interest. Therefore, the lease is non-
cancellable by either party.
5. The lease period usually coincides with the
economic life of the asset and may be broken into
primary and secondary period.
6. The lessor enters into the transaction only as a
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financier. He does not bear the costs of repairs,
maintenance or operation.
7. The lessor is typically a financial institution and
cannot render specialized service in connection
with the asset.
8. The lease is usually full-pay-out, that is, the single
lease repays the cost of the asset together with
the interest."
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 equipments or machinery is by the borrower. For all
practical purposes, the borrower becomes the owner of the
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 the 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 the lessor, any of the above mentioned expenses.
The period of lease extends over and covers the entire life of the
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-cancellable.
All the abovesaid features are available in the transaction
entered into by the appellant. In addition, we find that the
registration of the 56 cars stood in the name of the appellant
from the very beginning and on payment of full amount including
termination fee, as agreed upon, nothing more was needed to be
done to vest the appellant with ownership and only loan
documents were needed to be discharged and cancelled.
There are certain tax benefits which by styling the
transaction like a financial lease become available to the lessor
(financer) and the lessee (borrower) both. Accounting standards
have been devised consistently with which the entries are made
in the accounts so as to satisfy the requirements of tax laws and
to avail the best benefits by way of tax planning to both the
parties.
However, so far as the Act is concerned, we have to go by
the provisions of the Act, keeping in view the real nature of the
transaction ascertaining the real intention of the contracting
parties in the light of the facts and circumstances of a given
case. Once a party has been notified under sub-Section (2) of
Section 3 of the Act then under sub-Section (3), notwithstanding
anything contained in any other law for the time being in force
with effect from the date of notification under sub-Section (2),
any property, movable or immovable or both belonging to
notified party stands attached simultaneously with the issue of
the notification and becomes liable to be dealt with by the
custodian in such manner as the Special Court may direct. A
person is liable to be notified by reference to transaction in
securities between 1.4.1991 and 6.6.1992. Any contract or
agreement entered into between 1.4.1991 and 6.6.1992, in
relation to any property of the notified party is liable to be
cancelled, if found to have been entered into fraudulently or to
defeat the provisions of the Act. Analysing the provisions of the
Act, it was held in B.O.I. Finance Ltd. Vs. Custodian and
others, (1997) 10 SCC 488, that the custodian under the Act is
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required to assist in the attachment of the notified person’s
property and to manage the same thereof. The properties of the
notified persons, whether attached or not, do not, at any point of
time, vest in him. He is merely a custodian and not a receiver
nor is he a final liquidator so as to enjoy control over the
properties. In other words, the position of the custodian is the
same as that of the notified person himself. We are, therefore,
of the opinion that the custodian remains bound by the
obligations incurred by the notified party itself, if not incurred
fraudulently or to defeat the provisions of the Act.
For the purpose of deciding the controversy before us, it is
not necessary for us to examine whether the transaction entered
into between the appellant and Fairgrowth, the respondent No.
3, would at all attract the applicability of the provisions of the
Act in view of sub-section (2) of Section 3 thereof. The learned
counsel for the appellant has taken a very fair stand submitting
that the appellant is prepared to pay if anything is still found to
be due and payable by it but in any case the 56 cars could not
have been held liable and directed to be delivered to the
custodian. It was a simple case of accounting. If the appellants
have cleared all their payments in accordance with the
agreement dated 4.12.1990, initially to Fairgrowth and
thereafter to the custodian including payment of terminal fee
subject to adjustment for security deposit and the interest
accrued thereon, then all that had remained to be done was the
transfer of ownership on paper which the custodian should have
been directed to do, submitted the leaned counsel. But, as we
have already noticed, the registration of the cars already stands
in the name of the appellant. On a scrutiny of the accounts, if in
the opinion of the Special Court, nothing had then remained to
be paid by the appellant, then it was only a matter of calculation,
the difference between the appellant’s statement of account and
the one prepared by the Chartered Accountant at the instance of
the custodian being bonafide, the appellant could, at best, have
been directed to pay the deficit. But in no case submitted the
learned counsel for the appellant, the 56 cars could have been
directed to be delivered to the custodian. In spite of having
made full payment (bonafide error or dispute as to calculation
excepted), direction for delivery of cars to the custodian has
caused failure of justice. We find ourselves in agreement with
the submission so made.
The appeal is allowed. The impugned order dated 28.7.98
passed by the Special Court is set aside. The application filed by
the appellant shall stand restored on the file of the Special
Court. The Special Court shall look into the accounts after
affording the parties an opportunity of hearing and determine if
any amount, and if so to what extent, remains still payable by
the appellant to the custodian, for and on behalf of Fairgrowth,
the respondent No. 3. In the event of any amount being held
liable to be so paid, the same shall be paid by the appellant
within the time appointed by the Special Court failing which the
appellant shall be liable to be proceeded against including for
attachment of property.
No order as to the costs.