NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY VS ANAND SONBHADRA

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2222 OF 2021

NEW OKHLA INDUSTRIAL DEVELOPMENT

AUTHORITY ..APPELLANT(S)

VERSUS

ANAND SONBHADRA ..RESPONDENT(S)

WITH

CIVIL APPEAL NO. 2367-2369 OF 2021

NEW OKHLA INDUSTRIAL DEVELOPMENT

AUTHORITY ..APPELLANT(S)

VERSUS

MANISH GUPTA & Anr. Etc. ..RESPONDENT(S)

J U D G M E N T

K.M. JOSEPH, J.

1. Hardly six years old, the Insolvency and

Bankruptcy Code (hereinafter referred to as the

‘IBC”) continues to be a fertile ground to spawn

litigation. Born in the year 2016, the IBC this time

around has given rise to the question as to whether

the appellant would be a financial creditor and

entitled to be so treated in the Corporate Insolvency

Resolution Process (CIRP, in short) commenced against

the corporate debtor under the ‘IBC’.

THE APPEALS

CIVIL APPEAL NO.2222/2021

2. The appellant ‘NOIDA’ initially submitted Form

’B’ and claimed as an operational creditor in regard

to the dues outstanding under the lease. Subsequently

the appellant filed a claim in Form ‘C’ and claimed

as a financial creditor. There was some

correspondence which reveals that the appellant

insisted upon being treated as a financial creditor.

Finally, the matter was considered by the

adjudicating authority (NCLT) which held that there

was no financial lease in terms of the Indian

Accounting Standards and there was no financial debt.

By the impugned order, NCLAT has affirmed the view

taken by the NCLT. Hence the appeal.

CIVIL APPEAL NOS.2367-2369 OF 2021

3. The appellant in 2222 of 2021 is the appellant in

this case also. The appeal is filed against an

interim order passed by the NCLAT staying the order

passed by the NCLT. By the order passed by the NCLT,

the appellant herein was directed to be admitted as a

financial creditor and adjudicating authority also

directed to admit the whole of the claim of the

appellant. In view of the order passed, which is the

subject matter of C.A. No. 2222/2021, NCLAT found it

fit to pass an order staying the order passed by the

NCLT. Hence the appeals.

4. Since a common question arises namely whether the

appellant is entitled to be treated as a financial

creditor within the meaning of the IBC, we are

rendering the common judgment.

5. We have heard Shri Tushar Mehta, Learned

Solicitor General appearing for the appellant in C.A.

No.2222/2021 and Smt. Madhavi Divan, learned

Additional Solicitor General for the appellant in

C.A. No.2367-2369/2021. We have also heard Shri Ritin

Rai, learned Senior Counsel appearing on behalf of

the respondent in CA 2222/2021. Besides we heard

Dr. A.M. Singhvi, learned Senior Counsel who was

allowed to intervene in the matter on the basis that

there is a case involving the appellant NOIDA which

is pending consideration. We also heard Shri

Devashish Bharuka on behalf of the first respondent

in C.A. Nos. 2367-2369/2021.

THE LEASE

6. The terms of the lease are as found in C.A. No.

2222/2021. The lease was entered into on the 30th day

of July, 2010. The appellant is the lessor described

as the Authority under Section 3 of the Uttar Pradesh

Industrial Area Development Act, 1976 (hereinafter

referred to as the ‘UPIAD Act’). The lease deed

recites that the leasehold property forms part of the

land acquired under the Land Acquisition Act and

developed by the lessor for the purposes of setting

up of an ‘Urban and Industrial Township’. The purpose

of the lease is the construction of the residential

flats according to the setback and building plan

approved by the appellant. The lessee earned its

right as lessee under the process of two bid tender

system in favour of a consortium of which it is a

member. The lease deed provides that the shareholding

of the lessor shall remain unchanged till the

temporary occupancy/completion certificate of at

least the first phase of the project is obtained from

the lessor and the lessee is permitted to transfer

upto 49% of the shareholding subject to conditions.

Thereafter, it is recited that of the consideration

of Rs.46,14,69,996.50, 10% stood paid. The lease deed

further contemplated moratorium of 24 months from the

date of allotment. Only the interest at 7% per annum

compounded half yearly which accrued during the

moratorium period shall be payable in equal half

yearly instalments. The lease deed further

contemplated payment of the balance 90% of the amount

after expiry of the moratorium in 16 half yearly

instalments along with interest as specifically set

out. Relevant portions of the lease deed to be

noticed read as follows:

“And also, in consideration of the yearly

lease rent hereby reserved and the covenants

provisions· and agreement herein contained

and on the part of the Lessee. to be

respectively paid observed and performed, the

Lessor doth hereby demise on lease to the

lessee! that plot of land numbered as Group

Housing Plot No.GH-5/B, Sector-137, In the

NOIDA, Distt. Gautam Budh Nagar (U.P.)

contained by measurement 22,565.77 Sq. mtrs.

be the same a little more or less and

bounded:

On the North by : As per Site

On the South by : As per Site

On the East by : As per Site

On the West by : As per Site

And the said plot is more clearly delineated

and shown In the attached plan and therein

marked red.

TO HOLD the said plot (hereinafter referred

to as the demised premises with their

appurtenances up to the lessee for the term

of 90 (ninety) years commencing from 30,

JULY, 2010 except and always reserving to the

Lessor.

a) A right to lay water mains, drains, sewers

or electrical wires under or above the

demised premises, if deemed necessary by the

Lessor in developing the area.

b) The Lessor reserves the right to all mine

and minerals, claims, washing goods, earth

oil, quarries, over & under the allotted plot

and full right and power at the time to do

all acts and things which may be necessary or

expedient for the purpose of searching for

working and obtaining removing and enjoy the

same Without providing or leaving any

vertical support for the surface of the

residential plot or for any

building for the lime being standing thereon

provided always that the lessor shall make

reasonable compensation to the Lessee for all

damages directly occasioned by the exercise

of such rights. To decide the amount of

reasonable compensation the decision of the

Lessor will

be final and binding on the Lessee.

(II) AND THE LESSEE DOTH HEREBY DECLARE AND

CONVENANTS WITH THE LESSOR IN THE MANNER

FOLLOWING: .

a) Yielding and paying therefore yearly in

advance during the said term unto the lessor

In the month of MARCH for each year the

yearly lease rent indicated below: -

(i) Lessee has paid Rs. 46,14,699;96 say

Rs.46,14,700,00 as lease rent being 1% of the

plot premium for the first 1O years of lease

period.

(ii) The lease rent may be enhanced by 50%

after every 10 years i.e., 1.5 times of the

prevailing lease rent.

(ii) The lease rent shall be payable In

_advance every year. First such payment shall

fall due on the date of execution of lease

deed and thereafter, every year, on or before

the last date of previous financial year.

(iv) Delay In payment of the advance lease

rent will be subject to Interest @14% per

annum compounded half yearly on the defaulted

amount for the defaulted period.

(v) The lessee has the option to pay lease

rent equivalent to 11 years @ 1 % of the

premium of the plot per year as 'One Time

Lease Rent unless the Lessor decides to

withdraw this facility: On payment of One

Time Lease Rent, no further annual lease rent

would be required to be paid for the balance

lease· period. This option may be exercised

at any time during the lease period provided

the lessee has paid the earlier lease right

due and lease rent already paid will not be

considered· in One Time Lease Rent option.

b) The Lessee shall be liable to pay all

rates, taxes, charges and assessment leviable

by whatever name called for every description

in respect of the plot of land or building

constructed thereon assessed or Imposed from

time to time by the lessor or any Authority/

Government. In exceptional circumstances the

time of deposit for the payment due may be

extended by_the lessor. But in such case of

extension of time an interest@ 14% p.a.

compounded every half yearly shall be charged

for the defaulted amount for such delayed

period. In case lessee fails to pay the above

charges it would be obligatory on the part or

Its members/ sub lessee to pay proportional

charges for the allotted areas.

c) The Lessee shall use the allotted plot for

construction of Group Housing, however, the

lessee shall be entitled to a lot the

dwelling unit on sublease basis to its

allottee and also provide space for

facilities like Roads, Parks etc. as per

their requirements, convenience with the

allotted plot, fulfilling requirements or

building bye-laws and prevailing and under

mentioned terms and conditions to the lessor.

Further transfer/sub lease shall be governed

by the transfer policy of Lessor:

(i) Such allottee/sub lessee should be citizen

of India and competent to contract.

(ii) Husband/wife and their dependent

children will not be separately eligible for

the purpose of allotment and shall be treated

as single entity.

(iii) The permission for part transfer of

plot shall not be granted under any

circumstances. The Lessee shall not be

entitled to complete transaction for sale,

transfer, assign or otherwise part with

possession of the whole or any part of the

building constructed thereon before making

payment according to the schedule specified

in the lease deed of the plot to the Lessor.

However, after making payment of premium of

the plot to the lessor as per schedule

specified in the lease deed, permission for

transfer of built up flats or to part with

possession of the whole or any part of the

building constructed on the group housing

plot, shall be granted and subject to payment

of transfer chargers as per policy prevailing

at the time of granting such permission of

transfer. However, the Lessor, reserves the

right to reject any transfer application

without assigning any reason. The lessee will

also be required to pay transfer charges as

per the policy prevailing at the time of such

permission of transfer.

The permission to transfer the part Or the

built up space will be granted subject to

execution of tripartite sub- lease deed which

shall be executed in a form and format as

prescribed by the lessor.” On the fulfillment

of the following conditions: -

a) The Lease Deed of plot has been executed

and the Lessee has made the payment according

to the schedule specified in the lease deed

of the plot, interest and one time lease

rent. Permission of sub-lease deed shall be

granted phasewise on payment of full premium

(with interest upto the date of deposit) of

the plot of that phase.

b) Every sale done by the lessee shall have

to be registered before the physical

possession of the property is handed over.

c) The Lessee has obtained building occupancy

certificate from Planning Department, Greater

Noida (Lessor).

d) The Lessee shall submit list of individual

allottees of flats within 6 months form the

date of obtaining occupancy certificate.

e) The Lessee shall have to execute

tripartite sub lease in favour of the

individual allottees for the developed

flats/plots in the form and format as

prescribed by the LESSOR.

f) The Sub-Lessee undertakes to put to use

the premises for the residential use of

residential area only.

g) The Lessee shall pay an amount of Rs.

1000/- towards processing fee and

proportionate (pro-rate basis) transfer

charges and lease rent as applicable at the

time of transfer and shall also execute sub

lease deed between Lessor, Lessee and

proposed transferee (sub-Lessee). The Lessee/

Sub Lessee shall also endure adherence to the

building regulations and directions of the

Lessor. The Lessee as well as sub Lessee

shall have to follow rules and regulations

prescribed in respect of lease hold

properties and shall have to pay the charges

as per rules of the Lessor/Government of U.P.

The transfer charges shall not be payable in

case of transfer between son/daughter,

husband/wife, mother/father and vice versa or

between these six categories. A processing

fee of Rs.1000/- will be payable in such

case. The transfer of the flat in favour of

st sub-Lessee shall be allowed without any

transfer charges but sub lease deed will be

executed between the Lessor & Lessee and

allottee. However, a processing fee of the

Rs. 1000/- will be payable at the time of

transfer/execution of the sub-lease deed. The

physical possession of dwelling units/

flats/plots will be permitted to be given

after execution of sub-lease deed.

i) Every transfer done by the Lessee shall

have to be registered before the physical

possession of the flat/ plot is handed over.

J) Except otherwise without obtaining the

completion certificate, the Lessee shall have

the option to divide the allotted plot and to

sub lease the same with the prior approval of

lessor on payment of transfer charges.

However, the area of each of such sub divided

plot should not be less than 10,000 sq.

metres.

k) Rs.1000/- shall be paid as processing fee

in each case of transfer of flat in addition

to transfer charges.

7. Norms of development are specifically set out as

maximum permissible FAR, maximum ground coverage and

maximum height. The construction is to be completed

in maximum five phases within a period of seven years

from the date of execution of the lease deed. Delay

specifically entitled the appellant to cancel, as

also gave rise to power to extend time in the manner

provided therein with penalty. The period of

extension is fixed at 3 years with penalty. It

further provided that further extension will normally

be not permitted. If the lease is cancelled, the

Lessee is to lose all rights and the building

appurtenant thereto. The lessee is at total liberty

to design the size of the flat/plots. The FAR

earmarked for commercial/institutional use would be

admissible but the allottee/lessee may utilize the

same for their residential use as per their

convenience. The clause relating to mortgage reads as

follows:

MORTGAGE

“The lessee may with prior permission of the

Lessor, mortgage the land to any Financial

Institution(s)/ Bank(s) for raising loan for

the purpose of financing his investment in the

project on receipt of payment by allottee or on

receipt of assurance of payment by bank or

under any other suitable arrangement. In mutual

settlement amongst the LESSOR, developer and

the financial institution(s)/ Bank(s). As

regards the case of mortgaging the land to any

Financial Institution(s)/ Bank(s) to mortgage

the said land to facilitate the housing loans

of the final purchasers, N.O.C may be issued

subject to such terms and conditions as may be

decided by the LESSOR at the time of granting

the permission.

Provided that in the event of sale or

foreclosure of the mortgaged/ charged property

the LESSOR shall be entitled to claim and

recover such percentage, as decided by the

LESSOR of the unearned increase in values of

properties in respect of the market value of

the said land as first chare, having priority

over the said mortgage charge, the decision of

the LESSOR in respect of the market value of

the said land shall be final and binding on all

the parties concerned.

The LESSOR’S right to the recovery of the

unearned increase and the pre-emptive right to

purchase the property as mentioned herein

before shall apply equality to involuntary sale

or transfer, be it bid or through execution of

decree of insolvency/court.”

Transfer of plot is the next provision to notice and

it reads as follows:

“TRANSFER OF PLOT

Without obtaining the completion certificate

the lessee shall have the right to sub-divide

the allotted plot into suitable smaller plots

as per planning norms and to transfer the

same to the interested parties upto

30.09.2010 with the prior approval of LESSOR

on payment of transfer charges @ 2% of

allotment rate. However, the area of each of

such sub-divided plots should not be less

than 20,000 sq. mtrs. However, individual

flat/plot will be transferable with prior

approval of the LESSOR as per the following

conditions: -

(i) The dues of LESSOR towards cost of land

shall be paid in accordance with the payment

schedule specified in the Lease Deed before

executing of sub-lease deed of the flat.

(ii) The lease deed has been executed.

(iii) Transfer of flat will be allowed only

after obtaining completion certificate for

respective phase by the Lessee.

(iv) The sub-lessee undertakes to put to

use the premises for the residential use

only.

(v) The lessee has obtained building occupancy

certificate from Building Cell, NOIDA.

(vi) First sale/transfer of a flat/plot to

an allottee shall be through a Sub-lease/

Lease Deed to be executed on the request of

the Lessee to the LESSOR in writing.

(vii) No transfer charges will be payable

in case of first sale, including the built-up

premises on the sub-divided plot(S) as

described above. However, on subsequent sale,

transfer charges shall be applicable on the

prevailing rats as fixed by the LESSOR.

(viii) Rs. 1000/- shall be paid as

processing fee in in each case of transfer of

flat in addition to transfer charges.”

8. Under the heading “Misuse, addition, alteration

etc.”, it is provided that the lessee shall not use

the flat for any purpose other than residential

purpose. Violation would open the doors for

cancellation. The lessee is liable to pay all rates,

taxes, charges and assessment of every description

imposed by any lessor empowered in this behalf,

whether it be imposed on the plot or the building

constructed thereon from time to time.

9. Under the heading “Overriding power over dormant

property”, it is provided as under:

“OVERRIDING POWER OVER DORMANT

PROPERTIES

The lessor reserves the right to all mines,

minerals, coals, washing gold earth’s olls,

quarries on or under the plot and full right

and power at any time to do all acts and

things which may be necessary or expedient

for the purpose of searching for, working and

obtaining removing and enjoying the same

without providing or leaving any vertical

support for the surface of the plot(s)/ flats

or for the structure time being standing

thereon provided always that the Lessor shall

make reasonable compensation to the Lessee

for all damages directly occasioned by

exercise of the rights hereby reserved. The

decision of the Chief Executive Office/

Lessor on the amount of such compensation

shall be final and binding on the lessee/

sub-lessee.”

10. The lessee is to maintain the premises. Under the

head ‘Maintenance’, it is, inter alia, stated as

follows:

“5. The lessee/sub lessee shall make such

arrangements as are necessary for the

maintenance of the building and common

services and · If the building Is not

maintained properly. The Chief Executive

Officer or any officer authorized by· Chief.

Executive Officer of the Lessor will have

power to get the maintenance done through the

Lessor and recover the amount so spent from

the lessee/sub lessee. The lessee/sub lessee

will be individually and severally liable for

payment of the maintenance amount. The

rules/regulation of UP Flat ownership act

1975 shall be applicable on the lessee/sub

lessee. No objection on the amount spent for

maintenance of the building the lessor shall

be entertained and decision of the Chief

Executive Officer of the Lessor In this

regard shall be final.”

11. Cancellation of lease deeds is separately

provided as follows:

“CANCELLATION OF LEASE DEED

“In addition to the other specific clauses

relating to cancellation, the Lessor, as the

case may be, will be free to exercise its

right of cancellation of lease in the case

of:-

1. Allotment being obtained through

misrepresentation/suppression of material

facts, misstatement and/or fraud.

2. Any violation of directions issued or

rules and regulation framed by Lessor or by

any other statutory body.

3. Default on the part of the lessee for

breach/violation of terms and conditions of

registration/allotment/lease and/or nondeposit of allotment amount.

4. If at the same time of cancellation, the

plot is occupied by the Lessee thereon the

amount equivalent to 25% of the total premium

of the plot shall be fortified and possession

of the plot will be resumed by the Lessor

with structure thereon, if any, and the

lessee will have no right to claim

compensation thereof. The balance, if any

shall be refunded without any interest. The

forfeited amount shall not exceed the

deposited amount with the Lessor and no

separate notice shall be given in this

regard.

5. If the allotment is cancelled on the

ground mentioned in sub clause 1 above, then

the entire amount deposited by the lessee,

till the date of cancellation shall be

forfeited by the Lessor and no claim

whatsoever shall be entertained in this

regard.”

12. We may also notice the provisions under other

clauses:

“OTHER CLAUSES

1. The Lessor reserves the right to make such

additions/ alternations or modifications in

the terms and conditions of allotment/lease

deed/sub lease deed from time to time, as may

be considered just and expedient.

2. In case of any clarification or

interpretation regarding these terms and

conditions the decision of Chief Executive

Officer or the lessor shall be final and

binding.

3. If due to any “Force Majeure” or such

circumstances beyond the lessor’s control,

the lessor is unable to make allotment or

facilitate the Lessee to undertake the

activities in pursuance of executed lease

deed, the deposits depending on the stages of

payments will be refunded along with simple

interest @ 4% p.a., if the delay in refund is

more than one year from such date.

4. If the Lessee commits any act of omission

on the demised premised resulting in

nuisance, it shall be lawful for the lessor

to ask the Lessee to remove the nuisance

within a reasonable period falling which the

LESSOR shall itself get the nuisance removed

at the Lessee’s cost and charge damages from

the Lessee during the period of submission of

nuisance.

5. Any dispute between the lessor and Lessee/

Sub-Lessee shall be subject to the

territorial jurisdiction of the Civil Courts

having jurisdiction over District Gautam Budh

Nagar or the Courts designated by the Hon’ble

High Court of Judicature at Allahabad.

6. The Lease Deed/ allotment will be governed

by the provisions of the U.P. Industrial Area

Development Act, 1978 (U.P. Act no. 6 of

1976) and by the rules and/ or regulations

made or directions issued, under this act.

7. The lessor will monitor the implementation

of the project. Applicants who do not have a

firm commitment to implement the project

within the time limits prescribed are advised

not to avail the allotment.

8. The lessee/ sub-lessee of the Lessee shall

be liable to pay all taxes/ charges livable

from time-to-time lessor or any other

authority duly empowered by them to levy the

tax/charges.

9. Dwelling units flats shall be used for

residential purpose only, in case of default,

render the allotment/ lease liable for

cancellation and the Allottee/Lessee/sublessee will not be paid any compensation

thereof.

10. Other buildings earmarked for community

facilities cannot be used for purposes other

than community requirements.

11. All arrears due to the Lessor would be

recoverable as arrears of land revenue.

12. The Lessee shall not be allowed to assign

or change his role, otherwise the lease shall

be cancelled and entire money deposited shall

be forfeited.

13. The lessor in larger public interest may

take back the possession of the

land/building/ by making payment at the

prevailing rate.

14. In case the lessor is not able to give

possession of the land in any circumstances

deposited money will be refunded to the

allottee with simple interest.

15. All terms and conditions of brochure and

its corrigendum, allotment, building bye-laws

and as amended from time to time shall be

binding on the Lessee.

For and on behalf of LESSOR”

` (Emphasis supplied)

FINDINGS OF THE NCLAT

13. FINDINGS

I. The NCLAT finds that the lease deed does not have

any clause of transfer of ownership of the underlying

asset, which is land and not flat, as harped upon by

the appellant. This is noted as one of the factors,

which is an important factor. The appellant has not

done any classification of the lease as a financial

lease, however observing that it would not be a

deciding factor. The NCLAT has proceeded to evaluate

the contents of the lease. It proceeds to remind

itself that to be classified as a financial lease,

what is relevant is whether there is a substantial

transfer of all the risks and rewards incidental to

ownership of an underlying asset. It proceeds to

further hold that the lease is heavily tilted in

favour of the appellant, controlling almost all the

aspects and while passing over the risks keeps the

rewards with lessor, except the liberty to sell the

flats which would be constructed. Thereafter, the

NCLAT proceeded to consider whether rewards

incidental to ownership of the underlying asset were

transferred. It is found that appellant put a

condition that the lessee will be allowed to

transfer/sell upto 49% of its shareholding, subject

to the condition that the original shareholders

indicated on the date of submission of the tender,

shall continue to hold at least fifty-one per cent of

the shareholding, till the temporary occupancy

completion certificate is obtained of at least one

phase.

II. There is reference to a total premium of Rs.46

crores and the down payment of ten percent. So also,

reference is made to half-yearly instalments to be

paid between 2010 and 2020. The term of the lease is

for ninety years. Reference is made to the clause

reserving rights to all mine and minerals under the

allotted plot, inter alia. Reliance is placed on ten

percent of the amount paid towards premium being

repeated, by referring to the same amount as lease

rent. Lease rent and premium are used

interchangeably. The option of paying the lease rent

is referred to. The liability to pay taxes is

adverted to. There is further reference to the

following clause:

“c) The Lessee shall use the allotted plot

for construction of Group Housing. However,

the lessee shall be entitled to allot the

dwelling units on sublease basis to its

allottee and also provide space for

facilities like Roads, Parks etc. as per

their requirements, convenience with the

allotted plot, fulfilling requirements or

building bye-laws and prevailing and under

mentioned terms & conditions to the lessor.

Further transfer/sub lease shall be governed

by the transfer policy of the Lessor.”

Reference is made to the clause that the

allottee/sub-lessee, should be a citizen of India and

should be competent and that husband, wife, and

dependent children would be considered single entity.

Further reference is made to the following clause:

“iii) The permission for part transfer of

plot shall not be granted under any

circumstances. The Lessee shall not be

entitled to complete transaction for sale,

transfer, assign or otherwise part with

possession of the whole or any part of the

building constructed thereon before making

payment according to the schedule specified

in the lease deed of the plot to the Lessor.

However, after making payment of premium of

the plot to the lessor as per schedule

specified in the lease deed permission of

transfer of built-up flats or to part with

possession of the whole or any part of the

building constructed on the Group Housing

Plot, shall be granted and subject to payment

of transfer charges as per policy prevailing

at the time of granting such permission of

transfer. However, the Lessor, reserves the

right to reject any transfer application

without assigning any reason. The lessee will

also be required to pay transfer charges as

per the policy prevailing at the time of such

permission of transfer.”

III. Reference is made to the following clause, which

reads as follows:

The lessee shall have to execute sub-lease in favour

of the individual allottees for the developed

flats/plots in the form and format, as prescribed by

the lessor. This is relied upon by the NCLAT to

conclude that rewards incidental to ownership is not

transferred.

IV. Next, it is found that the lease deed

contemplates that the number of phases within which

the work needs to be completed. The schedule of time

had to be adhered to by the lessee. The power of

cancellation loomed large in this context.

V. Next, reliance is placed on the clause relating

to mortgage, which required permission of the

appellant to mortgage the plot. The priority of

charge of the appellant was maintained. The use of

the flat was limited to residential purpose only.

Departure from the same would invite the wrath of

cancellation. The appellant reserved the right to

even remove the vertical support for the surface of

the plots/flats with only liability to pay

compensation and the right to determine which was

lodged with the appellant and it was to be binding on

the lessee/sub-lessee. The general power of

cancellation is maintained.

VI. Thereafter, we may notice the following:

“21. Thus, the Appellant, even after creating

the lease kept with itself all the rights to

control and monitor the project which was to

come up. The Appellant of course now has

tried to say in the Appeal that it was "only

exercising minor supervision over the land

use" (see 9.12 of the Appeal), which we do

not agree to. What we can see from the Lease

Deed which we have just referred in brief, is

that the acts which could be performed by the

lessee, were fully controlled by the

Appellant. The lessee, of course, had the

liberty to construct and transfer the flats

by way of sublease. The above discussion

shows that while risks and liabilities were

transferred to the lessee, the rewards

incidental to ownership were not transferred.

There is no Clause of transfer of ownership

at the end of lease term. There is no option

given to the lessor to purchase the asset at

a price that is accepted to be sufficiently

lower than the fair value. The lease is for a

term of 90 years. For life of a land, 90

years cannot be said to be major part of

economic life of the asset. There are no

calculations available, and the Lease Deed

does not state that the present value of the

lease payments amounts to at least

substantially all of the fair value of the

asset i.e. the land. The right to cancel the

lease by the lessor are specified at various

places in the lease deed, however, there is

no option to the lessee to step out. There is

no option available in the lease deed for the

lessee to continue lease for secondary

period. This is, leave apart, the indicator

which requires that said secondary period

should be at a rent that is substantially

lower than market rent.

22. Thus, when we have gone through the Lease

Deed keeping the classification of leases and

the indicators mentioned above, we do not

find that the lease deed in question can be

said to be a finance lease.

23. Keeping in view the Indian Accounting

Standards, what appears broadly is that when

lease involves real estate (like land in

present matter) with a fair value different

from its carrying amount, the lease can be

classified as a finance lease if the lease

transfers ownership of the property to the

lessee by the end of the lease term or there

is bargain purchase option. The lease must

transfer substantially all the risks and also

rewards incidental to ownership of the asset.

24. The argument of the Appellant trying to

mix up transfer of ownership of the asset

which is land with right to transfer flats to

be constructed has no substance. Merely,

because the lessee was given right to fix the

price of the dwelling units to be

constructed, that by itself is not sufficient

to say that the lease of the land is a

finance lease. The argument of the Appellant

that lessee has an option to pay onetime

lease rent and that if such right was

exercised lessee would not be required to pay

further rent and that this shows that present

value of the lease payment amounts to at

least substantially all of the fair value of

the asset, is also baseless. No material is

brought to show as to what is and would be

the fair value. With regard to right to

cancel lease, it is reserved with the lessor

but not the lessee. The Appellant argues that

the question of cancellation of lease deed by

lessee would not arise as lessee would build

and transfer dwelling units. This is

speculative and cannot be helpful in

construing the document. Again, it is not

that the right to land would get transferred

to the flat purchasers (who are referred

rather as sub-lessees). We do not find

substance in the arguments being raised by

the Appellant to bring the Lease Deed within

the requirements of Indian Accounting

Standards. We rather find substance in the

submissions of the Respondent as recorded in

the Chart reproduced supra.”

VII. Finally, we may further also notice paragraphs-29

and 30 at page 41 and 42 of impugned Order in C.A.

No. 2222 of 2021.

“29. In the present matter, there is no sale

of land. It is lease, for premium /rent with

almost all rights controlled by the Lessor.

We have gone through the provisions of

Section 5(8)(f) and also when we keep the

above observations of the Hon’ble Supreme

Court of India, we are unable to persuade

ourselves to accept the submission that when

land is leased out, if premium is fixed and

instalments are given, it should be treated

as a financial lease. We do not find

substance in this argument.

30. We may record that we are not finding

fault with the various terms and conditions

in the Lease Deed. It is a Lease Deed from a

development authority which has the object of

developing the township and thus wants to

control the manner in which the constructions

of housing come up. That purpose is alright.

However, such lease does not fit in with the

requirements of Indian Accounting Standards

which we have referred. Just to be part of

COC, the lease of land between developing

authority and the builders cannot be

considered or treated as a financial lease.”

RELEVANT PROVISIONS OF THE IBC

14. Section 5(8), which is at the centre of the

controversy, defines ‘financial debt’ as: -

“5(8) “financial debt” means a debt alongwith

interest, if any, which is disbursed against

the consideration for the time value of money

and includes–

(a) money borrowed against the payment of

interest;

(b) any amount raised by acceptance under any

acceptance credit facility or its

dematerialised equivalent;

purchase facility or the issue of bonds,

notes, debentures, loan stock or any similar

instrument;

(d) the amount of any liability in respect of

any lease or hire purchase contract which is

deemed as a finance or capital lease under

the Indian Accounting Standards or such other

accounting standards as may be prescribed;

(e) receivables sold or discounted other than

any receivables sold on non-recourse basis;

(f) any amount raised under any other

transaction, including any forward sale or

purchase agreement, having the commercial

effect of a borrowing; 1 [Explanation. -For

the purposes of this sub-clause, - (i) any

amount raised from an allottee under a real

estate project shall be deemed to be an

amount having the commercial effect of a

borrowing; and (ii) the expressions,

“allottee” and “real estate project” shall

have the meanings respectively assigned to

them in clauses (d) and (zn) of section 2 of

the Real Estate (Regulation and Development)

Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into

in connection with protection against or

benefit from fluctuation in any rate or price

and for calculating the value of any

derivative transaction, only the market value

of such transaction shall be taken into

account;

(h) any counter-indemnity obligation in

respect of a guarantee, indemnity, bond,

documentary letter of credit or any other

instrument issued by a bank or financial

institution;

(i) the amount of any liability in respect of

any of the guarantee or indemnity for any of

the items referred to in sub-clause (a) to

(h) of this clause;”

15. Section 3(11) defines the word ‘debt’. It

reads as: -

“(11) "debt" means a liability or obligation

in respect of a claim which is due from any

person and includes a financial debt and

operational debt;”

16. Section 3(6) defines the word ‘claim’. It

reads as: -

“(6) "claim" means—

(a) a right to payment, whether or not such

right is reduced to judgment, fixed,

disputed, undisputed, legal, equitable,

secured or unsecured;

(b) right to remedy for breach of contract

under any law for the time being in force, if

such breach gives rise to a right to payment,

whether or not such right is reduced to

judgment, fixed, matured, unmatured,

disputed, undisputed, secured or unsecured;”

17. Section 5(21) defines the word ‘operational

debt’. It reads as: -

“(21) "operational debt" means a claim in

respect of the provision of goods or services

including employment or a debt in respect of

the repayment of dues arising under any law

for the time being in force and payable to

the Central Government, any State Government

or any local authority;”

18. Section 5(20) defines the word ‘operational

creditor’. It reads as: -

“(20) "operational creditor" means a person

to whom an operational debt is owed and

includes any person to whom such debt has

been legally assigned or transferred;”

19. Section 3(33) defines the word ‘transaction’.

It reads as: -

“(33) "transaction" includes a agreement or

arrangement in writing for the transfer of

assets, or funds, goods or services, from or

to the corporate debtor;”

THE UTTAR PRADESH INDUSTRIAL AREA

DEVELOPMENT ACT, 1976 UNDER WHICH

APPELLANT WAS CREATED (‘UPIAD’, FOR SHORT)

20. The Act defines the word ‘transferee’ in Section

2(f) as follows: -

“2(f) ‘Transferee’ means a person (including

a firm or other body of individuals whether

incorporated or not to whom any land or

building is transferred in any manner

whatsoever, under this act and includes his

successors and assigns,”

21. Section 3 deals with the Constitution of the

authority and reads as follows: -

“3. (1) The State Government may, by

notification, constitute for the purposes of

this Act, An authority to be called (Name of

the area) Industrial Development Authority,

for any industrial development area.

(2) The Authority shall be a body corporate.

(3) The Authority shall consist of the

following: –

(a) The Secretary to the Government, Uttar

Pradesh, Member Industries Department or his

Nominee not below Chairman the rank of Joint

Secretary-ex-official.

(b) The Secretary to the Government, Uttar

Pradesh, Member Public works Department or

his nominee not below the rank of Joint

Secretary ex-official.

Pradesh, Local Member Self-Government or his

nominee not below the rank of joint

Secretary-ex official.

(d) The Secretary to the Government, Uttar

Pradesh, Finance Member Department or his

nominee not below the rank of Joint

Secretary-ex official.

(e) The Managing Director, U.P. State

Industrial Development Member Corporation-ex

official.

(f) Five members to be nominated by the State

Government Member by notification.

(g) Chief Executive Officer. Member Secretary

(4) The headquarters of the Authority shall

be at such place as may be notified by the

State Government.

(5) The procedure for the conduct of the

meetings for the Authority shall be such as

may be prescribed.

(6) No act or proceedings of the Authority

shall be invalid by reason of the existence

of any vacancy in or defect in the

constitution of the Authority.”

22. Section 6 of the UPIAD deals with the functions

of the Authority, which in this case is the

appellant. Section 6 reads as follows:

“FUNCTION OF THE AUTHORITY

6. (1) The object of the Authority shall

be to secure the planned development of the

industrial development area.

(2) Without prejudice to the generality of the

objects of the Authority, the Authority shall

perform the following functions :–

(b) to prepare a plan for the development of

the industrial development area;

industrial, commercial and residential

purpose according to the plan;

(d) to provide infrastructure for industrial,

commercial and residential purposes;

(e) to provide amenities;

(f) to allocate and transfer either by way of

sale or lease or otherwise plots of land for

industrial, commercial or residential

purposes;

(g) to regulate the erection of buildings and

setting up of industries: and

(h) to lay down the purpose for which a

particular site or plot of land shall be

used, namely for industrial or commercial or

residential purpose or any other specified

purpose in such area.”

23. Section 7 deals with the power to transfer. It

reads as follows: -

“7. The authority may sell, lease or

otherwise transfer whether by auction,

allotment or otherwise any land or building

belonging to the Authority in the industrial

development area on such terms and conditions

as it may, subject to any rules that may be

made under this Act think fit to impose.”

The proviso deals with consequences of not

utilising it for the purpose for which it was

allowed.

24. Section 8 provides that for the proper planning

and development of the industrial development area,

the authority may issue such direction as it

considered necessary regarding various aspects. They

include architectural features of the elevation or

frontage of any building, the alignment of building

on any site, the number of residential buildings that

may be erected on any site, the restrictions in

regard to open spaces and height to be maintained,

maintenance of amenities, restrictions of use of any

site for a purpose other than that for which it has

been allocated.

25. Section 10 deals with power to require proper

maintenance of site and buildings. Section 11 deals

with power to levy taxes. It, inter alia, reads as

follows: -

“11. Levy such Taxes. — [(1) For the purposes

of providing, maintaining or continuing any

amenities in the industrial development area,

the Authority may with the previous approval

of the State Government, levy such taxes as

it may consider necessary in respect of any

site or building on the transferee or

occupier thereof, provided that the total

incidence of such tax shall not exceed one

per cent of the market value of such site,

including the site of the building.

Explanation—For the purpose of this subsection, the expression “market value” means,

the amount of—

(a) consideration, in the case of sale; or

(b) premium, in the case of lease; or

c) the minimum value determined in accordance

with the rules made under the Indian Stamp

Act, 1899, whichever is more]

2) If the State Government considers it

necessary or expedient in the public

interest, it may, by a general or special

order, exempt wholly or partly-any such

transferee or occupier or any class thereof

from the taxes levied under sub-section (1).”

26. Section 11A inserted with effect from 21.03.2016

empowers collection of tolls. Section 11B inserted

likewise provides for levy of additional stamp duty.

27. Section 12 reads as follows: -

“12. Applications of certain provisions of

President's Act XI of 1973.—The provisions of

Chapter VII and Sections 30, 32, 40, 41, 42,

43, 44, 45, 46, 47, 49, 50, 51, 53, and 58 of

the Uttar Pradesh Urban Planning and

Development Act, 1973, as re-enacted and

modified by the Uttar Pradesh President's Act

(Re-enactment with Modifications) Act, 1974,

shall mutatis mutandis apply to the Authority

with adaptation that— (a) any reference to

the aforesaid Act shall be deemed to be a

reference to this Act; (b) any reference to

the Authority constituted under the aforesaid

Act shall be deemed to be a reference to the

Authority constituted under this Act; and (c)

any reference to the Vice-Chairman of the

Authority shall be deemed to be a reference

to the Chief Executive Officer of the

Authority.”

28. Section 13 reads as follows: -

“(13) Where any transferee makes any default

in the payment of any consideration and money

or instalment thereof or any other amount due

--- account of the transfer of any site or

building by the Authority or any rent due to

the Authority in respect of any lease, or

where any transferee or occupier makes any

default in the payment of any fee or tax

levied under this Act, the Chief Executive

officer may direct that in addition to the

amount of arrears, further sum not exceeding

that amount shall be recovered from the

transferee or occupier, as the case may be,

by way of penalty.”

29. It is necessary to notice Section 12A and 12B

inserted with effect from 12.03.2016. They read as

follows: -

“12-A. No Panchayat for industrial township.—

Notwithstanding anything contained to the

contrary in any Uttar Pradesh Act, where an

industrial development area or any part

thereof is specified to be an industrial

township under the proviso to clause (1) of

Article 243-Q of the Constitution, such

industrial development area or part thereof,

if included in a Panchayat area, shall, with

effect from the date of notification made

under the said proviso, stand excluded from

such Panchayat area and no Panchayat shall be

constituted for such industrial development

area or part thereof under the United

Provinces Panchayat Raj Act, 1947 or the

Uttar Pradesh Kshettra Panchayats and Zila

Panchayats Adhiniyam, 1961, as the case may

be, and any Panchayat constituted for such

industrial development area or part thereof

before die date of such notification shall

cease to exist,

Explanation:—The expression “Panchayat and

Panchayat area” shall have the meanings

respectively assigned to them in part IX of

the Constitution.]

12-B.—(1) The Governor may, by notification,

specify under Article 243-Q of the

Constitution of India, the whole of Special

Investment Region or the Industrial

Development Area or any part thereof to be an

Industrial Township.

(2) Notwithstanding anything to the contrary

contained in any Uttar Pradesh Act, where an

special investment region or industrial

development area or any part thereof is

specified to be an Industrial Township under

the proviso to clause (1) of Article 243- Q

of the Constitution of India, such industrial

development area or part thereof, falling in

a Municipality shall from the date of

notification stand excluded from that

Municipality area and all powers and

functions performed with respect to such area

shall be exercised or performed by the

Authority.

Explanation: —The expression “Municipality”

shall have the meaning assigned to it in Part

IX or Part IX-A of the Constitution of

India.]”

30. Section 14 reads as follows: -

“14. For feature for breach of conditions of

transfer. —(1) In the case of non-payment of

consideration money or any installment

thereof on account of the transfer by the

Authority of any site or building or in case

of breach of any condition of such transfer

or breach of any rules or regulations made

under this Act, the Chief Executive Officer

may resume the site or building so

transferred and may further forfeit the whole

or any part of the money, if any, paid in

respect thereof.

(2) Where the Chief Executive Officer orders

resumption of any site or building under subsection (1) the Collector may, on his

requisition, cause possession thereof to be

delivered to him and may for that purpose use

or cause to be used such force as may be

necessary.”

31. We may further notice Section 17:

“(17) Upon any area being declared on

industrial development area under the

provision of this act, such area, if included

in the master plan or the zonal development

plan under the Uttar Pradesh Urban planning

and Development Act, 1973, or any development

plan under any other Uttar Pradesh Act, shall

with effect from the date of such declaration

be deemed to be excluded from any such plan.”

THE PROVISIONS OF THE UTTAR PRADESH

URBAN PLANNING AND DEVELOPMENT ACT, 1973

MADE APPLICABLE TO THE AUTHORITY VIDE

SECTION 12 OF THE UPIAD ACT [For short, ‘the

1973 Act’]

32. Chapter VII dealing with Finance, Accounts and

Audit begins with Section 20. Section 20 provides for

fund of the authorities. It reads as follows:

“20. (1) The authority shall have and

maintain its own fund to which shall be

credited–

(a) all moneys received by the Authority from

the State Government by way to grants, loans

advances or otherwise;

(b) all moneys borrowed by the Authority from

sources other than the State Government by

way of loans or debentures;

the Authority under this Act;

(d) all moneys received by the Authority from

the disposal of lands, buildings and other

properties movable and immovable; and

(e) all moneys received by the Authority by

way of rents and profits or in any other

manner or from any other sources.

(2) The fund shall be applied towards meeting

the expenses incurred by the Authority in the

administration of this Act for no other

purposes.

(3) Subject to any directions of the State

Government, the Authority may keep in current

account of any Scheduled Bank such sum of

money out of its funds as it may think

necessary for meeting its expected current

requirements and invest any surplus money in

such manner as it thinks fit.

(4) The state Government may, after due

appropriation made by Legislature by law in

that behalf, make such grants, advances and

loans to the Authority as that Government may

deem necessary for the performance of the

functions of the authority under this Act,

and all grants, loans and advances, made

shall be on such terms and conditions as the

State Government may determine.

(5) The Authority shall maintain a sinking

fund for the repayment of moneys borrowed

under sub-section (5), and shall pay every

year into the sinking fund such sum as may be

sufficient for repayment within the period

fixed of all moneys so borrowed.

(7) The sinking fund or any part thereof

shall be applied in, or towards, the

discharge of the loan for which such fund was

created, and until such loan is wholly

discharged it shall not be applied for any

other purpose.”

33. Section 21 provides that the authority shall

prepare a budget in the form and at such time as the

State Government may specify.

34. Section 22 provides that the authority is to

maintain proper accounts. The accounts of the

authority shall be subject to audit annually by the

Examiner Local Fund Accounts.

35. Section 23 mandates that the authority shall

prepare a report and submit it to the State

Government in such form and on or before such date as

specified by the State Government and the report is

to be laid before both Houses of the Legislature.

36. Section 24 deals with Pension and Provident Fund.

It reads as follows: -

“24. (1) The Authority may constitute for the

benefit of its whole-time paid members and of

its officers and other employers in such

manner and subject to such conditions, as the

State Government may specify, such pension or

provident funds as it may deem fit.

(2) Where any such pension or provident fund

has been constituted, the State Government

may declare that the provisions of the

Provident Funds Act, 1925, shall apply to

such fund as if it were a Government

Provident Fund.”

37. We must notice Section 40:

“40. Recovery of moneys due to Authority—Any

money due to an Authority on account of any

fee; or charges, or from disposal of land,

building or any other property, movable or

immovable, by way of rent, premium, profit or

hire purchase instalment, may, without

prejudice to the right of recovery by any

other mode of recovery provided by or under

this Act or any other law for the time being

in force, be realised—

(a) either, as arrears of land revenue upon a

certificate of the amount due sent by the

Authority to the collector, or (b) by

attachment and sale of property in the manner

provided in Sections 504, 505, 506, 507, 508,

509, 510, 512, 513 and 514 of the [Uttar

Pradesh Municipal Corporation, 1959) (2 of

1959)]; and such provisions of the said [Act]

shall mutatis mutandis apply to recovery of

dues of an Authority as they apply to

recovery of a tax due to a [Municipal

Corporation], so however, that references in

the aforesaid section of the said Adhiniyam

to ‘Mukhya Nagar Adhikari’, [Corporation] and

Executive Committee shall be constructed as

references to ‘Vice Chairman, ‘Development

Authority’ and ‘Chairman respectively:

Provided that no two or more modes of

recovery shall be commenced or continued

simultaneously.]

the old Section 40, U.P. Urban Planning and

Development Act, 1973 prior to Amendment Act

21 of 1985 is given below:

“40, Mode of recovery of money due to

Authority any money certified by the

Authority as due to it on account of fees or

charges, or from the disposal of lands,

buildings or other properties, movable or

immovable, or by way of rents and profits

may, if the recovery thereof is not expressly

provided for in any other provision of this

Act, be recovered by the Authority as arrears

of land revenue, and no suit shall lie in the

Civil Court for recovery of such money.”

38. Section 41 provides for directions being issued

by the State Government for the administration of the

Act being binding on the Authority. Under Section 42

of the UP 1973 Act, the Authority is to furnish

return and other information to the Government.

Section 43 deals with manner of service of notices,

orders, and other documents. Section 44 deals with

how public notices are to be made known. Section 45

mandates fixing of reasonable time in any notice,

order, or document, unless time is otherwise fixed by

the Act or Regulation. Section 47 proclaims that

every member and every officer and other employee of

the Authority shall be deemed to be a public servant

within the meaning of Section 21 of the Indian Penal

Code. Without sanction of the Chief Executive Officer

of the Authority or any other officer authorised by

him, there cannot be prosecution for any offence

under the Act. Section 51 deals with power of

delegation, both of the State Government and of the

Authority and the Chief Executive Officer. Section 53

empowers the State Government to exempt, by

notification, any land or building from the

provisions of the 1976 Act or Rules or Regulations

made thereunder. Section 58 of the UP 1973 Act, as

made applicable to the 1976 Act, provides for the

dissolution of the Authority, on the State Government

forming the opinion, that the purpose for which the

Authority was established, has been substantively

achieved, rendering the continued existence of the

Authority unnecessary.

CONTENTIONS OF THE APPELLANTS

39. The learned Solicitor General would rely on

Section 5(8)(d) and Section 5(8)(f) of the IBC in

attempting to persuade the Court that the appellant

is actually a financial creditor. He would point out

with reference to Section 5(8)(d) that a careful

analysis of the lease deed would show that the lease

in question is a financial lease. In his endeavour,

in this regard, he emphasised the part of the

provision, which brings in the concept of a deeming

provision. In other words, he contended that the

Court is bidden to treat a certain position as

deemed. The NCLAT has proceeded as if what is

involved is classification of a financial lease he

complained. He took us through the statutory rules,

which have come to embody the Indian Accounting

Standards (IAS) within the meaning of Section

5(8)(d), which have been enacted under the Companies

Act, 2013.

40. He would first and foremost point out that the

most prominent and indispensable element to make a

lease a financial lease is that there should be a

substantial transfer of the risks and rewards

incidental to ownership from the lessor to the

lessee. What is contained in later rules are

essentially by way of examples or illustrations. The

mere fact that with reference to each one of them,

the appellant may not answer the description of a

financial lessor, may not suffice to deprive the

appellant of the status of a financial creditor, as

the vital question to be posed and answered is

whether substantially there is a transfer of risks

and rewards incidental to ownership. He does not

dispute that in the case in question, appellant has

not classified the lease as a financial lease in the

balance sheet. He would however point out that the

NCLAT has erred in finding that reward incidental to

ownership has not been transferred to the lessee. In

this regard, he would point out that the lessee is

free to fix the amount of consideration it can charge

from the buyers from the lessee. The appellant cannot

demand any share in the consideration received by the

lessee. In other words, the lessee is free to

appropriate the entire profits. This is crucial in

appreciating whether the rewards incidental to

ownership has been transferred to the lessee. He

highlights the fact the appellant is an Authority

constituted under a statute, namely the UPIAD. He

took us through the provisions of Section 6 and 7 of

the Act. He would contend that as the Authority is

charged with the statutory duty to carry out planned

development of the area and group housing being

residential in nature and since the construction had

to be carried out in accordance with the laws in

force and the appellant was also charged with the

duty to regulate the activity, all that has happened

is that the lease deed contains provisions for the

regulatory regime. This cannot detract from the

transfer of rewards substantially to the lessee. he

contends.

41. As far as Section 5(8)(f) of the IBC is concerned

it is pointed out that the said provision is a catchall section and acts as a residuary reservoir, and

what remains after what has been provided in the

preceding provisions, are captured within its scope.

He would contend that the Court must not overlook the

object and scheme of the IBC. The financial creditors

occupy a position of dominance whereby they call the

shots when it comes to ruling on the destiny of the

corporate debtor. Under the IBC, true power vests

with the Committee of Creditors. It is the financial

creditors, who are at the helm of affairs of the

Committee. It is the Committee which will vote and

finally decide, on the Resolution Plan, which binds

all. A financial creditor would be in a position to

sway the views of others on the Committee. He would,

in the context of the facts point out that as things

stand, the Committee is virtually filled with

homebuyers. It would be unjust to deny the appellant

its say in the proceedings of the Committee. Huge

sums of public money are at stake. As the custodian

of public interest, the appellant must be vouch-safed

its legitimate position in the Committee of

Creditors. It is this important perspective, which

has been overlooked by the NCLAT, it is complained.

The appellant cannot be treated as an operational

creditor, whose interest is no more than the mere

realisation of the money due to it. The appellant is

more comparable with a bank. In other words, the

lease in question provides the lessee with the

mechanism, by which on payment of a mere ten percent

of the total premium upfront, the lessee gets

possession of the land. A moratorium follows.

Thereafter, under the lease, the lessee is no doubt

obliged to pay the balance ninety per cent of the

premium and that too in 16 half-yearly instalments.

If the lessee had wanted to purchase the property and

required finance from any other source, including a

bank, it would have had to receive financial

accommodation in some form or the other, under which,

the respondent would become obliged to pay back the

loan to the bank in terms of the arrangement. In this

case, on the other hand, under the lease, a lessee,

instead of approaching a bank, must be treated as

raising funds in the manner provided in the lease and

that too on very easy and reasonable terms. The

lessee pays ten percent only in the beginning. The

lessee is, in fact, given the benefit of a reprieve

and thereafter, he is enabled to pay the lessor

directly the balance amount. Therefore, this is a

transaction, as defined in Section 2(33) of the IBC.

He would submit that the amounts are to be paid back

with interest. Therefore, on the whole, it must be

treated as a case where, there is raising of funds by

the lessee, which, has a commercial underpinning, as

required under Section 5(8)(f) of the IBC. He would

point out that the main provision, i.e., as contained

in Section 5(8) contemplates a debt, which is

disbursed. Various clauses, which are enumerated

thereafter, need not contain the aspect of

disbursement. Therefore, raising of funds, within the

meaning of Section 5(8)(f), can be contemplated

without actual disbursement. He would rely on the

Judgement of this Court in Pioneer Urban Land and

Infrastructure Limited and Another vs. Union of India

(UOI) and Others1

42. Smt. Madhavi Divan, learned Additional Solicitor

General, appears for NOIDA in the connected matter.

She adopts the contentions of the learned Solicitor

General appearing for the same party. However, the

learned Additional Solicitor General, would make

three-pronged submissions with regard to the

appellant qualifying as a financial creditor. She

would contend that the appellant would fall in the

main provisions of Section 5(8). There is a debt.

There is a time value of money. Interest is

predicated on the strength of the same. As far as the

requirement of disbursement is concerned, she draws

our attention to Section 2(33) of the IBC, which

defines the word ‘transaction’. It is her contention

that the disbursement need not be unidimensional. In

the modern world, with the sophistication and

development of the financial market, the disbursement

can be from the creditor to the debtor or from the

debtor to the creditor. Therefore, even without the

1 (2019) 8 SCC 416

aid of the provisions, which appear by way of

inclusion, the appellant fits the bill as a financial

creditor. She also highlighted the true role of the

appellant under the Statute of which it is an

offspring. She would point out that there are longterm stakes, as far as the appellant is concerned.

The appellant is charged with the sublime function of

ensuring planned development. The lease operates as a

tool of financing. Whatever be the form, of which the

Court must not be a prisoner, the substance cries out

for labelling the appellant as a financial creditor.

Borrowing must not be viewed from the prism of

convention. The lease contemplates an upfront

payment, a moratorium and staggered payments of

installments. She also draws considerable inspiration

from Pioneer (supra). She would contend that in

Pioneer (supra), which involved a challenge to

including homebuyers as financial creditors on the

strength of the Explanation, which was included in

Section 5(8)(f) of the IBC, this Court recognised

that a homebuyer is not a borrower in the traditional

sense and yet the Court found that homebuyer was a

financial creditor and builder was being financed by

the payment of advances and staggered payment of

installments and, at the end of which, the equivalent

in terms of the flat, was promised. It would involve

a manifest absurdity, if the appellant, who would be

in a better position, in fact, than the homebuyers,

is yet excluded from the Committee of Creditors on

the score that it is to be treated as an operational

creditor.

43. With reference to the expression ‘raising of

funds’, contemplated in Section 5(8)(f), she would

persuade the Court to hold that the lessee, by

entering into the lease, comes to enjoy the property

and also have other rights, including the right to

entirely appropriate the profit from the transfer of

the flats constructed thereon. By the staggered

payments, after the initial payments of advance of

ten percent and a moratorium freeing the funds of the

corporate debtor clearly takes place. There is

generation of funds by the mechanism provided in the

lease and it plainly has the effect of borrowing and

bringing into play the statutory mantra also, of

commercial effect of borrowing. It works extremely

well for the lessee, in fact, in comparison to how it

would have fared, had it approached the bank or a

financial institution. With regard to Section

5(8)(d), the learned Additional Solicitor General

also emphasised upon the word ‘deemed’ to be

financial lease with reference to the Indian

Accounting Standards. It is her case that, in fact,

in the accounts of the appellant, the transaction is

reflected as a sale. This assumes significance as,

under the Indian Accounting Standards, the dominant

test is, whether, substantially, the risks and

rewards incidental to ownership has been transferred.

There cannot be a more eloquent fulfilment of this

requirement than the very action of the appellant in

treating the transaction as a sale in the balancesheet, and what is more, for the years, much prior to

the enactment of the IBC. It is submitted that Court

may not be oblivious that the premium under the

lease, is, indeed, linked to the market value,

indicating, unerringly, in the direction of a sale.

She would make a thinly veiled threat that if the

appellant is to be excluded in the manner from the

Committee of Creditors, there can be possible

cancellation of leases being resorted to by the

appellant, which may not augur well for the real

estate world. She relied upon Swiss Ribbons Private

Limited and Another v. Union of India and Others2.

SUBMISSIONS OF SHRI RITIN RAI

44. The respondent in Civil Appeal No. 2222/2021

namely the resolution professional who appears

through Shri Ritin Rai, learned Senior Counsel would

make the following submission.

The case of the appellant that the disbursal can

flow in either direction ignores that what is

disbursed is a debt and not its repayment. The

appellant has not parted with any money that is now

with the corporate debtor. Section 5(8) does not

use the word ‘transaction’ and any other

interpretation other than a flow of funds from

creditor to the debtor should not be accepted, and

it will lead to absurdity. As far as the case under

Section 5(8)(d) is concerned, it is submitted that

2 (2019) 4 SCC 17

the appellant has not classified in its books of

accounts classifying the lease as financial lease.

The classification as operating lease or financial

lease is to be made from the inception date. Neither

at the time of entering into the lease deed nor

subsequently has any classification been made.

Under the Indian Accounting Standards, a Lessee

under a capital lease transaction recognises the

lease as an asset in his Balance Sheet and it is

presented as Receivable at an amount equal to net

investment. The objective of IAS 116 is that both

the Lessor and Lessee provides relevant information.

In the case of financial lease, a lessor is required

to disclose in its financial statement selling

profits or loss, finance income on the net

investment in the lease, income relatable to

variable lease, payment, not included in the

measurement of the net investment of the lease. A

pattern is expected. Lease payment under an

operating lease are on the other hand on straight

line basis or another systematic basis. There is

difference of substance between the two cases. The

absence of classification amounts to non-compliance

with mandatory requirement as to standards required

under Section 133 of the Companies Act for which a

penalty is provided. The lease in question does not

countenance substantially the transfer of all the

rewards. The Lessee in terms of clause 12 of other

clauses is not permitted to assign leasehold

interest. Restrictions are put even on the lessee’s

shareholding. The clause relating to mortgage would

inter alia indicate apart from restriction otherwise

that any unearned increase in the value of the lease

premises will be at the disposal of the appellant.

Therefore, the gains would enure to the appellant.

There is no renewal of the lease. Support is drawn

otherwise from the order of NCLAT. Reliance is

placed on the following judgment of this Court in

Mohd. Noor and Others v. Mohd. Ibrahim and Others3 :

“..The ownership concept does not accord with

the status of a person who is paying the

rent. A tenant under various legislations

either urban or rural property, agricultural

or otherwise, enjoys right of heritability

and transferability. At the same time, he

does not become owner of the property.

3 (1994) 5 SCC 562

Transfer of ownership is distinct and

different from transfer of interest in the

property. A licensee or even a tenant may be

entitled by law to transfer his interest in

the property but that is not a transfer of

ownership.”

A lessee’s right to sub-lease comes with certain

restrictions. The appellant continues to be the

owner. The reward incidental to ownership is not to

be read as profit from the commercial practice. The

reward has to be considered as purely emanating from

the rights of ownership. Towards the development,

selling and promotion, the appellant has no role.

The word ‘reward’ bears the meaning that which is

offered or given for some service or attainment.

Therefore, the rewards cannot be said to mean the

profit generated from the commercial activities of

selling the units by the Lessee. Land has no economic

life. As regards Section 5(8)(f) goes, it is

contended that the claim of the appellant in view of

the terms of the lease under which after the initial

payment there is a moratorium and the Lessee is

permitted to pay the balance premium in easy

instalments overlooks the fact that a claim under any

lease would then be termed as financial debt. Leases

are already covered under Section 5(8)(d). There is

no amount raised pursuant to any other transaction in

the present case. The situation in Pioneer (supra) is

distinguishable as no amount is raised from the

appellant.

SUBMISSIONS OF DR. ABHISHEK MANU SINGHVI

45. There are concurrent findings of two courts

against the appellants. Findings have been rendered

which should dissuade this court from interfering in

the matter. The appellants have understood itself to

be an operational creditor. This is sought to be

substantiated with reference to the submission of the

claim initially in form B meant for operational

creditors except workmen and employee. Subsequently

that it was belatedly an amended claim in form C was

found. The appellant has improved its case at each

stage.

46. Before the NCLT it contended it must be treated

as a financial creditor in view of Section 5(8)(d).

Finding they will be unable to meet the requirements

under the Indian Accounting Standards set out in

Section 5(8)(d), for the first time in its written

submission before the NCLAT the contention was raised

under Section 5(8)(f). The appellant cannot

concurrently claim that the lease deed is covered by

a specific provision relating to financial leases

contained in Section 5(8)(d) and also under Section

5(8)(f) which is a general provision. The dues to the

appellant qualify as statutory dues. Reliance is

placed on Section 12 of the UPIAD which makes Section

40 of the U.P. Act. 1973 applicable.

47. Appellant under UPIAD is not permitted to carry

out any activity which is of a financial nature and

consequently any dues arising from disposal of land

which are in the discharge of statutory duties, must

be considered as statutory dues. In fact, NOIDA has

been treated in a better manner than a financial

creditor, having been given 41% share of its admitted

claim.

48. It is contended that the risks and rewards

incidental to ownership have not been transferred the

leases not a finance lease. There has been no

disbursement under the lease deed within the meaning

of Section 5(8). The repercussions of NOIDA being

declared as a financial creditor would be to

frustrate the CIRP of the real estate corporate

debtor. Having regard to its position as a public

authority and the nature and transactions commercial

wisdom of NOIDA would in fact compel the appellant to

vote against all resolution plans proposed. The home

buyers will be most adversely affected. Shri

Devashish Bharuka, appearing for the flat owners

contended that the flat owners have a heritable and

transferable right under Section 5 and 7 of the U.P.

Apartments Flat Owners Act, 2010.

THE IMPORTANCE OF BEING A FINANCIAL

CREDITOR UNDER THE IBC

49. In this context, it is undoubtedly true that in

the scheme of the IBC, Section 21 of the IBC

contemplates the constitution of the Committee of

Creditors. The Committee of Creditors is to consist

of all financial creditors of the corporate debtor.

It is the Committee of Creditors, which has power to

appoint and replace the Interim Resolution

Professional as the Resolution Professional. Under

Section 27 of the IBC, the Committee of Creditors,

which would consist of only the financial creditors,

would have the right to replace a Resolution

Professional. Under Section 28, the approval of the

Committee of Creditors is mandatory in respect of

various powers which need to be exercised by the

Resolution Professional. Central to the IBC, and what

would, in fact, constitute its very soul, is the idea

of resurrecting an ailing corporate debtor. The

means, contemplated, is the submission, consideration

and approval of Resolution Plans to be given by

Resolution Applicants. Here again, Section 30

contemplates that the Resolution Plan is to be

initially scrutinised by the Resolution Professional,

who is to present the Resolution Plan, which conforms

to Section 30(2), to the Committee of Creditors. The

Committee of Creditors may approve the Resolution

Plan in the manner provided in Section 30(4).

Regulation 38 of the Insolvency Bankruptcy Board of

India (Insolvency Resolution Process for Corporate

Persons) Regulations, 2016, no doubt, provides for

the mandatory contents of the Resolution Plan, which

may be approved. The Plan must include the submission

as to how the interests of stakeholders, including

financial creditors and operational creditors, are to

be dealt with. Regulation 38(1), inter alia in fact,

contemplates that the Resolution Plan must provide

that the amount payable to the operational creditors

shall be paid in priority over the financial

creditors.

50. It is true that, in a given case, it may appear

that the interests of operational creditors have been

best looked after in the circumstances under a

particular approved Resolution Plan. In fact, this is

also one of the contentions of the respondents, who

would point out that the appellants interests have

been adequately and fairly addressed in the

Resolution Plan. However, what is pointed out is

that, as a matter of principle, it is vital, both

from the point of view of the interest and rights of

the appellant and also the object of the IBC itself,

that the appellant must be treated as a financial

creditor. By being a Member of the Committee of

Creditors, the appellant would have the right to

place its perspective. It would have the opportunity

to persuade the other Members of the Committee of

Creditors to either accept or reject or modify a

Resolution Plan. The corporate debtor slipping into

liquidation, is a matter, which would, undoubtedly,

impact the appellant in a considerable manner. None

of these aspects have been borne in mind by the

NCLAT, it is complained of.

CERTAIN MISCELLANEOUS OBJECTIONS

51. The argument of the respondent/intervenor that if

the appellant is recognised as a financial creditor,

since it claims itself to be a public authority and

it holds the property as a trustee, it will not agree

to any hair cut proposed by any resolution applicant

does not appeal to us. The provisions in question

cannot be construed on the basis of a prophecy of how

a financial creditor will behave in its capacity as

financial creditor. If the appellant falls within the

ambit of the financial creditor as defined in Section

5(8), then as to how it will conduct itself being a

public authority cannot be a relevant factor.

Equally unimpressive is the argument that the

appellant would have the largest claim in most real

estate resolutions where it is a lessor and would

therefore have the largest vote share in the

committee of creditors and consequently have a

domineering role in deciding on the fate of any

resolution plan. If the appellant falls within the

scope of the financial creditor, then none of these

aspects can weigh with the court. Apparently, the

respondent/intervenor represent the interests of flat

owners. It is undoubtedly true that being financial

creditor who perhaps fall under a particular class,

they have their own interests to espouse. But if the

appellant is actually a financial creditor, then the

mere fact that the interest of the appellant clashes

with that of the rest of the body of financial

creditors cannot detract from the court holding the

appellant a financial creditor if otherwise it

establishes the case that it is a financial creditor.

We cannot overlook the fact that large sums of money

form the subject matter of the debt claimed by the

appellant as due to it. There can be no objection to

the appellant setting up the claim to be a financial

debt and succeeding on the strength of the provisions

entitling it to be so treated and therefore, the

court should not hesitate to recognize the appellant

as financial creditor if it is one. The contention

also that the appellant would be more interested in

realizing the greater value of its assets and would

allow the corporate debtor to descend into

liquidation and would not allow any resolution plan

to pass muster are all arguments which we must only

mention before it is rejected as it seeks to deflect

us from proper understanding of the relevant

provisions with the aid of the lease and other

apposite inputs.

SECTION 5 (8) OF THE IBC: WHETHER SECTION

5(8) OF IBC ITSELF SUFFICES TO EMBRACE THE

LEASE IN QUESTION?

52. Out of deference to submissions addressed by

Smt. Madhavi Diwan, learned Additional Solicitor

General, appearing on behalf of appellant-NOIDA, that

appellant would be a financial creditor, even with

reference to Section 5(8), though such a line was not

taken by the learned Solicitor General, who purported

to appear for NOIDA in the main matter, we shall deal

with the said submission.

53. The essential requirements to attract Section

5(8) are that there must be a debt along with

interest, if any, which is disbursed against

consideration for the time value of money. There can

be no dispute that there is a debt in this case. Even

the respondents would contend that it is actually a

debt but an operational debt under Section 5(21).

That interest is payable in connection with the debt,

cannot be disputed, having regard to the terms of the

lease deed. It is another matter that liability to

pay interest is not an essential feature to attract

Section 5(8), as held by this Court in Orator

Marketing Private Limited v. Samtex Desinz Private

Limited4. The next requirement is that there be

disbursement. Disbursement is an indispensable

requirement to constitute a debt, a financial debt,

within the meaning of Section 5(8) and that

disbursement must be from the creditor to debtor. Or

4 2021 SCC Online SC 513

is it that, our understanding is mistaken? Our

understanding, in this regard, is sought to be shaken

by the learned Additional Solicitor General by

raising the following argument. It is her case that

the requirement of disbursement is fulfilled by the

payment of ten per cent down payment, which takes

place upfront in the facts of the case before us.

Further, it is her case that disbursal can flow both

from the debtor to the creditor and the other way

also. Myriad methods of availing financial facilities

can render the flow of funds in either direction. It

need not be unidirectional. It is, in this regard,

that the meaning of the word ‘transaction’, as

defined in Section 3(33), is invoked. Section 3(33)

of the IBC reads as follows:

“3(33) "transaction" includes a agreement or

arrangement in writing for the transfer of

assets, or funds, goods or services, from or

to the corporate debtor;

54. What is contemplated in the principal provisions

of Section 5(8) is a transaction, she contends. This

is as Section 5(8)(f) refers to ‘any other

transaction’, and therefrom, the provisions which

precede Section 5(8)(f) would also involve

transactions. The Legislature has not chosen to use a

suffix ‘from creditor to debtor’ before the word

‘disbursed’. So long as there is a disbursal against

consideration for the time value of money, which is

present in the case, and from which, the debt arises,

viz., a liability or an obligation, Section 5(8)

stands attracted. A default, by way of breach by the

lessee, gives rise to a cause of action for breach of

contract where the appellant can seek to recover

damages for the lost opportunity in developing the

land. The word ‘claim’ includes a right to remedy for

breach of contract, it is pointed out.

55. The word ‘transaction’, as such, is not used in

Section 5(8), as pointed out by the respondents.

Unless there is disbursement of the debt, Section

5(8) will not apply. We do bear in mind the following

exposition of law in regard to the interplay between

the words ‘debt’ and ‘claim’ in Pioneer (supra):

“69. It is precisely to do away with

judgments such as Raman Iron Foundry [Union

of India v. Raman Iron Foundry, (1974) 2 SCC

231] that “claim” is defined to mean a right

to payment or a right to remedy for breach of

contract whether or not such right is reduced

to judgment. What is clear, therefore, is

that a debt is a liability or obligation in

respect of a right to payment, even if it

arises out of breach of contract, which is

due from any person, notwithstanding that

there is no adjudication of the said breach,

followed by a judgment or decree or order.

The expression “payment” is again an

expression which is elastic enough to include

“recompense”, and includes repayment. For

this purpose, see H.P. Housing & Urban

Development Authority v. Ranjit Singh

Rana [H.P. Housing & Urban Development

Authority v. Ranjit Singh Rana, (2012) 4 SCC

505 : (2012) 2 SCC (Civ) 639] (at paras 13

and 14 therein), where Webster's

Comprehensive Dictionary (International

Edn.), Vol. 2 and Law Lexicon by P. Ramanatha

Aiyar (2nd Edn., Reprint) are quoted.”

56. Thus, a debt is a liability or an obligation in

respect of a right to payment. Irrespective of

whether there is adjudication of the breach, if there

is a breach of contract, it may give rise to a debt.

In the context of Section 5(8), in Pioneer (supra),

disbursement has been understood as money, which has

been paid. In the context of the transaction involved

in the said case, the homebuyers advanced sums to the

builder, who would then utilise the amount towards

the construction in the real estate project. That

there must be a disbursement, was clearly present in

the mind of the Court, is clear from the fact that it

has expressly proceeded on the basis that when the

money was paid by the homebuyer to the builder, the

amount disbursed was no longer with the homebuyer.

The homebuyer was paying lesser sums by way of

installments than he would have to pay for the

ultimate price of the flat/apartment. The Court went

on to hold that the expression ‘borrow’ was wide

enough to include the advance by the homebuyer to the

real estate developer for the temporary use. Both

parties had commercial interests, which was further

found. But what is relevant is to attract Section

5(8), on its plain terms, is disbursement. While, it

may be true that the word ‘transaction’ includes

transfer of assets, funds or goods and services from

or to the corporate debtor, in the context of the

principal provisions of Section 5(8) of the IBC, we

are of the view that to import the definition of

‘transaction’ in Section 2(33), involving the need to

expand the word ‘disbursement’, to include a promise

to pay money by a debtor to the creditor, will be

uncalled for straining of the provisions.

‘Disbursement’, within the meaning of Section 5(8),

is the payment of money, which flows to the debtor.

In the word ‘claim’, as defined in Section 3(6),

right to payment is one of the components. The golden

thread that runs through the word ‘claim’, is the

right to payment. The right to payment may arise from

a Judgement. It may or may not be fixed. It may be

disputed or undisputed. It may be legal or equitable.

It may be secured or unsecured, but what is

indispensable is, there must be a right to payment.

Similarly, in cases of breach of contract, under any

law in force, if it gives rise to a right to payment,

irrespective of whether it is reduced to a Judgment

or fixed or matured or unmatured, disputed or

undisputed, secured or unsecured, as long as there is

a right to payment, a claim arises. When there is a

claim and, in regard to such a claim, there is a

liability or obligation, which is due from any

person, it gives rise to a debt. A debt includes a

financial debt and an operational debt. It is after

defining the word ‘debt’ with reference to the

existence of a right to payment in the broadest

terms, as defined in the term ‘claim’ and including

the word ‘financial debt’ within the expression

‘debt’, the word financial debt, in turn, is

elaborately defined in Section 5(8). What is relevant

for the purpose of Section 5(8), has been clearly

articulated and can be understood with reference to

what is expressly provided. It is unnecessary to

bring in the concept of transaction, as defined in

Section 2(33), for appreciating its scope. A perusal

of definition of the word ‘debt’, no doubt, reveals

that it is closely intertwined with the definition of

the word ‘claim’ in Section 3(6). The word

‘transaction’ is conspicuous by its absence in the

definition of both the word ‘claim’ and the word

‘debt’. We do hold that ‘debt’ means a liability or

obligation, which relates to a claim. The claim or

right to payment or remedy for breach of contract

occasioning a right to payment must be due from any

person. Now, if it is due from any person, it must be

due to someone who would then be the creditor.

Section 5(7) defines ‘financial creditor’ as person

to whom a financial debt is due besides an assignee

or transferee from such person. While it may be true

that there would be the brooding omnipresence of a

transaction, as defined, underlying a debt and claim

as defined, it would be unnecessary and unreasonable

to import in the concept of transfer of funds, from

or to a corporate debtor, to glean the meaning of

disbursement in Section 5(8), at least, in the facts

of the instant case. In other words, while the word

‘transaction’ does contemplate a transfer of fund,

inter alia, to a corporate debtor, it is unnecessary

to explore the converse situation projected by the

learned Additional Solicitor General, for

understanding the scope of the word ‘financial debt’,

as contained in Section 5(8), viz., the principal

provision. As to the employment of the word

‘transaction’ in the various clauses of Section 5(8)

and the true scope of Section 5(8)(f), it is a

matter, which will be discussed separately. We are of

the view that, in the lease in question, there has

been no disbursement of any debt (loan) or any sums

by the appellant to the lessee. The appellant would,

therefore, not be a financial creditor within the

ambit of Section 5(8).

SECTION 5(8)(D): WHETHER THE APPELLANT IS A

FINANCIAL LESSOR

57. The IBC was enacted in the year 2016. It is

interesting to note that the word ‘financial lease’

has been defined in the Recovery of Debts Due to

Banks and Financial Institutions Act, 1993 by

insertion of Section 2 (ha). This insertion was

effected by Act 44 of 2016. It reads as follows:

“2(ha) “financial lease” means a lease under

a lease agreement of tangible asset, other

than negotiable instrument or negotiable

document, for transfer of lessor's right

therein to the lessee for a certain time in

consideration of payment of agreed amount

periodically and where lessee becomes the

owner of the such assets at the expiry of the

term of lease or on payment of the agreed

residual amount, as the case may be.”

Section 2 (ma) of the Securitisation and

Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 which is also inserted by

Act 44 of 2016 w.e.f. 1.9.2016 defines the word

‘financial lease’ identically to Section 2(ha) in the

Recovery of Debts Due to Banks and financial

Institutions Act, 1993. We notice this for the reason

that the same law giver has enacted Section 5(8)

defining financial debt in the IBC including a lease

which is a financial lease in a manner which is

different in scope from the words ‘financial lease’

as defined in the aforesaid two enactments. In the

definition of ‘financial lease’ in the two Acts which

we have adverted to, the conventional concept of a

‘financial lease’ inevitably and indispensably

involving the transformation of a lessee into the

owner of the assets when the lease ends, is

essentially captured whereas for purpose of IBC,

Parliament has set out the definition which we will

recapitulate here

Section 5(8)(d)- “the amount of any liability

in respect of any lease or hire purchase

contract which is deemed as a finance or

capital lease under the Indian Accounting

Standards or such other accounting standards

as may be prescribed;”

58. The concept of a financial lease has engaged the

attention of this court in a decision which has been

applied by the NCLAT.

In Asea Brown Boveri Ltd. v. Industrial Finance

Corporation of India and Others5 the appellant entered

into a lease and finance agreement with the third

respondent therein under which the subject matter of

the lease was 57 cars. The third respondent became a

notified party under a law under which the special

court found that the transaction was only a lease and

not a finance lease. In this context this court went

on to hold as follows:

“13. What is a lease finance? According

to Dictionary of Accounting & Finance by R.

Brockington (Pitman Publishing, Universal Book Traders,

1996 at p. 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)

5 (2004) 12 SCC 570

14. In Lease Financing & Hire Purchase by Dr.

J.C. Verma (4th Edn., 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 longterm 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 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)

16. 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 abovementioned

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.”

59. We shall take up Section 5(8)(d) of the IBC. The

subject matter of Section 5(8)(d) is a lease or a

hire-purchase contract. The matter does not end

there. In other words, it is not any lease or a hirepurchase contract, which would entitle the lessor to

be treated as the financial creditor. There must be a

lease or hire-purchase contract, which is deemed as a

finance or capital lease. The Law Giver has not left

the courts free to place, its interpretation on the

words ‘finance or capital lease’. The Legislature has

contemplated the finance or a capital lease, which is

deemed as such a lease under the Indian Accounting

Standards. It could also be deemed as a financial or

a capital lease under any other accounting standards

as may be prescribed. The word ‘prescribed’ has been

defined in Section 3(26) as meaning prescribed under

Rules made by the Central Government. There is no

case for the appellant that Central Government has

made any Rules providing for other accounting

standards under Section 5(8)(d) of the IBC. In

Section 5(8)(d), it is necessary to notice the

opening words of the provision, viz., ‘the amount of

any liability in respect of’. The Law Giver, in other

words, has contemplated that should there be any

liability arising out of a lease or hire-purchase,

which is deemed as a finance or a capital lease in

terms of the Indian Accounting Standards, then, the

person, who has incurred the liability, would become

the debtor and the person, in respect of whom, the

liability has been incurred, would become the

financial creditor.

60. Much emphasis was laid by the appellant on the

word ‘deemed’ in Section 5(8)(d). One would have

expected that on turning to the Indian Accounting

Standards, there would be a provision providing for a

deemed finance or capital lease. The inquiry in this

direction, however, did leave us with failure and

even disillusionment. We found that there is no

provision, which articulates a deeming provision, as

such, providing for a lease or a hire-purchase

contract, which is deemed as a finance or capital

lease. The word ‘deemed’ is used as a verb. It is a

legislative devise by way of a fiction. In other

words, the provision requires the Court to imagine a

state of affairs as true. The province of a deeming

provision is the subject matter of a large body of

case law. Suffice it to notice the following

paragraphs from Aneeta Hada v. Godfather Travels and

Tours Private Limited6:

“34. Lord Asquith, in East End Dwellings Co.

Ltd. v. Finsbury Borough Council [1952 AC 109

: (1951) 2 All ER 587 (HL)] , had expressed

his opinion as follows : (AC pp. 132-33)

“If you are bidden to treat an imaginary

state of affairs as real, you must surely,

unless prohibited from doing so, also imagine

as real the consequences and incidents which,

if the putative state of affairs had in fact

6 2012 (5) SCC 661

existed, must inevitably have flowed from or

accompanied it. … The statute says that you

must imagine a certain state of affairs; it

does not say that having done so, you must

cause or permit your imagination to boggle

when it comes to the inevitable corollaries

of that state of affairs.”

38. From the aforesaid pronouncements, the

principle that can be culled out is that it

is the bounden duty of the court to ascertain

for what purpose the legal fiction has been

created. It is also the duty of the court to

imagine the fiction with all real

consequences and instances unless prohibited

from doing so. That apart, the use of the

term “deemed” has to be read in its context

and further, the fullest logical purpose and

import are to be understood. It is because in

modern legislation, the term “deemed” has

been used for manifold purposes. The object

of the legislature has to be kept in mind.”

61. It is apposite, at this juncture, to advert to

the Indian Accounting Standards relevant to our

inquiry.

62. The Rules, which are relevant in regard to the

specification of a lease as a financial lease are set

down as Rules 61 to 67 of Indian Accounting Standards

[for short “IAS”]. They have been made under Section

133 of the Companies Act, 2018.

“Classification of leases (paragraphs B53–

B58)

61 A lessor shall classify each of its leases

as either an operating lease or a finance

lease.

62 A lease is classified as a finance lease

if it transfers substantially all the risks

and rewards incidental to ownership of an

underlying asset. A lease is classified as an

operating lease if it does not transfer

substantially all the risks and rewards

incidental to ownership of an underlying

asset.

63 Whether a lease is a finance lease or an

operating lease depends on the substance of

the transaction rather than the form of the

contract. Examples of situations that

individually or in combination would normally

lead to a lease being classified as a finance

lease are:

(a) the lease transfers ownership of the

underlying asset to the lessee by the end of

the lease term;

(b) the lessee has the option to purchase the

underlying asset at a price that is expected

to be sufficiently lower than the fair value

at the date the option becomes exercisable

for it to be reasonably certain, at the

inception date, that the option will be

exercised;

the economic life of the underlying asset

even if title is not transferred;

(d) at the inception date, the present value

of the lease payments amounts to at least

substantially all of the fair value of the

underlying asset; and

(e) the underlying asset is of such a

specialised nature that only the lessee can

use it without major modifications.

64 Indicators of situations that individually

or in combination could also lead to a lease

being classified as a finance lease are:

(a) if the lessee can cancel the lease, the

lessor’s losses associated with the

cancellation are borne by the lessee;

(b) gains or losses from the fluctuation in

the fair value of the residual accrue to the

lessee (for example, in the form of a rent

rebate equaling most of the sales proceeds at

the end of the lease); and

lease for a secondary period at a rent that

is substantially lower than market rent.

65 The examples and indicators in paragraphs

63–64 are not always conclusive. If it is

clear from other features that the lease does

not transfer substantially all the risks and

rewards incidental to ownership of an

underlying asset, the lease is classified as

an operating lease. For example, this may be

the case if ownership of the underlying asset

transfers at the end of the lease for a

variable payment equal to its then fair

value, or if there are variable lease

payments, as a result of which the lessor

does not transfer substantially all such

risks and rewards.

66 Lease classification is made at the

inception date and is reassessed only if

there is a lease modification. Changes in

estimates (for example, changes in estimates

of the economic life or of the residual value

of the underlying asset), or changes in

circumstances (for example, default by the

lessee), do not give rise to a new

classification of a lease for accounting

purposes.

Finance leases

Recognition and measurement

67 At the commencement date, a lessor shall

recognise assets held under a finance lease

in its balance sheet and present them as a

receivable at an amount equal to the net

investment in the lease.”

63. The analysis of the said criteria in the context

of the lease in question, would yield the following

results. Under Rule 61, the lessor is obliged to

classify each of its leases as an operating lease or

a finance lease. In Civil Appeal No. 2222 of 2021,

there is no case for the appellant-NOIDA, that it has

been classified as finance lease. As far as the other

Civil Appeal filed by the very same Authority, i.e.,

NOIDA is concerned, Smt. Madhavi Diwan, sought to

contend that, while it is not shown as a finance

lease as such, the transaction is characterised as a

sale in the balance sheet.

64. Rule 62, the sheet anchor of the appellant,

declares that a lease is classified as a financial

lease if it transfers, substantially, all the risks

and rewards incidental to ownership of an underlying

asset. Moving on to Rule 63, it undoubtedly, declares

that what matters is not the form but the substance.

Thereafter, under the examples of situations, either

individually or in combination, which would lead to a

lease being classified as a finance lease, certain

situations have been depicted. As far as the first

situation is concerned, it would involve a lease,

where, there is a transfer of ownership of an

underlying asset to the lessee by the end of the

lease term. There is no case for the appellants that

the lease contemplates transfer of ownership of the

underlying asset. The underlying asset is the land. In

fact, the case of the appellant would appear to be

also that there is no transfer of ownership because

by the end of lease term third party rights would

have been created over the dwelling unit/ built up

space/ plot constructed by the Lessee. It is also the

further case set up that the Lessee alone brings

third parties on to the property and gets paid by

such parties.

It will be relevant to notice that the so called

third parties do not get ownership rights as such.

The rights are transferred in favour of the allotees

of dwelling units /built up space/ plot only by way

of a sub-lease. Therefore, there is no transfer of

the ownership of the underlying asset by the end of

the lease term. Under the next situation considered

relevant under the Indian Accounting Standards, is

the granting of an option to the lessee to purchase

the underlying asset at a price, which is expected to

be sufficiently lower than the fair value at the date

of option becoming exercisable for it to be

reasonably certain at the inception date, that the

option will be exercised. The underlying asset is the

plot.

65. From the Table presented before the NCLAT by the

appellant, we find that appellant appears to have

taken the stand that the lease rent is paid for the

leasing of the land and the premium is paid for the

rights to develop and construct the buildings on the

lease land. Therefore, the underlying asset is not

just a land but the right to develop or construct a

building.

66. A lease of immovable property is defined in

Section 105 of the Transfer of Property Act, inter

alia, as a transfer of a right to enjoy such

property. The property, which is leased, under the

lease is the plot of land. Section 105 speaks about

the terms on which the lease takes place. The right

to enjoy the leased property and the terms, on which

it is to be enjoyed, must be distinguished from the

property, which is the subject matter of lease. The

subject matter of the lease is such property. It is

such property, viz., immovable property, in the case

of a lease of an immovable property, which can be

treated as the underlying asset, for the purpose of

the Rules made under Section 133 of the Companies

Act, 2013. The contention of the appellant that the

underlying asset is also the right to develop or

construct a building on the leased land, does not

appear to be tenable. The very contention contains an

irreconcilable contradiction. On the one hand, the

land is correctly described as the leased land. The

right to develop or construct a building on the

leased land, cannot be treated as the underlying

asset. In fact, there is no case that the buildings

that are put up on the leased land, would also

constitute part of the underlying asset. We may

firstly notice that there is no option to purchase

‘the right to develop or construct the building’.

This itself suffices to expose the fallacy that the

right to develop or construct the building is also

part of the underlying asset.

67. At any rate there is no right within the meaning

of criteria with the Lessee to purchase the asset.

This criterion is also not fulfilled as there is no

option to purchase at all that is vested with the

lessee.

68. The third criteria in Rule 63 is, where the lease

term is for the major part of the economic life of

the underlying asset, even if the title is not

transferred. The definition of ‘economic life’, as

provided in Indian Accounting Standards (hereinafter

referred to as ‘the IAS’, for short) 17, reads as

under:

“Economic life is either:

(a) the period over which an asset is expected

to be economically usable by one or more

users; or

(b) the number of production or similar units

expected to be obtained from the asset by one

or more users.”

(Emphasis supplied)

The lease in question is for a period of ninety

years. In regard to land, the underlying asset, ‘the

principle of economic life of underlying asset’, is

inapposite. The economic life of land is not limited.

The principle in the said situation is predicated

with reference to measuring the economic life of an

asset. More importantly, it speaks of the major part

of the economic life of the asset. Both these

concepts are inapposite and even inapplicable with

regard to land. Land does not depreciate with the

passage of time. Ordinarily, the price of land would

only increase, unlike other assets.

69. The argument of the appellant is that on the

construction being completed the lease land shall be

of no value to the lessor and the third party right

being created, results in the economic life and the

value of the asset being exhausted. We find no merit

in this argument having regard to the fact that the

underlying asset is the land. There is another

important reason which we must set out here. A sublease has been produced before this Court in

C.A.No.2369 of 2021. Originally it was referred to in

the course of argument by Shri Devashish Bharuka.

However, it has subsequently been filed under an

affidavit on behalf of Respondent No..1 in

C.A.No.2367-2369 of 2021. The sub-lease, no doubt, is

entered into between the appellant as Lessor and one

M/s. Cloud 9 Projects Pvt. Ltd., the Lessee in the

said lease and the sub-lessee. The sub-lease dated

12.11.2018 would show that the land admeasuring 40087

sq.mtr. bearing Plot NO.GH-02 was the subject matter

of the lease. The lease was, as in the facts of this

case, for a period of 90 years. The lease was entered

into with the lessee in the said case on 17.06.2009.

70. It is indicated in the sub-lease that the lessee

has the right to allot to its applicants, the

dwelling units including the undivided proportionate

share in the land, inter-alia. It is further provided

that the sub-lessee will observe the covenants, terms

and conditions, laid down in the original lease.

Thereafter, it is provided that in consideration of

the amount paid, which included the cost of super

structure and the undivided proportionate share in

the land underneath the building paid by the sub-

lessee to the lessee the lessee sells, transfers, and

conveys to the sub-lessee the dwelling unit with

proportionate right, inter-alia, in the land

underneath the building. It is next provided that the

lessee simultaneously sub-leases to the sub-lessee

for the unexpired period of ninety years lease, the

undivided unidentified title to the land

proportionate to the area allotted to the sub-lessee

in relation to the total area subject to various

terms and conditions. In Condition 6, it is mentioned

inter-alia that the sub-lessee shall get exclusive

possession of the built-up covered area of the

dwelling unit, and is being transferred the title of

the same along with the right over the land, through

the sub-lease. The lessee and the sub-lessee are to

perform the covenants and conditions in the lease

deed between the lessee and the lessor as applicable

in relation to the land and the unit being leased

under these present. The sub-lessee cannot mortgage

the dwelling unit to secure ‘any loan’ at any stage

except with the prior permission of the lessor. Sub

lessee is to also obtain an appropriate NOC from the

lessee/lessor, in this regard. The sub-lessee can use

the dwelling unit only for residential purposes and

for no other purpose. The right of the sub-lessee is

made subject to the provisions of the UP Act of 2010.

It is thereafter that condition 21 deals with what is

to happen on the expiry of the lease of the land. It

reads as follows:

“21. That the Lessee /Sub-Lessee shall on

the expiry of the lease of the land,

peacefully hand over the said land unto

the Lessor after removing the

superstructure, within the stipulated

period. The share in the undivided

proportionate land hereby sub-leased,

shall always remain un-divisible and

unidentified. Similarly, the Sub-Lessee

shall have the right of usage of common

areas and will not have any independent

right of possession of the same.

It is further provided in condition 24 that the terms

and conditions of the parent lease deed, inter-alia,

shall be binding on the parties after execution of

the sub-lease. Condition 27 provides that in case of

any breach of the terms and conditions of the sublease by the lessee/sub-lessee, the lessor will have

the right to re-enter the demised dwelling unit,

after determining the sub lease. It is further

provided that at the time of re-entry of demised

dwelling unit, the lessor may re-allot the same to

any other person. All the clauses of the parent lease

deed are made applicable and they are to prevail in

case of any repugnancy between them and the sublease.

71. A perusal of the same would reveal that in

keeping with the lease deed and the provisions of

Section 9 of the U.P. Apartment Owners Act, it is

that the sub-lease deed is executed. The sub-lessee

or the allottee pays the cost of the structure and

the undivided proportionate interest in the land. The

transfer to him is described as a sale and

conveyance. There is simultaneous sub-lease also in

regard to the unidentified title to the proportionate

land. The sub-lease appears to effect a sale of the

dwelling unit. However, certain conditions appear to

militate against an absolute transfer. They include

the condition that the sub-lessee cannot mortgage the

dwelling unit for securing any loan at any stage

except with prior written permission of the lessor.

The use of the dwelling unit being limited to

residential purpose is perhaps another feature which

is unique. The power of the lessor to re-enter the

dwelling unit, which is described in condition 27 as

the ‘demised' dwelling unit, after determining the

sub-lease and also the power to re-allot the same to

any person are clearly inconsistent with a completed

sale. This is apart from condition 21 which we had

extracted which obliges the sub-lessee on the expiry

of the lease of the land to deliver to the lessor the

land, after removing the super structure within the

stipulated time. It will be noticed further, that the

rent and the premium which is the amount claimed by

the appellant has no relation with what the lessee

would get from the sub-lessee. There is no such case

that the amount which is claimed relates to any

default by the sub-lessee.

72. The underlying asset in the lease is no doubt the

plot of land. The terms contemplate construction of

residential flats over the plot by the lessee. The

lessee can subject to the lease transfer the built-up

flats. The transfer is secured through a sub- lease.

The transferor in the sub-lease of the dwelling unit

is the lessee in regard to which the sub-lease

appears to evidence the sale. We have noticed the

features in terms of the conditions. If the built-up

area/flats is to be treated as part of the underlying

asset then the appellant would be the lessor of the

flat. However, going by the terms of the lease and

the sub-lease, the flat is entirely constructed by

the lessee and it is the lessee who transfers the

same to the sub-lessee, and gets the entire

consideration. The title flows from the lessee to the

sub-lessee. The subject matter of the sub-lease is

the dwelling unit as also the undivided right in the

land. The question is whether on the basis of Section

5(8)(d), under the lease, what is the underlying

asset as between the appellant and the corporate

debtor? Though the flats to be constructed are

contemplated in the lease, it is not the same as

understanding them as the subject matter of the

lease. The flats would be the subject matter of the

sub-lease. No doubt, from the lease and the sub-lease

the right of the lessee or rather its obligation

under the lease is to put up the residential flats

which he can transfer in terms of the lease. It may

be true that the terms of the lease are made binding

on the sub- lessee. However, as between the lessor

and the lessee, the underlying asset would be the

plot of land. From the terms of the sub lease which

is as per the decision of the Lessor (appellant) goes

to show the extent of the control by the Lessor and

consequent intrusion into the power of the lessee

namely, despite power to effect an apparent sale of

the flat the term includes barring the purchaser from

mortgaging the dwelling unit for any loan except with

the prior consent of the lessor, the power of reentry of the lessor and to re-allot the “sold

dwelling unit” to any other person and the obligation

of the lessee/sub lessee to surrender the land after

demolishing the super structure on the expiry of the

period of lease.

73. The lease before us is stated to be for a period

of 90 years. The lease is intended and structured to

attain the objective of putting up residential

structures as part of the planned development of the

area. The constructed area or the flats can be

transferred to the allottees by the Lessee on the

strength of tripartite sub-leases. This is borne out

by the terms of the sub-lease produced before this

court. This is also clear from the provisions of the

clause before us which contemplate the execution of a

sub-lease. There is no provision for renewal. The

parties have clearly contemplated that the terms of

the sub-lease will be in the form and format as

provided by the Lessor (appellant). It is accordingly

that the clause in the lease actually contemplates

inter alia that the construction be completed within

7 years from the date of execution of the lease deed

with a maximum extension of another 3 years with

penalty. Ordinarily, there would be no further

extension. Therefore, the construction can be used

till the expiry of the 90 years period by the sublessee and the terms of the lease and sub-lease would

clearly indicate that at the end of 90 years, far

from any enlargement of the rights of the sub-lessee,

the sub-lessee is to deliver back the land directly

to the Lessor after removing the superstructure. It

is another matter that with the passage of a long

period of time, the superstructure itself may be in a

state of disrepair. However, what is relevant is that

the concept of economic life is ill-suited to the

facts as the lease is in respect of land which is to

be taken as the underlying asset. It may not be

possible to hold that the lease is for the major part

of the economic life of land. It cannot be said that

at the expiry of 90 years the land will cease to be

economically usable. Therefore, we cannot accept the

argument of the appellant that after 90 years

appellant would not get the empty parcel of land and

the land would not be of any commercial use to the

appellant after the expiry of the lease. The argument

that the land will be of no value to the lessor, has

no force, having regard to the nature of underlying

asset, namely, land which indeed ordinarily would

have perennial value. In clause 12 under other

clauses, it is provided that lessee shall not be

allowed to assign or change his role. Any breach

would lead to cancellation and entire money deposited

will be forfeited. Though the words used are the

lessee cannot assign or change his ‘role’, it would

in substance mean that it is a contract to the

contrary within the meaning of Section 108 of the

Transfer of Property Act. The position would indeed

be that the lessee cannot assign his right. We must

at this juncture notice under the heading ‘Transfer

of Plot” that the lease does contemplate that upto

30.09.2010, the lessee has a right to sub-divide the

allotted plot into suitable smaller plots as per the

planning norms and to transfer the same to the

interested parties with prior approval of the lessor

on payment of transfer charges. However, the area of

the sub-divided plot cannot be less than 20,000 sq.

meters. We would notice that the leasehold plot in

the case is only 22565.77 sq.meters. We would

understand the scope of the said provision as right

given to the lessee, no doubt, to transfer the

allotted plot after sub-division into smaller plots

and to transfer the plots so sub-divided. This is

subject to two conditions. This is permitted only for

a period of two months from the date of execution of

the agreement namely till 30.09.2010. This can be

only done if the lessor permits it by prior approval.

More importantly, the sub-plots which can be so

transferred, cannot be less than 20000 sq. meters. As

we have noticed this will appear to be a standard

clause and we have noticed that the lease in the case

of M/s Cloud 9 which we have adverted to, consisted

of about 40000 square meters. We do note that the

lease deed in civil appeal no. 2367-69 of 2021 is for

a plot of 69998.73 square metres. Also, therein the

minimum size of the sub divided plot is not less than

10,000 square metres. But the other conditions

including prior approval remains the same. Further

provisions under the heading ‘transfer of plot’ deal

with only cases of individual flat/plot being

transferrable subject to the various conditions, the

most pertinent being that it contemplates essentially

a sub-lease. We do not think that we can permit the

matter to be appreciated on the basis of the

situation contemplated in a case where under the

lease within 2 months on a sub-division of the plot

assignment takes place of the plot without the

construction and without obtaining the completion

certificate. In fact, no argument was advanced based

on the said provision. The claim relates to rental

and premium on the basis that the lease continued and

the lessee (corporate debtor) persevered in the

lease.

74. The underlying principle appears to be that even

if it is by way of a lease, the rights are vested

with the lessee, for the lion’s share of the economic

life or the value of the underlying asset, then,

substantially, the lessee is enjoying the rights as

an owner it is in this context that the principle is

laid down that the transfer of title is not

necessary. In other words, sans transfer of title,

the lessee enjoys the asset for the fruitful period

of the life of the asset. At the end of the major

part of the economic life of an underlying asset, the

life of which is limited by time, the asset would be

mostly depreciated, if not, without any value. Such a

situation can never apply, in the case of land.

75. The fourth example of the situation, whereunder a

lease is to be classified as a financial lease, is,

if at the inception date, the present value of the

lease payments, amounts to at least substantially all

100

of the fair value of the underlying asset. ‘Fair

Value’ is defined in the IAS, as follows:

“Fair value is the amount for which an asset

could be exchanged, or a liability settled,

between knowledgeable, willing parties in an

arm’s length transaction.”

76. Inception date is different from the commencement

of lease as ordinarily understood under the IAS.

Inception date has been defined in the IAS, as

follows:

“The inception of the lease is the earlier of

the date of the lease agreement and the date

of commitment by the parties to the principal

provisions of the lease. As at this date: (a)

a lease is classified as either an operating

or a finance lease; and (b) in the case of a

finance lease, the amounts to be recognised

at the commencement of the lease term are

determined.”

77. In fact, there is no such classification done by

the appellant. Even as on the commencement day, what

is paid by the lessee, is only ten percent of the

total premium. There is neither a transfer of

ownership, at the end of the lease term. There is

also no option to purchase with the lessee. The

payment of ten percent of the premium, in the first

place, does not represent substantially all of the

101

fair value of the underlying asset. The lease is for

a period of ninety years. At the end of ninety years,

there is, in fact, no provision for renewal of the

lease. The amount of the premium paid cannot be

linked with the fair value of the land. The

relationship between the appellant and the lessee,

was to remain throughout as lessor and lessee. It may

not be possible to even find that the total premium

and the rent would represent substantially all of

fair value of the underlying asset.

78. The fifth example in Rule 63 is clearly

inapplicable as it is not the appellant’s case that

the underlying asset is of such a specialised nature

that the lessee could only use it without major

modification. Therefore, as far as Rule 63 is

concerned, to sum-up, none of the situations

mentioned in Rule 63 are present in the instant

lease.

79. Rule 64 continues with situations, which,

individually or in combination, would also lead to a

lease being classified as a finance lease. The first

situation is power reserved with the lessee to cancel

102

the lease and the lessor’s losses associated with the

cancellation being borne by the lessee. This example

also does not apply for the simple reason that lease

does not confer even the power to cancel the lease on

the lessee. On the other hand, by stark contrast, the

lessor is abundantly clothed in various contexts to

cancel the lease.

80. The second situation in Rule 64 is, when the

gains or losses from the fluctuation in the fair

value of the residual accrue to the lessee. The

specific example, which is given in the said

situation is a case of a rent rebate, equalling most

of the sale proceeds at the end of the lease. The

example clearly has the underpinning of an ultimate

sale at the end of the lease. In other words, a

finance lease posits ordinarily a lease to begin with

and a sale, when the curtains are finally wrung down.

We have already noticed that no sale of the

underlying asset is contemplated. The lease is for a

period of ninety years. The expression ‘residual

value’ is also defined. It reads as follows:

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“The residual value of an asset is the

estimated amount that an entity would

currently obtain from disposal of the asset,

after deducting the estimated costs of

disposal, if the asset were already of the

age and in the condition expected at the end

of its useful life.”

Residual value is predicated with reference to

the end of the useful life of an asset. Useful life

is, inter alia, the period over which an asset is

expected to be available for use by an entity. The

‘end’ of useful life is hard to conceive in respect

of land. Also, nothing is shown to establish how the

ingredients are attracted.

81. The last example in Rule 64 is the ability of the

lessee to continue for a secondary period at a rent

that is substantially lower than the market rent. As

far the lease in question is concerned, the period of

the lease is ninety years. The lease, as such, does

not contemplate a renewal of the lease. No secondary

period is contemplated.

82. Rule 65 goes on to declare that the examples and

indicators in Rules 63 and 64 are not always

conclusive. Though the learned Solicitor General

104

seized upon this enunciation, the very next sentence

would belie the possibility of any expectation on the

basis of the aforesaid declaration. What is stated is

that even despite the presence of the examples and

indicators in Rules 63 and 64, if other features of

the lease do not persuade the Court to conclude that

the lease transfers substantially all the risks and

rewards incidental to ownership, it is to be

classified as an operating lease. It would not be a

financial lease. In this case, the position obtaining

is the converse situation. None of the features in

Rules 63 and 64, advance the case of the appellant

that the lease in question is a financial lease. No

doubt, a perusal of Rule 65 does give an impression

that the most important criteria is that the lease

must effect, substantially, the transfer of all the

risks and the rewards incidental to ownership. The

example, which is given in Rule 65, is based on

transfer of ownership at the end of the lease for a

payment, which is equal to the fair value at the time

of transfer and which is variable. The other example

furnished is variable lease payment, as a result of

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which, the lessor does not substantially transfer all

the risks and the rewards.

83. Rule 66 provides that the classification of the

lease must be made at the inception date, for which,

there is no claim made by the appellants.

Reclassification is permitted only, if there is a

modification of the lease. Changes in estimates,

which is again related to in the example to the

changes in the estimates of the economic life or the

residual value of the underlying asset, will not

occasion a new classification of the lease for

accounting purposes. So also, changes in

circumstances, such as default by the lessee would

not warrant a new classification being effected. The

appellants have, admittedly, not classified the lease

in question at the inception date as a finance lease.

This, undoubtedly, is a circumstance, which would

militate against the lease of the appellant being

treated as a finance lease.

84. Rule 67 again provides that at the commencement

date, which means the date of commencement of the

lease, the lessor should recognise the assets under a

106

finance lease in its balance sheet and the asset so

recognised must be presented as a receivable. The

matter does not end there. The asset must be

presented as an amount equal to the net investment of

the lease. There is nothing on record to establish

that the underlying asset has been dealt with in the

aforesaid manner by the appellants.

85. Having made a survey of the various situations

and examples under the Statutory Rules, which would

persuade the Court to ‘deem’ a lease as a finance

lease and, having found that none of the situations

or indicators suit the case of the appellant, the

case should rest and the point must be answered

against the appellant. However, the time is now ripe

to examine the contents of Rule 62 and Rule 65. They

declare as to when a lease is to be classified as a

financial lease. It provides that a lease may be so

classified as a financial lease, if it transfers

substantially all the risks and rewards incidental to

ownership of an underlying asset. The converse

position applies to an operating lease and a lease is

to be classified as an operating lease, if the lease

107

does not substantially transfer all the risks and the

rewards incidental to the ownership of the underlying

asset.

86. The concept revolves around the transfer

substantially of risks and rewards incidental to the

ownership of the leasehold property. Therefore, we

must deal with what constitutes ownership of an

asset. We may notice the following discussion

regarding the ‘idea of ownership’ in Salmond on

Jurisprudence, 12th Edition:

“Ownership denotes the relation between a

person and an object forming the subject

matter of his ownership. It consists in a

complex of rights, all of which are rights in

rem, being good against all the world and not

merely against specific person(a). Though in

certain situations some of these rights may

be absent, the normal case of ownership can

be expected to exhibit the following

incidents(b).”

87. Thereafter, the following are treated as the

rights associated with ownership. An owner of a

property will have the right to possess the thing

which he owns, it is stated. Secondly, the second

principle is described as follows: -

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“Secondly, the owner normally has the right

to use and enjoy the thing owned: the right

to manage it, i.e., the right to decide how

it shall be used; and the right to the income

from it. Whereas the right to possess is a

right in the strict sense, these rights are

in fact liberties: the owner has a liberty to

use the thing, i.e., he is under no duty not

to use it, in contrast with others who are

under a duty not to use or interfere with

it.”

88. The third right is described as follows: -

“Thirdly the owner has the right to consume,

destroy or alienate the thing. The rights to

consume and destroy are straight-forward

liberties. The right to alienate, i.e., the

right to transfer his rights over the object

to another, involves the existence of a

power. A non-owner even though he has

possession, cannot normally transfer the

rights of ownership over a thing to another;

for the law acts on the principle nemo dat

quod habet. To this principle there are

certain exceptions: for example, the Factors

Acts enable non-owners in possession to

transfer ownership in certain circumstances.”

89. Fourthly, the right is one associated with the

indeterminate duration of the right. It is here that

we find the following discussion in this regard: -

“Fourthly, ownership has the characteristic

of being indeterminate in duration. The

position of an owner differs from that of a

non-owner in possession in that the latter’s

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interest is subject to be determined at some

future set point, whereas the interest of the

owner can endure theoretically for ever. The

interest of a bailee or lessee comes to an

end when the period of hire or of the lease

determines; the owner’s interest is

perpetual, being determined neither by any

set point nor by the owner’s death, because

the property owned can descend to the owner’s

heir or next-of-kin, and if he had sold the

property prior to his death, then the new

owner’s interest would continue unaffected by

the previous owner’s death.”

90. Fifthly, there is a residual nature, in regard to

the concept of ownership, and it is described as

follows: -

“If, for example, a landowner gives a lease

of his property to A, an easement to B and

some other right such as a profit to C, his

ownership now consists of the residual

rights, i.e., the rights remaining when all

these lesser rights have been given away.

Moreover, in English law the general rule is

that the extinction of such lesser rights

will revive in the owner all his original

rights.”

91. A question may arise as to whether in approaching

the subject, we are to be guided by an examination of

the question as to whether the lessee in this case

possesses the rights incidental to ownership or the

expression ‘rewards incidental to ownership’ is

110

different from rights incidental to ownership. Can

there be rewards if the rights which we have

indicated herein before are not transferred? Can

there be rewards which must be interpreted in a

different manner from the idea of rights? In this

regard, we must also remind ourselves that to

constitute a lease, a financial lease, it is not

indispensable that the ownership is in all cases

transferred from the lessor to the lessee. However,

we have noticed the example hereinbefore wherein the

said concept is declared. That is, it is relevant

when the lease term is for the major part of the

economic life. Undoubtedly, ordinarily a financial

lease would be a lease which is born as a lease but

ends as a sale. The lease does involve transfer of

ownership from the previous owner, namely the lessor

to the lessee. In this context, Parliament has

defined financial lease in two enactments through

Amendment Act no. 44/2016 as hereinbefore noticed.

92. We may at once bear in mind two concepts, in the

overarching principle. The two concepts are

“substantially” and “all”. In other words,

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substantially all the risks and rewards incidental to

ownership must be transferred under the lease. While

we do agree with the appellants that an element of

flexibility is allowed by the presence of the concept

‘substantially’, at the same time, it cannot be a

case where predominantly all the risks and rewards

incidental to ownership are not transferred. In other

words, on a conspectus of all the terms of the lease

and the reference to the situations and examples

which have already been set out, if there is for the

most part, a transfer of all the risks and rewards

incidental to ownership, in effect, it can be treated

as a finance lease.

93. In Black’s Law Dictionary 11th Edition the word

“substance” to begin with, is defined as follows:-

“(i) The essence of something; the essential

quality of something, as opposed to its mere

form (ii) Any matter, esp. an addictive drug

illegal.”

94. The word “substantial” is defined as follows:-

“(i) Of, relating to, or involving substance;

material. (ii) Real and not imaginary; having

actual, not fictitious, existence. (iii)

Important, essential, and material; of real

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worth and importance (iv) Strong, solid, and

firm; large and strongly constructed (v) At

least moderately wealthy; possessed of

sufficient financial means (vi) Considerable

in extent, amount, or value; large in volume

or number (vii) Having permanence or nearpermanence; long-lasting (viii) Containing

the essence of a thing; conveying the right

idea even if not the exact details (ix)

Nourishing; affording sufficient nutriment.”

95. We would find the word ‘substantially’ occurring

in the provision in question would mean that what

matters is not the form but the substance. In other

words, largely and in substance all the risks and

rewards incidental to ownership is to be transferred

in a lease to constitute it as a finance lease.

96. In the context of the word ‘incidental’, the

contention that with reference to the definition of

the word incidental in Black’s Law Dictionary which

is referred by the appellant, namely that it is

subordinate to something of greater importance or

having a minor role, and therefore the interpretation

must be that it can be less than the absolute, does

not appear to us to be correct. No doubt, the word

incidental has been defined as follows: -

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“Subordinate to something of greater

importance; having a minor role”

97. In this case we may notice the definition of the

word “incident to employment” in Black’s Law

Dictionary wherein it has been defined as follows: -

“A risk that is related to or connected with

a worker’s job duties.”

98. The words “incident of ownership” itself has been

defined as follows: -

“Any right of control that may be exercised

over a transferred life-insurance policy so

that the policy’s proceeds will be included

in a decedent’s gross estate for estate-tax

purposes. The incidents of ownership include

the rights to change the policy’s

beneficiaries and to borrow against, assign,

and cancel the policy.”

(Emphasis supplied)

99. In State of Orissa and Another V. M/S. Chakobhai

Ghelabhai and Company,

7 one of the questions which

arose was whether under Section 29 of the Orissa

Sales Tax Act, 1947, the State had power to provide

for fee on the memorandum of appeals and applications

in revision. Section 29 of the said Act inter alia

provided for the power to make rules providing for

7 AIR 1961 SC 284

114

the procedure and other matters including fees

incidental to the disposal of appeals and

applications for revision and for review under

Section 23. While dealing with the scope of the word

“incidental”, this Court held as follows: -

“The fees imposed are not taxes at all; they

come within the expression “other matters

(including fees) incidental to the disposal

of appeals and applications for revision etc.

We are unable to agree with the High Court

that the word ‘incidental’ has reference to a

matter of casual nature only. The procedure

for disposal of an appeal includes as a

necessary incidental matter the filing of an

appeal on a proper fee.”

(Emphasis supplied)

100. In State of Tamil Nadu V. Binny Ltd., Madras,

8 the

question arose whether the sales of provisions

effected by the assessee in a workman store, was

assessable to tax under a State law. Section 2(d)(ii)

defined business as including any transaction in

connection with or incidental or ancillary to the

trade, commerce, manufacture, adventure or concern

which formed the subject matter of section 2(d)(i).

8 1980 Supp SCC 686

115

The contention taken by the assessee was that it was

necessary that the connection between the sales of

the provisions in the store and manufacture of the

goods in question must be direct and that direct

connection was missing. In other words, the assessee

was carrying on manufacture and sale of textiles. It

was also running a store in question. The word

“business” was defined as including trade and

manufacture inter alia in the first limb of

Section(2)(d) and also any transaction incidental to

such trade and manufacture. This Court took the view

that there is no justification in the contention of

the assessee. We notice the following exposition: -

“It is indeed difficult to see how it can at

all be said that the activity of selling

provisions to the workmen in the Store was

not incidental to the business of manufacture

of textiles in the factory. The sales which

were effected in the Store were to the

workmen employed in the factory where

textiles were being manufactured and the

provision of this facility to the workmen was

certainly incidental to the carrying on the

business of manufacture of textiles. This

view finds support from the decision of this

Court in Royal Talkies, Hyderabad v.

Employees State Insurance Corporation where

the question was as to whether a canteen

116

maintained by a cinema owner in the premises

of the cinema could be said to be incidental

to the business of running the cinema.

Krishna Iyer, J., speaking on behalf of the

court, pointed out that (SCC p.212 : SCC

(L&S) p. 505) “a thing is incidental to

another if it merely appertains to something

else as primary. Surely, such work should not

be extraneous or contrary to the purpose of

the establishment but need not be integral to

it either.”

(Emphasis supplied)

101. The proper interpretation in the context of the

word “incidental” is not that it is subordinate to an

absolute, as it is sought to be made out. In M/s.

Shroff and Co. v. Municipal Corpn. of Greater Bombay

and Another,

9 this Court reiterated the view that the

expression incidental means ‘necessary’ in certain

contexts which does not mean a matter of causal

nature only.

102. In the context of the provision in question, the

expression “incidental to” would mean arising out of

or otherwise connected with. In other words, the

risks and rewards must flow out of ownership. The

rewards must be those arising out of ownership. This

9 1989 Supp 1 SCC 347

117

in fact is central to understanding the concept of a

finance lease.

103. An argument is raised that paragraphs 15A to 17

of the Indian Accounting Standards (in IND AS) 17, it

becomes evident that finance leases are contemplated

in respect of lands. We may notice paragraphs 15A to

17, which read as follows: -

“15A. When a lease includes both land and

buildings elements, an entity assesses the

classification of each element as a finance

or an operating lease separately in

accordance with paragraphs 7-13. In

determining whether the land element is an

operating or a finance lease, an important

consideration is that land normally has an

indefinite economic life.

16. Whenever necessary in order to classify

and account for a lease of land and

buildings, the minimum lease payments

(including any lump-sum upfront payments) are

allocated between the land and the buildings

elements in proportion to the relative fair

values of the leasehold interests in the land

element and buildings element of the lease at

the inception of the lease. If the lease

payments cannot be allocated reliably between

these two elements, the entire lease is

classified as a finance lease, unless it is

clear that both elements are operating

leases, in which case the entire lease is

classified as an operating lease.

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17. For a lease of land and buildings in

which the amount that would initially be

recognised for the land element, in

accordance with paragraph20, is immaterial,

the land and buildings may be treated as a

single unit for the purpose of lease

classification and classified as a finance of

operating lease in accordance with paragraphs

7-13. In such a case, the economic life of

the buildings is regarded as the economic

life of the entire leased asset.”

104. It is clear that the subject matter of the lease

mentioned in paragraphs 15A to 17 is not merely land

alone. It contemplates a situation where the lease

relates to land and buildings. It is no doubt true

that in paragraph 15A it is stated that in

determining whether the land element is an operating

or finance lease, an important consideration is that

the land normally has an indefinite economic life.

What is significant is that what the provision

contemplates is finding out whether the land element

in a composite lease can be treated as a finance

lease or as an operating lease. In a lease which has

only a land element, the concept of a limited

economic life, which is apposite in the context of

assets which have a life limited by time and which

119

ordinarily depreciate over time, would not be

relevant. We need not deal with the case of the lease

of land at the end of which there is a sale. There

may be instances of such leases entered into by

developmental authorities. It would then turn upon

the terms of the lease.

105. The lease in question, is a lease of the plot of

land, as already found by us. The underlying asset is

the plot of land. Therefore, we cannot treat the

subject matter of the lease, as containing both land

and building elements. We have already noticed, while

dealing with Rule 63(b) that the case of the

appellant before the NCLAT, was only that, apart from

the land, the right to develop or construct the

building, is the underlying asset. It is not the case

of the appellant that the buildings, which are to be

put up by the lessee, are also the subject matter of

the lease. In fact, it is, no doubt, true that the

lease actually contemplates that, as regards the

build-up area/plot or land, the transfer to the

allottee is to be made only by way of a sub-lease.

The sub-lease of the land in favour of the apartment

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owners, is also contemplated under Section 9 of the

Uttar Pradesh Apartment Owners Act, 2010. The lease,

indeed, does contemplate the execution of a

tripartite sub-lease. The form and the format are to

be dictated to by the lessor. The sub-lease can be

executed subject to the fulfilment of certain

conditions, which we have already adverted to. This

is, indeed, a case where the lease is of the plot and

the interest or the right to enjoy the lease is by

way of construction of residential buildings only and

the use, both by the lessor and lessee and even the

sub-lessee is regulated and circumscribed by the

terms of the lease and the sub-lease. Even, according

to the appellant, it is the lessee, who is to find

out the allottees and to transfer the rights in the

building, also the land, only by way of a sub-lease.

The consideration for the transfer of apartments is

subject to the transfer fee being paid, to be

appropriated by the lessee. The lease, therefore,

contemplates a sub-lease, whereunder, the rights over

the apartments, are regulated. Not unnaturally,

therefore, the appellant cannot project the case that

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the flats/apartments, would constitute part of the

underlying asset. We notice this, as though it was

not argued, we did toy with the idea that if the

lease is a composite lease of land and building, the

Rules made under the IAS, may have to be appreciated

differently. However, we need not explore that line

of thought any further.

106. The NCLAT has found that while all risks are

transferred, the rewards are not transferred,

therefore, we need consider only whether this is

correct. While we are on the concept of the rewards

incidental to ownership, we must record the

assistance which was provided by the fairness of Shri

Ritin Rai, learned Senior Counsel, who drew our

attention to the Clause B53 of IAS 116 which is as

follows: -

“B53: “The classification of leases for

lessors in this Standard is based on the

extent to which the lease transfers the risks

and rewards incidental to ownership of an

underlying asset. Risks include the

possibilities of losses from idle capacity or

technological obsolescence and of variations

in return because of changing economic

conditions. Rewards may be represented by the

expectation of profitable operation over the

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underlying asset’s economic life and of gain

from appreciation in value or realisation of

a residual value.”

107. There is reference to ‘idle capacity or

technological obsolescence’. In the context of risk,

it appears to be irrelevant, in the context of land.

Rewards are again predicated with reference to the

expectation of profitable operation over the

underlying asset’s economic life and the gain from

appreciation in value or the realisation of a

residual value. The concept of ‘economic life’ in the

first place is inapposite in the case of lease of

land alone. The residual value is predicated again

with the expiry of the term of the lease which is

predicated with reference to the end of the lease. In

other words, it would be the value of an asset

predicated with reference to the end of the useful

life of the asset [see in this regard definition of

residual value in para 77] at the expiry of the term

of the lease. The lease in question contemplates a

period of 90 years. The lease is only of the land.

123

108. We may now turn to the provisions of the lease

and the contentions in the context of

Section(5)(8)(d). Undoubtedly, the lessee is put in

possession of the land. Call it a right or a reward

incidental to ownership, possession, or the right to

possession has been transferred to the lessee. The

lessee is entitled to hold the plot. The lease

further proclaims that the lessee shall use the

allotted plot for the purpose indicated. Possession

being in the context of a lease does not partake of a

liberty to not use as would be the case of an owner.

In fact, the manner of the use is stipulated. Non-use

even entails penalty and even cancellation. In fact,

things could not be clearer when Clause 13 under

‘other clauses’ is borne in mind. The said clause

unequivocablly declares that the lessor in larger

public interest may take back the possession of the

land/ building and making payment at the prevailing

rate. This, no doubt, is subject to what we will

pronounce on its impact on the fate of this case.

109. Next, we may notice whether there is right with

the lessee to transfer the leasehold property. In

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this regard, it is relevant to notice that under the

law which is as contained in the Transfer of Property

Act, 1882, Section 108, thereof, provides for rights

and liabilities of a lessor and lessee. It declares

that in the absence of the contract or local usage to

the contrary, the lessor and lessee of immovable

property would possess rights and be subject to

liabilities as provided therein. Section 108(j) reads

as follows: -

“(j) the lessee may transfer absolutely or by

way of mortgage or sub-lease the whole or any

part of his interest in the property, and any

transferee of such interest or part may again

transfer it. The lessee shall not, by reason

only of such transfer, cease to be subject to

any of the liabilities attaching to the

lease:

nothing in this clause shall be deemed to

authorise a tenant having an untransferable

right of occupancy, the farmer of an estate

in respect of which default has been made in

paying revenue, or the lessee of an estate

under the management of a Court of Wards, to

assign his interest as such tenant, farmer or

lessee:”

110. Therefore, in the case of a lease where there is

no contract placing restrictions on the right of the

lessee, the lessee can transfer absolutely or by way

125

of mortgage or sub lease, the whole or any part of

his interest in the property and any transferee of

such interest or part may again transfer. This is no

doubt subject to the clause which deals with the

category of untransferable right of occupancy and the

other categories mentioned therein. In this context

the lease in question must be probed in order to find

out whether there is a contract placing restrictions

on the right of the lessee to transfer. As far as an

absolute assignment by the lessee, Clause 12 under

‘other clauses’, clearly prohibits any assignment by

the lessee. It declares that the lessee shall not be

allowed to assign or change his role. The lessee

would be liable to be visited with the penalty of

cancellation of the lease itself for breach. It

further provides that the entire money which the

lessee would have deposited would stand forfeited.

Therefore, while it may be that this clause is to

enable the proper and successful implementation of

the objective of the appellant which is tasked with

the planned development of the area and the use of

the property for the laudable purpose of construction

126

of group housing, it cannot detract from our finding

that there is a prohibition on assignment of the

right within the meaning of a contract which is

contrary under Section 108. Jurisprudentially, a

right which is the soul of ownership and which is

clearly incidental or arising out of ownership is

denied to the lessee, that is, the right to transfer

the leasehold right.

111. Undoubtedly, in law, generally the lessee can

assign his rights as a lessee which amounts to

assignment of his right. A lessee may create a sublease. A lessee can also create a mortgage. All of

these rights vest with a lessee, subject to a

contract to the contrary. In the lease in question

what is prohibited in Clause 12 under other clauses

is the right to assign his rights as lessee. Any

reward which the lessee could have obtained if it

wished to absolutely assign its right, is clearly

denied by virtue of the provision in the lease which

acts as a contract to the contrary.

112. No doubt, the lease deed would show that the

subject matter of the lease is Plot No.GH-05/B

127

Sector-137, Noida. It is further shown as measuring

22565.77 Sq. mts. The purpose of the lease is

constructing the residential flats. It is no doubt

true that under the head ‘transfer of plot’ it is

indicated that without obtaining the completion

certificate the Lessee will have the right to subdivide the allotted plot into suitable smaller plots

as per the planning norms and to transfer the same to

interested parties. This can be done upto 30.09.2010

with prior approval of the appellant-Lessor on

payment of transfer charges at the rate of 2% of the

allotment rate. However we notice that there is a

stipulation that the area of each of the sub-divided

plot should not be less than 20,000 sq.mtrs. We have

already noticed that the total extent of the lease

property is only 22565.77 square mtrs. Thereafter, it

is no doubt mentioned that individual flat /plot will

be transferrable with prior approval of the Lessor,

subject to various conditions which include execution

of the lease deed and the sub-lessee undertaking to

put the premises for residential use only. Even

though there is reference to transfer of plot which

128

is to consist of not less than 20,000 sq.meters with

the prior approval of the Lessor, it was to be done

before 30.09.2010. It is difficult to conceive how

when the total extent is little over 20,000 sq. meter

i.e., 22565.77 sq. metres and when the condition for

transfer of the plot is that the area of the sub

divided plot should not be less than 20,000 sq. meter

and the construction has to be completed in the

manner provided and yet the transfer in the aforesaid

manner is permitted only upto 30.09.2010. The parties

contemplated transfer only if there is prior approval

of the plot of not less than 20,000 sq. metres before

30.09.2010. At least it is not a case before us that

this clause has been invoked or worked. The transfer

of the first sale/transfer of a flat/ plot to an

allottee is to be done through sub-lease/ lease deed.

No doubt, we have already noticed the difference in

area in the lease in the connected appeal and the

lease which is the subject matter of the sub-lease

provided before us.

113. As far as the right to mortgage is concerned the

lessee is indeed permitted to mortgage the land.

129

However, the mortgage can be effected only with prior

permission of the lessor. The right to mortgage which

flows as an incident of ownership is one of the

bundle of rights which vests with an owner. It is

undoubtedly a lesser right and the owner would be

possessed of the residual right. However, it is one

of the many rights which is incidental to ownership

but there is no absolute right to create a mortgage.

114. The requirement of prior permission to create a

mortgage would mean that the permission may be

forthcoming or it can be denied. If there is a denial

of the right to create a mortgage, then it would

impliedly mean that to the said extent the right to

raise funds for the purpose of financing the

investment is impaired. Depending on whether or not

the right is permitted actually the rewards

incidental to ownership is transferred. In other

words, if we were to imagine that the lessee stood in

the shoes of an owner of the property, he would be in

a position to create a mortgage, raise funds as he

chose and deal with the property in the manner, he

felt advised to. The clause relating to mortgage, in

130

fact, indicates that the purpose contemplated, is

that the mortgage can only be for the purpose of

raising loan or for the purpose of financing the

lessee’s investment in the project. This in turn is

to be on receipt of the payment by the allottee or on

receipt of assurance of payment by the bank or under

any other suitable arrangement. In this regard, the

lease contemplated a mutual settlement amongst the

lessor, the developer and the financial

institution/bank. It clearly constitutes a foray into

the right of a person ‘if an owner’ to deal with the

property including the right to create a mortgage.

The suitable arrangement in mutual settlement

contemplates the lessor giving its consent to the

terms of the mortgage. It includes the right of the

lessor to prevail upon, in regard to the terms of the

mortgage. Its object may be lofty and in keeping with

its role as a statutory authority but its impact on

the true interpretation of the lease and as to

whether it involves transfer of rewards incidental to

ownership is another matter. The terms and conditions

of the NOC which is contemplated as necessary for

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mortgaging the land to facilitate housing loans of

final purchaser will be as decided by the lessor.

Still further we may notice that under the proviso if

there is a sale or a foreclosure of the mortgaged

property, the lessor is given the right to such

percentage of the unearned increase in value as will

be decided by the lessor.

115. Moving on to the transfer of the plot having

regard to the purpose of the lease it is as follows:-

The lease contemplates the lessee is to put up

construction of group housing. The lessee is entitled

to allot the dwelling units on sub-lease basis to its

allottee and shall provide space for facilities which

are indicated which include roads, parks, etc. It is

further indicated that however transfer/ sub lease

shall be governed by the transfer policy of the

lessor. No doubt, restrictions are put in regard to

how allotment can be made. Allotments can be made

only to citizens of India competent to contract. This

means that if the law permits (Barring citizens of

certain countries, the law does permit citizens of

other countries to acquire property in India) the

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allotment of what is constructed by the lessee by way

of group housing to persons who are not citizens and

make profits on such transfer, this clause indeed

impacts such right and also takes away the profits

which it could make thereunder. The lease further

indicates that there will be no permission to part

transfer of plot. In this regard, it must be noticed

that what is permitted under the lease is the

creation of a sub-lease of the dwelling units to the

allottee. No doubt there would be a sub-lease over

the plot as well. The lease goes on to state that

the lessee shall not be entitled to complete

transaction for sale, transfer, assign or otherwise

part with the possession of whole or part of any of

the buildings constructed thereon, before making

payment in terms of the schedule under the lease.

Though it is described as sale, transfer, assignment

or otherwise as all of it relates to the building

which is constructed on the underlying leased

property. We must not lose sight of the fact that

the subject matter of the lease is the plot described

as plot no. GH-05/B Sec.137, Noida consisting of

133

22565.77 square metres. What is essentially and in

reality permitted apparently is the creation of only

the sub-lease. Undoubtedly by the lessee the transfer

of the built-up area is permitted subject to payment

of transfer charges in terms of the policy. The

lessor is given an absolute right to reject any

application for transfer. The lessee is to pay the

transfer charges in terms of the policy which is

determined. The transfer of the built-up flats is to

be premised on a tripartite sub lease. The terms of

such a sub-lease will be dictated to by the lessor.

The sub-lease interchangeably is described as sale by

the lease. The sale in turn is to be captured in the

terms of a sub-lease for it is clear that the lessee

is obliged to execute a sub-lease. We have referred

to the lease and the terms of a sample sub lease.

The sub lessee also can use the premises only for

residential purposes. In this case it must be noticed

that being a part of the fulfilment of its goal under

the act to transfer plots for residential purposes

inter alia and the lease in question being one for

developing group housing, the lessee can transfer the

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built-up flats only for residential purposes. The

argument of the appellant is that being a necessary

corollary of the lease being one to effectuate the

appellants duty and being a reasonable restriction,

it is undoubtedly the duty of the appellant in the

context of the purpose that a regulatory and the

restrictive mechanism in question is put in place. As

to whether there is a substantial transfer of all the

rewards incidental to ownership as an owner or

whether the lessee would stand in the shoes of a

person resembling an owner is another matter. Were

the lessee to enjoy the right as owner, there would

be liberty to transfer the premises subject to the

law of the land for any purpose. Being limited to

only residential purpose indeed robs the lessee of

one of the cardinal rights of a person who can be

described as an owner. The lease, read as a whole,

contemplates the transfer to enjoy/use the leasehold

property for the period of 90 years for the purpose

limited to the construction of the residential

complex only. This is apart from all the concomitant

constraints and restrictions which have been put in

135

place to achieve the goal of the appellant in its

statutory role.

116. It is no doubt true that the appellants

correctly point out that the lessor does not purport

to seek any sharing of the consideration which may be

received by the lessee from the allottees. In that

sense ‘rewards’ are transferred. We have in this

regard noticed the qualifications and conditions such

as forbidding transfer to non-citizens and the

purpose for which the said property can be used. The

other aspects, which even limit the rights and

therefore, dampen the prospect of profit, have been

adverted to.

117. Though the rules under the Uttar Pradesh

Ownership of Flat Act, 1975 is referred to in the

lease as noticed by us earlier, the Uttar Pradesh

Apartments (Promotion of Construction, Ownership and

Maintenance) Act, 2010 (hereinafter referred to as

‘the UP 2010 Act’, for short) repealed the 1975 Act.

The UP Act 2010 came into force on 21.07.2010. The

lease deed, in this case, came to be executed on

30.07.2010. We notice that in the UP 2010 Act,

136

Section 2 provides that the Act applies to all

buildings having four or more apartments in any

building constructed or converted into apartment and

land attached to the apartment whether freehold or

held on lease excluding shopping malls and

multiplexes. Section 3 defines common areas and

facilities as including the land on which the

building is located and all easements, rights and

appurtenances belonging to the land and building.

Section 5(1) declares that every person to whom any

apartment is sold or otherwise transferred by the

promotor, shall, subject to the provisions of the

Act, be entitled to the exclusive ownership and

possession of the apartment so sold or otherwise

transferred to him. The person, who is entitled to

the exclusive ownership and possession of the

apartment, is also declared entitled to such

percentage of the undivided interest in the common

areas and facilities as may be specified in the deed

of apartment. The percentage is to have a permanent

character and cannot be altered except with a written

137

consent of all the apartment owners. Section 7 reads

as follows:

“Section 7 - Apartment to be heritable and

transferable

Each apartment, together with the undivided

interest in the common areas and facilities

appurtenant to such apartment, shall, for all

purposes constitute a heritable and

transferable immovable property within the

meaning of any law for the time being in

force, and accordingly, an apartment owner

may transfer his apartment and the percentage

of undivided interest in the common areas and

facilities appurtenant to such apartment by

way of sale, mortgage, lease, gift, exchange

or in any other manner whatsoever in the same

manner, to the same extent and subject to the

same rights, privileges, obligations,

liabilities investigations, legal

proceedings, remedies and to penalty,

forfeiture or punishment as any other

immovable property or make a bequest of the

same under the law applicable to the transfer

and succession of immovable property.

Provided that where the allotment, sale or

other transfer of any apartment has been made

by any group housing cooperative society or

association in favour of any member thereof,

the transferability of such apartment and all

other matters shall be regulated by the law,

which may provide a transfer fee at a maximum

rate of 2 percent but not less than 1 percent

in any case of the sale value, applicable to

such group housing cooperative society or

association whosoever maintains the common

areas and facilities. The transfer fee shall

no be leviable in case of heritability.”

138

118. The most crucial provision is Section 9. It

reads as follows:

“Section 9 - Right of re-entry

(1) Where any land is given on lease by a

person (hereafter in this section referred to

as the lessor) to another person (hereafter

in this section referred to as the lessee,

which term shall include a person in whose

favour a sublease of such land has been

granted), and any building has been

constructed on such land by the lessee or by

any other person authorised by him or

claiming through him, such lessee shall grant

in respect of the land as many subleases as

there are apartments in such building and

shall execute separate deeds of sub lease in

respect of such land in favour of each

apartment owner before handing over the

possession of apartment in such building to

him. The lessor shall be duty bound to supply

the plans and other legal documents to the

lessee. Provided that no sublease in respect

of any land shall be granted except on the

same terms and conditions on which the lease

in respect of the land has been granted by

the lessor and no additional terms and

conditions shall be imposed by the lessee

except with the previous approval of the

lessor.

(2) Where the lessee has any reason to

suspect that there had been any breach of the

terms and conditions of the sublease referred

to in subsection (1), he may himself inspect

the land on which the building containing the

concerned apartment has been constructed, or

may authorise one or more persons to inspect

such land and make a report as to whether

there had been any breach of the terms and

conditions of any sublease in respect of such

land and, if so, the nature and extent of

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such breach, and for this purpose, it shall

be lawful for the lessee or any person

authorised by him to enter into, and to be

in, the land in relation to which such breach

has been or is suspected to have been

committed.

(3) Where the lessee or any person

authorised by him makes an inspection of the

land referred to in subsection (1), he shall

record in writing his findings on such

inspection [a true copy of which shall be

furnished to the apartment owner by whom such

breach of the terms and conditions of

sublease in respect of the land appurtenant

to the apartment owned by him has been

committed (hereinafter referred to as the

defaulting apartment owner)] and where such

findings indicate that there had been any

breach of the terms and conditions of the

sublease in respect of such land, the lessee

may, by a notice in writing, require the

defaulting apartment owner to refrain from

committing any breach of the terms and

conditions of the sublease in respect of such

land, or to pay in lieu thereof such

composition fees as may be specified in the

notice in accordance with such scales of

composition fees as may be prescribed.

(4) The defaulting apartment owner who is

aggrieved by any notice served on him by the

lessee under subsection (3) may, within

thirty days from the date of service of such

notice, prefer an appeal to the Court of the

District Judge having jurisdiction

(hereinafter referred to as the District

Court), either challenging the finding of the

lessee or any person authorised by him or

disputing the amount of composition fees as

specified in the notice, and the District

Court may, after giving the parties a

reasonable opportunity of being heard,

confirm, alter or reverse those finding or

may confirm, reduce or increase the amount of

composition fees or set aside the notice.

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(5) Where, on the breach of any terms and

conditions of any sublease in respect of any

land, any composition fees become payable,

the defaulting apartment owner shall be

deemed to have been guilty of such breach and

in default of payment thereof it shall be

lawful for the lessee to recover the amount

of the composition fees from the defaulting

apartment owner as arrears of land revenue.

(6) Where any composition fees are paid

whether in pursuance of the notice served

under subsection (3) or in accordance with

the decision of the District Court or a

higher court on appeal, no further action

shall be taken by the lessee for the breach

of the terms and conditions of the sublease

in respect of the land in relation to which

payment of such composition fees has been

realised.

(7) If the defaulting apartment owner omits

or fails to refrain from committing any

breach of the terms and conditions of the

sublease in respect of the land or, as the

case may be, omits or fails to pay the

composition fees in lieu thereof-

(i) in accordance with the notice issued by

the lessee under subsection (3); or

(ii) where the finding of the lessee or the

person authorised to inspect the land about

any breach of the terms and conditions of any

sublease in respect of the land or the amount

of composition fees specified in the notice

issued by the lessee are altered by the

District Court on appeal or by any higher

court on further appeal, in accordance with

the decision of the District Court or such

higher court, as the case may be; the lessee

shall be entitled,-

(a) where no appeal has been preferred under

subsection (4), within sixty days from the

date of service of the notice under

subsection (3), or

(b) where an appeal has been preferred under

subsection (4), within sixty days from the

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date on which the appeal is finally disposed

of by the District Court or, where any

further appeal is preferred to a higher

court, by such higher court, to exercise the

right of reentry in respect of the undivided

interest of the lessee in the land

appurtenant to the apartment owned by the

defaulting apartment owner, and where such

right of reentry cannot be exercised except

by the ejectment of the defaulting apartment

owner from his apartment, such right of

reentry shall include a right to eject the

defaulting apartment owner from the concerned

apartment: Provided that no such ejectment

shall be made unless the defaulting apartment

owner has been paid by the lessee such amount

as compensation for such ejectment as may be

determined in accordance with the prescribed

scales of compensation.

(8) No appeal preferred under subsection (4)

shall be admitted, unless twentyfive per cent

of the composition fees specified in the

notice served on the defaulting apartment

owner has been deposited to the credit of the

District Court in savings bank account to be

opened by the District Court in any branch of

an approved bank:

Provided that the District Court may, on

sufficient cause being shown, either remit or

reduce the amount of such deposit, and the

interest accruing on such deposit, shall

ensure to the credit of defaulting apartment

owner by whom such deposit has been made:

Provided further that the amount of such

deposit together with the interest due

thereon shall be distributed by the District

Court in accordance with the decision in such

appeal, or where any further appeal has been

preferred against such decision, in

accordance with the decision in such further

appeal.

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(9) The defaulting apartment owner, who is

aggrieved by the amount offered to be paid to

him under the proviso to subsection (7) as

compensation for ejectment from his apartment

may, within thirty days from the date of such

offer, prefer an appeal to the District Court

and the District Court may, after giving the

parties a reasonable opportunity of being

heard, maintain, increase or reduce the

amount of compensation.

(10) On the ejectment of the defaulting

apartment owner from the apartment under

subsection (7), the lessee by whom such

ejectment has been made may make a fresh

allotment of the concerned apartment to any

other person on such terms and conditions as

he may think fit.

(11) Where any lessee omits or fails to take

any action either in accordance with the

provisions of subsection (2) or subsection

(3) or subsection (7) the lessor may, in the

first instance, require the lessee by a

notice in writing to take action against the

defaulting apartment owner under subsection

(2) or subsection (3) or, as the case may be,

under subsection (7), within a period of

ninety days from the date of service of such

notice, and in the event of the omission or

failure of the lessee to do so within such

period, the lessor may himself take action as

contained in subsection (2) or subsection (3)

or subsection (7), and the provisions of

subsection (4) to subsection (6) and

subsection (8) to subsection (10), shall, as

far as may apply to any action taken by him

as if such action had been taken by the

lessee.

(12) For the removal of doubts, it is hereby

declared that no work in any apartment by the

owner thereof shall be deemed to be a breach

of the terms of the sublease in respect of

the land on which the building containing

such apartment has been constructed unless

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the work is prohibited by subsection (2) of

section 6.”

(Emphasis supplied)

119. Section 5 contemplates a sale or transfer

otherwise of an apartment by the promoter. Then

subject to the other provisions of the Act, the buyer

or transferee becomes entitled to exclusive ownership

and possession. He becomes entitled to a percentage

of the undivided interest in the common areas.

Section 8 is a provision which conditions ownership

based on amounts remaining to be paid. Still further

Section 9 is another provision which conditions

Section 5.

120. The mere fact that Section 7 declares that each

apartment, together with the undivided interest in

common areas, is to be heritable and transferable,

would not amount to creating a freehold right over

the land, which is the subject matter of the sublease, in favour of the apartment owner, under

Section 9 of the UP Act of 2010. In other words, no

enlargement of the rights of the sub-lessee into that

of a freehold owner of the land is contemplated. The

mere fact that an undivided interest in the common

144

area, is created including the land (the definition

of ‘common area’ includes land) and is made heritable

and transferable, would only mean that the specific

right, which the sub-lessee (apartment owner) has

under the sub-lease executed within meaning of

Section 9, both over the land and the apartment, will

be heritable and transferable. In fact, Section 10 of

the UP Act of 2010 provides for a declaration to be

given by a promotor containing, inter alia, the

statement as to whether, land is freehold or

leasehold. No doubt, the effect of Section 7 of the

UP Act is that the proviso in Section 7 does

contemplate that in the case of any allotment, sale

or other transfer made by any group housing

cooperative society or association, the

transferability of the apartment and all other

matters, will be as regulated by the law and it may

include the transfer fee at the maximum rate of two

per cent. Section 7, no doubt, permits the apartment

owner the right to transfer the apartment with the

common area including the right in the land by way of

sale, mortgage, lease, gift, in the same manner and

145

to the same extent and subject to the same rights,

privileges, obligations and liabilities, inter alia,

under the law applicable to the transfer and

succession of an immovable property. Also since

Section 9 contemplates sub-lease over the land, there

cannot be claims of enlargement over the same vide

either Section 5 or Section 7. The case of sale if

it relates to land in the balance sheet projected by

the appellant represented by Ms. Madhavi Divan cannot

but be rejected.

121. We have noticed that the lessee has no power to

cancel the lease. However, cancellation of lease deed

under various contingencies is permitted to the

lessor. They include allotment obtained through

misrepresentation/ suppression of material facts

inter alia violation of directions issued or rules

and the regulations framed by the lessee or any other

statutory authority, default on the part of the

lessee on the terms and conditions of registration/

allotment lease. The provisions provide for the

extent to which the premium can be forfeited in the

event of cancellation among the other clauses. This

146

is apart from the earlier reference to the power to

cancel in specified contingencies. It is relevant to

notice that the lessor is clothed with an absolute

power to make additions/ alterations or modifications

in the terms of the lease deed inter alia apart from

the sub lease. One clause which we have already

noticed is Clause 13 falling in other clauses. It

empowers the lessor to take back possession of the

land/ building. The only limitation is that larger

public interest must justify such taking back of the

possession. It also must be attended/ accompanied by

the lessor becoming liable to only make the payment

at what is described as the ‘prevailing rate.’ It is

clear that it is incompatible with the lessee

enjoying rights/rewards incidental to ownership. The

only requirement then being what the lessor perceives

as larger public interest, the overriding power

constitutes a shadow over the rights of the lessee

which is clearly incompatible with the rights and

therefore even rewards which would follow the normal

exercise of rights as an owner. The right to

possession and the rewards associated with it can be

147

extinguished upon the lessor invoking the said power.

Therefore, we would find on the whole that the

appellant is not the financial lessor under section

5(8)(d) of the IBC. No doubt we would observe that

we have arrived at the findings based on the

prevailing statutory regime. Needless to say there

is always power to amend the provisions which

essentially consist of the Indian Accounting

Standards in the absence of any rules prescribed

under Section 5(8)(d) of the IBC by the Central

Government.

THE CASE UNDER SECTION 5(8)(f)

122. Section 5(8) defines ‘financial debt’ as meaning

‘a debt along with interest, if any, which is

disbursed against the consideration of time value of

money’. Thereafter, Clauses (a) to (i) deal with

transactions which are included as financial debt. It

is, thereafter, that Clause (f) provides that a

financial debt includes any amount raised under any

other transaction, including any forward sale or

purchase agreement, having the commercial effect of a

148

borrowing. To further simplify the concept, in

Section 5(8)(f), we may eclipse the words ‘includes

any forward sale or purchase agreement’, and then,

the provision would read as ‘any amount raised any

other transaction having commercial effect of a

borrowing’. The word ‘transaction’ has been defined

in Section 2(33) to include ‘an agreement or

arrangement in writing for the transfer of an asset,

or funds, goods or services from or to the corporate

debtor. At this very juncture, we may notice that

‘operational debt’ has been defined in Section 5(21),

which means ‘a claim in respect of provision of goods

or services including employment’. Operational debt

also means a debt in respect of payment of dues

arising under any law for the time being in force and

payable to any Local Authority, inter alia.

‘Operational creditor’ is defined in Section 2(20) as

meaning ‘a person to whom operational debt is owed

and includes any person to whom such debt has been

legally assigned or transferred’.

123. ‘Transaction’, as defined in Section 3(33),

would, undoubtedly, include an agreement or

149

arrangement in writing or the transfer of funds. The

transfer of funds may take place from a corporate

debtor. A transfer can also take place when there is

transfer of funds to the debtor. A transfer may

include a transfer of assets in writing again from or

to the corporate debtor. The definition of the word

‘debt’ in Section 3(11) is intertwined with the

definition of the word ‘claim’ in Section 3(6). The

impact of these provisions has been considered by

this Court in Pioneer Urban Land and Infrastructure

Limited and Another v. Union of India and Others10. It

may be profitable to advert to the same.

“68. Thus, in order to be a “debt”, there

ought to be a liability or obligation in

respect of a “claim” which is due from any

person. “Claim” then means either a right to

payment or a right to payment arising out of

breach of contract, and this claim can be

made whether or not such right to payment is

reduced to judgment. Then comes “default”,

which in turn refers to non-payment of debt

when whole or any part of the debt has become

due and payable and is not paid by the

corporate debtor. The learned counsel for the

petitioners relied upon the judgment in Union

of India v. Raman Iron Foundry [Union of

India v. Raman Iron Foundry, (1974) 2 SCC

10 (2019) 8 SCC 416

150

231], and, in particular relied strongly upon

the sentence reading: (SCC p. 243, para 11)

“11. … Now the law is well settled that a

claim for unliquidated damages does not give

rise to a debt until the liability is

adjudicated and damages assessed by a decree

or order of a court or other adjudicatory

authority.”

69. It is precisely to do away with judgments

such as Raman Iron Foundry [Union of

India v. Raman Iron Foundry, (1974) 2 SCC

231] that “claim” is defined to mean a right

to payment or a right to remedy for breach of

contract whether or not such right is reduced

to judgment. What is clear, therefore, is

that a debt is a liability or obligation in

respect of a right to payment, even if it

arises out of breach of contract, which is

due from any person, notwithstanding that

there is no adjudication of the said breach,

followed by a judgment or decree or order.

The expression “payment” is again an

expression which is elastic enough to include

“recompense”, and includes repayment. For

this purpose, see H.P. Housing & Urban

Development Authority v. Ranjit Singh

Rana [H.P. Housing & Urban Development

Authority v. Ranjit Singh Rana, (2012) 4 SCC

505 : (2012) 2 SCC (Civ) 639] (at paras 13

and 14 therein), where Webster's

Comprehensive Dictionary (International

Edn.), Vol. 2 and Law Lexicon by P. Ramanatha

Aiyar (2nd Edn., Reprint) are quoted.”

151

124. The question, which fell for consideration in

Pioneer (supra) was whether a homebuyer, who made

advances to the real estate developer, utilising

which, the real estate developer puts up the project

and what the homebuyer got in return or was expected

to get in return was a developed flat or an

apartment, would be covered as a financial creditor.

It would be apposite to refer to the following

observations:

“75. And now to the precise language of

Section 5(8)(f). First and foremost, the subclause does appear to be a residuary

provision which is “catch all” in nature.

This is clear from the words “any amount” and

“any other transaction” which means that

amounts that are “raised” under

“transactions” not covered by any of the

other clauses, would amount to a financial

debt if they had the commercial effect of a

borrowing. The expression “transaction” is

defined by Section 3(33) of the Code as

follows:

3. (33) “transaction” includes an agreement

or arrangement in writing for the transfer of

assets, or funds, goods or services, from or

to the corporate debtor;

As correctly argued by the learned Additional

Solicitor General, the expression “any other

transaction” would include an arrangement in

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writing for the transfer of funds to the

corporate debtor and would thus clearly

include the kind of financing arrangement by

allottees to real estate developers when they

pay instalments at various stages of

construction, so that they themselves then

fund the project either partially or

completely.

76. Sub-clause (f) Section 5(8) thus read

would subsume within it amounts raised under

transactions which are not necessarily loan

transactions, so long as they have the

commercial effect of a borrowing. We were

referred to Collins English Dictionary &

Thesaurus (2nd Edn., 2000) for the meaning of

the expression “borrow” and the meaning of

the expression “commercial”. They are set out

hereinbelow:

“borrow.—vb 1. to obtain or receive

(something, such as money) on loan for

temporary use, intending to give it, or

something equivalent back to the lender. 2.

to adopt (ideas, words, etc.) from another

source; appropriate. 3. Not standard. to

lend. 4. (intr) Golf. To putt the ball uphill

of the direct path to the hole: make sure you

borrow enough.”

***

“commercial.—adj. 1. of or engaged in

commerce. 2. sponsored or paid for by an

advertiser: commercial television. 3. having

profit as the main aim: commercial music. 4.

(of chemicals, etc.) unrefined and produced

in bulk for use in industry. 5. a

commercially sponsored advertisement on radio

or television.””

153

125. In the said example, therefore, the homebuyer,

by providing amounts to the real estate developer,

was found to be entitled to be treated as a financial

creditor on the basis that the real estate developer

must be treated as having raised money under the

transaction in question. In other words, it was a

case of a transaction by reason of the fact that

there was transfer of funds to the corporate debtor.

The transfer of funds was in the form of the advance

payments and the installments payable by the

homebuyer under the agreement to the developer. Thus,

this Court concluded that it must be treated as a

case falling under Section 5(8)(f), even without the

aid of the Explanation added by an amendment, which

was challenged in the said case. The real estate

developer, in other words, raised amounts within the

meaning of Section 5(8)(f) under the transfer of

funds by the homebuyer to the developer and it was

found to possess a commercial effect. In this regard,

the discussion is as follows:

“77. A perusal of these definitions would

show that even though the petitioners may be

154

right in stating that a “borrowing” is a loan

of money for temporary use, they are not

necessarily right in stating that the

transaction must culminate in money being

given back to the lender. The expression

“borrow” is wide enough to include an advance

given by the homebuyers to a real estate

developer for “temporary use” i.e. for use in

the construction project so long as it is

intended by the agreement to give “something

equivalent” to money back to the homebuyers.

The “something equivalent” in these matters

is obviously the flat/apartment. Also of

importance is the expression “commercial

effect”. “Commercial” would generally involve

transactions having profit as their main aim.

Piecing the threads together, therefore, so

long as an amount is “raised” under a real

estate agreement, which is done with profit

as the main aim, such amount would be

subsumed within Section 5(8)(f) as the sale

agreement between developer and home buyer

would have the “commercial effect” of a

borrowing, in that, money is paid in advance

for temporary use so that a flat/apartment is

given back to the lender. Both parties have

“commercial” interests in the same—the real

estate developer seeking to make a profit on

the sale of the apartment, and the

flat/apartment purchaser profiting by the

sale of the apartment. Thus construed, there

can be no difficulty in stating that the

amounts raised from allottees under real

estate projects would, in fact, be subsumed

within Section 5(8)(f) even without adverting

to the Explanation introduced by the

Amendment Act.”

126. It is, therefore, the appellants case that if

the home buyer could be treated as covered under

Section 5(8)(f), and therefore, a financial creditor,

155

the appellant also should be treated as a financial

creditor under the lease. Instead of approaching a

bank or a financial institution, the lessee is

facilitated to pay the consideration for the lease in

the following manner:

The lessee would pay ten percent of the total

premium upfront. The balance of the premium is to

be paid in sixteen half-yearly installments with

interest falling due after the expiry of the

period of moratorium, which consisted of two

years from the date of the commencement of the

lease. During the moratorium, the lessee, would,

no doubt, have to pay the lease amount and the

interest which is not to be confused with the

premium. In other words, the lease contemplated

payment of the named sum of premium and also

lease rent. The rent could be paid on an annual

basis or it could be paid at one go as provided

in the agreement. There was, thus, amount raised

by the lessee in the manner in that, while no

amount was paid or disbursed in the conventional

sense by the appellant-lessor to the lessee, by

156

permitting the lessee under the lease to effect

the payments due from it under the lease after

the moratorium was over in a staggered manner,

viz., by payment of sixteen half-yearly

installments with interest, it had the effect of

raising of funds in the sense that it operated as

a tool for raising finance. The expression

‘raising funds’ employed in Section 5(8)(f), it

is the case of the appellant, must receive an

expansive interpretation. In the modern world

myriad manifestations not to be pigeonholed to

any set or finite number of transactions, may be

contemplated. The legislative intention is to

provide a catch-all or residuary provision. It is

emphasised, in this context, before us that the

Court must adopt a purposive interpretation. The

concept of a financial creditor is that of a

person who is not merely interested in recovery

of the money, which perhaps characterises an

operational creditor. The appellant, being an

Authority under the UPIAD Act, charged with the

duty of developing the land for various purposes,

157

including residential purposes, has a long-term

perspective and interest in the lease property

like a conventional financial creditor who would

do deep and due diligence and undertake careful

and elaborate study before entering into a

transaction. The appellant also has a binding

stake or interest in the transaction. What is

involved is public money. The land, which is

subject matter of the lease, came to vest with

the appellant on the strength of acquisition of

land after payment of huge amounts as

compensation. The said amount would represent the

cost of the land. It is such land, which is the

subject matter of the lease. When the appellants

have such an interest, as described earlier,

excluding the appellant from the decision-making

process itself by not including it in the

Committee of Creditors, is described as illegal

and a manifest absurdity.

127. Per contra, apart from pointing out that this

Court is being asked to overturn the concurrent

findings rendered by the NCLT and NCLAT, the

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prevarication in the stand of the appellant is

emphasised. Apart from the fact that originally

appellant claimed as operational creditor in Form B

and filed the Form-C later, declaring it as a

financial creditor, it is pointed out that the

appellant has attempted to shift its stand at

different stages. Initially, the stand was that

appellant fell under Section 5(8)(d) on the basis

that what was involved was a finance lease. Finding

itself unable to fulfil the requirement of being a

financial lessor before the NCLAT, the focus shifted

to Section 5(8)(f). Since, the case was initially set

up under Section 5(8)(d), the case of the appellant

involved reliance being placed on a specific

provision, and simultaneously, on a general

provision. In other words, resort to Section 5(8)(d)

would preclude invoking of Section 5(8)(f). It is

pointed out that there is no disbursement under the

lease deed. With reference to the Judgment of this

Court in Anuj Jain, Interim Resolution Professional

for Jaypee Infratech Limited v. Axis Bank Limited and

159

Others11, it is contended that there is no

disbursement by the appellant, an indispensable

element under the main provisions of Section 5(8)

without which the appellant could not rely upon

Section 5(8)(f). On facts, it is pointed out that the

treatment given to the appellant under the Resolution

Plan dated 30.10.2019, is better than that of a

financial creditor, i.e., forty-one percent of the

amount claimed.

128. In the context of the Explanation to Section

5(8)(f), inter alia, by which, homebuyers were

expressly brought within the scope of Section

5(8)(f), this Court in Pioneer (supra), inter alia,

laid down as follows:

“70. The definition of “financial debt” in

Section 5(8) then goes on to state that a

“debt” must be “disbursed” against the

consideration for time value of money.

“Disbursement” is defined in Black's Law

Dictionary (10th Edn.) to mean:

“1. The act of paying out money, commonly

from a fund or in settlement of a debt or

account payable. 2. The money so paid; an

11 (2020) 8 SCC 401

160

amount of money given for a particular

purpose.”

71. In the present context, it is clear that

the expression “disburse” would refer to the

payment of instalments by the allottee to the

real estate developer for the particular

purpose of funding the real estate project in

which the allottee is to be allotted a

flat/apartment. The expression “disbursed”

refers to money which has been paid against

consideration for the “time value of money”.

In short, the “disbursal” must be money and

must be against consideration for the “time

value of money”, meaning thereby, the fact

that such money is now no longer with the

lender, but is with the borrower, who then

utilises the money. Thus far, it is clear

that an allottee “disburses” money in the

form of advance payments made towards

construction of the real estate project. We

were shown the Dictionary of Banking

Terms (2nd Edn.) by Thomas P. Fitch in which

“time value for money” was defined thus:

“present value: today's value of a payment or

a stream of payment amount due and payable at

some specified future date, discounted by a

compound interest rate of DISCOUNT RATE. Also

called the time value of money. Today's value

of a stream of cash flows is worth less than

the sum of the cash flows to be received or

saved over time. Present value accounting is

widely used in DISCOUNTED CASH FLOW analysis.”

(Emphasis supplied)

That this is against consideration for the

time value of money is also clear as the

money that is “disbursed” is no longer with

161

the allottee, but, as has just been stated,

is with the real estate developer who is

legally obliged to give money's equivalent

back to the allottee, having used it in the

construction of the project, and being at a

discounted value so far as the allottee is

concerned (in the sense of the allottee

having to pay less by way of instalments than

he would if he were to pay for the ultimate

price of the flat/apartment).

72. Shri Krishnan Venugopal took us to ACT

Borrower's Guide to the LMA's Investment

Grade Agreements by Slaughter and May (5th

Edn., 2017). In this book “financial

indebtedness” is defined thus:

“Definition of Financial Indebtedness

(Investment Grade Agreements)

“Financial indebtedness” means any

indebtedness for or in respect of:

(a) moneys borrowed;

(b) any amount raised by acceptance under any

acceptance credit facility or dematerialised

equivalent;

purchase facility or the issue of bonds,

notes, debentures, loan stock or any similar

instrument;

(d) the amount of any liability in respect of

any lease or hire purchase contract which

would, in accordance with GAAP, be treated as

a balance sheet liability [(other than any

liability in respect of a lease or hire

purchase contract which would, in accordance

with GAAP in force [prior to 1-1-2019]/[prior

to []]/[] have been treated as an operating

lease)];

162

(e) receivables sold or discounted (other

than any receivables to the extent they are

sold on a non-recourse basis);

(f) any amount raised under any other

transaction (including any forward sale or

purchase agreement) of a type not referred to

in any other paragraph of this definition

having the commercial effect of a borrowing;

(g) any derivative transaction entered into

in connection with protection against or

benefit from fluctuation in any rate or price

[and, when calculating the value of any

derivative transaction, only the marked to

market value (or, if any actual amount is due

as a result of the termination or close-out

of that derivative transaction, that amount)

shall be taken into account];

(h) any counter-indemnity obligation in

respect of a guarantee, indemnity, bond,

standby or documentary letter of credit or

any other instrument issued by a bank or

financial institution; and

(i) the amount of any liability in respect of

any guarantee or indemnity for any of the

items referred to in Paras (a) to (h) above.”

73. When compared with Section 5(8), it is

clear that Section 5(8) seems to owe its

genesis to the definition of “financial

indebtedness” that is contained for the

purposes of investment grade agreements. Shri

Venugopal argued that even insofar as

derivative transactions are concerned, it is

clear that money alone is given against

consideration for time value of money and a

transaction which is a pure sale agreement

between “borrowers” and “lender” cannot

possibly be said to fit within any of the

163

categories mentioned in Section 5(8). He

relied strongly on the passage in Slaughter

and May's book which is extracted

hereinbelow:

“Any amount raised having the “commercial

effect of a borrowing”

A wide range of transactions can be caught by

Para (f), including for example forward

purchases and sales of currency and repo

agreements. Conditional and credit sale

arrangements could also be covered here as

could certain redeemable shares.

The precise scope of this limb can be

uncertain. Ideally, from the borrower's

perspective, if there are additional

categories of debt which should be included

in “financial indebtedness”, these should be

described specifically and this catch-all

paragraph, deleted. A few strong borrowers do

achieve that position. Most, however are

required to accept the “catch all” and will

therefore need to consider which of their

liabilities might be caught by it, and

whether specific exclusions might be

required.”

We have already referred to paragraphs 75 and

76 above and hence do not refer to it.

129. It is thereafter, while dealing with the impact

of the employment of the word ‘means’ followed by

certain words and finally followed by the word

‘includes’, be found in Section 5(8), this Court in

Pioneer (supra), inter alia, held as follows:

164

“82. This statement of the law, as can be

seen from the quotation hereinabove, is

without citation of any authority. In fact,

in Jagir Singh v. State of Bihar [Jagir

Singh v. State of Bihar, (1976) 2 SCC 942 :

1976 SCC (Tax) 204] , SCC paras 11 and 19 to

21 and Mahalakshmi Oil Mills v. State of

A.P. [Mahalakshmi Oil Mills v. State of A.P.,

(1989) 1 SCC 164 : 1989 SCC (Tax) 56] , SCC

paras 8 and 11 (which has been cited in P.

Kasilingam [P. Kasilingam v. PSG College of

Technology, 1995 Supp (2) SCC 348] ), this

Court set out definition sections where the

expression “means” was followed by some

words, after which came the expression “and

includes” followed by other words, just as

in Krishi Utpadan Mandi Samiti case [Krishi

Utpadan Mandi Samiti v. Shankar Industries,

1993 Supp (3) SCC 361 (2)] . In two other

recent judgments, Bharat Coop. Bank (Mumbai)

Ltd. v. Employees Union [Bharat Coop. Bank

(Mumbai) Ltd. v. Employees Union, (2007) 4

SCC 685 : (2007) 2 SCC (L&S) 82] , SCC paras

12 and 23 and State of W.B. v. Associated

Contractors [State of W.B. v. Associated

Contractors, (2015) 1 SCC 32 : (2015) 1 SCC

(Civ) 1] , SCC para 14, this Court has held

that wherever the expression “means” is

followed by the expression “and includes”

whether with or without additional words

separating “means” from “includes”, these

expressions indicate that the definition

provision is exhaustive as a matter of

statutory interpretation. It has also been

held that the expression “and includes” is an

expression which extends the definition

contained in words which follow the

expression “means”. From this discussion, two

things follow. Krishi Utpadan Mandi

Samiti [Krishi Utpadan Mandi

Samiti v. Shankar Industries, 1993 Supp (3)

SCC 361 (2)] cannot be said to be good law

insofar as its exposition on “means” and

“includes” is concerned, as it ignores

165

earlier precedents of larger and coordinate

Benches and is out of sync with later

decisions on the same point. Equally, Dr

Singhvi's argument that clauses (a) to (i) of

Section 5(8) of the Code must all necessarily

reflect the fact that a financial debt can

only be a debt which is disbursed against the

consideration for the time value of money,

and which permeates clauses (a) to (i),

cannot be accepted as a matter of statutory

interpretation, as the expression “and

includes” speaks of subject-matters which may

not necessarily be reflected in the main part

of the definition.”

130. It is, therefore, the case of the appellant that

it is not the law that in order that a creditor is

found entitled to be treated as a financial creditor

under any of the inclusionary clauses, he must also

satisfy the requirements in the main provision. In

other words, the concept of disbursement of the debt

to be found in Section 5(8), is not to be rigorously

insisted upon in appreciating the scope of Section

5(8)(f).

131. The stand of the respondents, on the other hand,

is the decision of this Court in Anuj Jain, Interim

Resolution Professional for Jaypee Infratech Limited

v. Axis Bank Limited and Others12, wherein a Bench of

12 (2020) 8 SCC 401

166

two learned Judges of this Court, inter alia, held as

follows:

“46. Applying the aforementioned fundamental

principles to the definition occurring in

Section 5(8) of the Code, we have not an iota

of doubt that for a debt to become “financial

debt” for the purpose of Part II of the Code,

the basic elements are that it ought to be a

disbursal against the consideration for time

value of money. It may include any of the

methods for raising money or incurring

liability by the modes prescribed in clauses

(a) to (f) of Section 5(8); it may also

include any derivative transaction or

counter-indemnity obligation as per clauses

(g) and (h) of Section 5(8); and it may also

be the amount of any liability in respect of

any of the guarantee or indemnity for any of

the items referred to in clauses (a) to (h).

The requirement of existence of a debt, which

is disbursed against the consideration for

the time value of money, in our view, remains

an essential part even in respect of any of

the transactions/dealings stated in clauses

(a) to (i) of Section 5(8), even if it is not

necessarily stated therein. In any case, the

definition, by its very frame, cannot be read

so expansive, rather infinitely wide, that

the root requirements of “disbursement”

against “the consideration for the time value

of money” could be forsaken in the manner

that any transaction could stand alone to

become a financial debt. In other words, any

of the transactions stated in the said

clauses (a) to (i) of Section 5(8) would be

falling within the ambit of “financial debt”

only if it carries the essential elements

stated in the principal clause or at least

has the features which could be traced to

such essential elements in the principal

clause. In yet other words, the essential

167

element of disbursal, and that too against

the consideration for time value of money,

needs to be found in the genesis of any debt

before it may be treated as “financial debt”

within the meaning of Section 5(8) of the

Code. This debt may be of any nature but a

part of it is always required to be carrying,

or corresponding to, or at least having some

traces of disbursal against consideration for

the time value of money.”

132. Under Section 5(8)(f), the words used, inter

alia, are ‘any amount raised under any other

transaction’. In our quest for similar words, namely,

any amount raised, we discover that similar words are

used namely ‘any amount raised’ specifically in

clauses 5(8)(b) and 5(8)(c). We may notice that, in

fact, Section 5(8)(a) specifically deals with money

borrowed against the payment of interest. We have

already found that under the main provision an

interest free loan has been held by this Court to

entitle the unpaid creditor to describe himself as a

financial creditor. The words ‘any amount raised

pursuing to any note purchase facility or issue of

bonds, notes, debentures, loans stocks’ are followed

by the words or by any similar instrument. Since,

Part II of the IBC deals with resolution and

168

liquidation for corporate persons and the definition

of financial debt is found in Section 5(8) falling

under Part II, we may bear in mind that Section 3(8)

defines corporate debtor as a corporate person who

owes a debt to any person. The word corporate person

has in turn been defined under Section 3(7) as a

company under the Companies Act as defined in Section

2(20) of the Companies Act, 2013, a limited liability

partnership as defined in the Limited Liability

Partnership Act, 2008 or any other person

incorporated with limited liability but under any law

for the time being in force but will not include any

financial service provider. In fact, a perusal of

Part III of IBC which deals with Insolvency

Resolution for individuals and partnership firms will

show that it does not contain the concept of

financial debt as indicated in Section 5(8). Section

5(8)(c) comprehensively refers to raising of any

amount based on note purchase facility, issue of

bonds, notes, debentures, loan stock or any similar

instrument. Thus, what is contemplated is ordinarily

the corporate debtor raises funds by issuing bonds,

169

notes, debentures or loan stock which are well known

instruments usually used by corporate bodies to

generate funds for its needs. These instruments are

ordinarily transferable. It is after enumeration of

such instruments specifically that the words ‘similar

instrument’ are employed. The expression ‘similar

instrument’ came to be considered by this Court in

the decision reported in State of Orissa v. State of

A.P.

13. Therein the question related to the

jurisdiction of the Supreme Court under Article 131

of the Constitution. The proviso to Article 131

operates to oust the jurisdiction of this Court. It

reads as follows:

“Provided that the said jurisdiction shall not

extend to a dispute arising out of any treaty,

agreement, covenant, engagement, sanad or

other similar instrument which, having been

entered into or executed before the

commencement of this Constitution, continues

in operation after such commencement, or which

provides that the said jurisdiction shall not

extend to such a dispute.”

(Emphasis supplied)

In the context of the said provision, we notice the

following discussion.

13 (2006) 9 SCC 591

170

“15. The word “or” indicates that the

succeeding phrase “other similar instrument”

is to be read disjunctively. At the same time

the word “similar” means that the instrument

must be of the same nature as those

preceding. An instrument, to fall within this

phrase would, in the context, have to be a

formal writing by which a right or liability,

is or purports to be, created, transferred,

limited, extended, extinguished, or recorded.

Thus a document acknowledging title in a

third person has been held to be an

instrument in Biswambhar Singh v. State of

Orissa [1954 SCR 842 : AIR 1954 SC 139] .”

(Emphasis supplied)

133. We need not further explore the scope of the

said clause 5(8)(c) except to notice that the word

similar instrument would indicate instruments similar

to the instruments which are specifically enumerated.

It is unnecessary for us to expound the different

types of instruments which answer the description of

similar instruments and we need only notice that the

golden thread that runs through the specific

instruments is that they all contain an

acknowledgement of debt. They are debt instruments

ordinarily issued by corporate bodies. They also are

transferable in the market and the holder can indeed

bring an action on the same even if he is not the

person who has made the initial disbursement of funds

171

to the corporate debtor. A glance at another

immediate neighbour which is the immediate

predecessor of Section 5(8)(f), throws some light on

the mind of the Law-Giver. Section 5(8)(e) deals with

receivables sold or discounted other than any

receivable sold on non-recourse basis. It will be

noted that the receivables are treated as current

assets. Ordinarily, they represent the value of goods

or services for which the creditor can expect payment

within a short time, ordinarily, during the balance

period of the financial year. If it were mere

receivables, then it would rightly belong to the fold

of an operational debt as such debt includes a claim

in respect of the provision of goods or services

including employment. However, what legitimises its

presence as a financial debt is the sale or

assignment of the receivables or its discounting. In

other words, when amounts are due to the seller of

goods or services which represent receivables in his

accounts, should he need payment immediately, it is

open to such a creditor to assign the right to

recover the amount to a third party. The third party

172

can recover it from the debtor. He can also have

recourse from the assignor of the receivables. When

there is a non-recourse clause, it is taken outside

the category of financial debt. It is also after

providing explicitly for raising of funds under

clause (b) which deals with acceptance of or under

any acceptance credit facility and through the

issuance of various instruments and further providing

for a residuary clause through the medium of similar

instruments in Section 5(8)(c), seemingly exhaustive

transactions, and further including the category of

financial debt in section 5(8)(e) that the

legislature has thought it fit to provide for the

catch-all or residuary provision in section 5(8)(f).

In section 5(8)(g), the legislature has included any

derivative transaction entered into or in connection

with protection against or benefit from fluctuation

in any rate or price as also a financial debt.

Derivative transactions are essentially instruments

which involve the deriving of the value of the

instrument with respect to and in relation to an

underlying asset. It could be a commodity or a share

173

or any other asset having a value. Ordinarily

derivatives comprehend within its scope forward

contracts, futures, options and swaps and an instance

of a swap would be an interest rate swap (IRS). The

derivative market is a gigantic financial market.

They also share the quality of marketability not

unlike instruments which are specifically dealt with

in Section 5(8)(c). While on any derivative

transaction, a derivative transaction is ordinarily

intended to hedge risk. This means it is intended to

potentially protect the person from the ill-effects

of the fluctuation in the price or the rate of an

underlying asset. A resort is also made to

derivatives as a matter of speculation in which case

it partakes of a benefit. The words used in Section

5(8)(g) appear to suggest that the law giver has

contemplated any derivative transaction, in

connection with the protection of the benefit from

fluctuation in the rate or price. There appears to be

an intricate and complex web of transactions which

can take place under a derivative transaction. The

174

important aspect is, however, a debt in the context

of its mention as a financial debt.

134. While there may be again a brooding omnipresence

of a disbursement at some level as between the

parties very often in such transactions referred to

as counter parties, there may not be a disbursement.

It is clear that the law-giver has provided for

calculation purposes, the market value of the

transaction for determining the value of the

derivative transaction. We are making these

observations only to indicate that the device of the

definition of the clause which employs the word

‘means’, followed by certain elements, and

thereafter, ending with an inclusionary clause,

providing for various distinct categories would

indicate that for invoking the specified categories,

there may not be a need for the presence of all the

elements included in the main provision.

135. However, this is different from holding that the

conditions in section 5(8)(f) would stand fulfilled

even without a person falling within its four walls

by satisfying even the requirements indicated

175

therein. In other words, as we have indicated the

raising of any amount under any other transaction

having the commercial effect of a borrowing is

indispensable to apply Section 5(8)(f).

136. The contention of the appellant on the one hand

is that the terms of the lease under which as far as

it provides for a moratorium for two years after the

initial upfront payment and facility of payment of

the balance amount of the premium with interest and

spread over 16 half-yearly instalments, amounts to

raising funds by the lessee from the appellant and it

has the commercial effect of a borrowing from the

perspective of the lessee. This is to counter the

case of the respondents that having regard to its

position as a statutory authority and a public

authority under the UPIAD, the transaction does not

have the commercial effect of borrowing. In other

words, the case of the respondent is being

indispensable requirement under Section 5(8)(f) that

the amount raised under any other transaction

referred to must have a commercial effect of a

borrowing, it would bring in its train a profit

176

motive which is incompatible with the position of the

appellant as a public authority charged with the

sublime duty it claims of planned development of the

area. Shri Madhavi diwan would apparently point out

along with the learned solicitor general that from

the point of view of the lessee, there is a

commercial effect. She also submits that the

appellant has also charged interest.

137. We have already noticed the view expressed by

this Court in Pioneer (supra). The view propounded is

that the presence of profit as the main aim is

essential for the commercial effect of a borrowing.

This Court found that both the real estate developer

and the home buyer are actuated by profit motive as

underlying the transaction.

138. We are of the view that in the facts of the

appeals before us, we are unable to hold that the

lessee has raised any amounts from the appellant. The

question, therefore, of considering the last limb of

Section 5(8)(f), namely, whether it has commercial

effect of a borrowing could not arise. But we can

safely say that the obligation incurred by the lessee

177

to pay the rental and the premium cannot be treated

as an amount raised by the lessee from the appellant.

It may be noticed that it is reasonably possible to

find that the lessee has raised this amount which it

had to pay to the appellant from some other sources.

The reliance on the concept of ‘a tool of raising

finance’ canvassed by the appellants would be

carrying things too far and to allow them to invoke

it carries with-it far-reaching implications and

bears dangerous portent for the purpose of Section

5(8)(f). We would think that the concept of

disbursement as present in the main provision appears

to be mandatory in Section 5(8)(f). The purport of

Section 5(8)(f) is to provide for an exhaustive

catch-all provision.

139. One of the contentions raised on behalf of the

respondent that, since the Law Giver has referred to

lease in Section 5(8)(d) of the IBC and defined

‘financial lease’, as limited only to finance lease

and capital lease, deemed, as such, under the Indian

Accounting Standards, no recourse can be made by the

appellants to Section 5(8)(f), which is a residuary

178

provision. On the other hand, the appellant, while

agreeing that all cases of financial or capital

lease, covered by Section 5(8)(d), cannot be

considered under Section 5(8)(f) contends that there

can be no embargo on the Court, considering whether,

in the lease in question, any amount is raised,

having the commercial effect of a borrowing. The case

of the respondent can be understood differently by

applying the principle that, when there is a special

provision, no light must be allowed to emanate from

the general provision. Another allied issue, which,

at this juncture, we must address is, whether the

words, ‘any amount raised under any other

transaction, in Section 5(8)(f), would involve

attributing the presence of a transaction on the

preceding provisions of Section 5(8). To put it

differently, the use of the word, ‘any other’, before

the word, ‘transaction’, would involve the

presumption that the preceding sub-clauses of Section

5(8), embodied specific transactions. Going by the

wide definition of the word ‘transaction’ in Section

2(33), we find that there is merit in the argument of

179

the appellant. Section 5(8)(a) to Section 5(8)(e)

proceed on the basis that there is a transaction, as

conceived by the Law Giver. As far as the contention

that, since the words, ‘lease or hire-purchase

contract’, is specifically confined to, what is

deemed as finance or capital lease, falling under the

Indian Accounting Standards, and, therefore, any

liability under such a lease, is not falling under

Section 5(8)(f).

140. It is, no doubt, true that in Section 2(33), a

transaction can be an arrangement in writing, under

which, there is transfer of assets, funds, goods and

services, from or to the corporate debtor. A perusal

of the terms of lease contemplate that the appellant

must not make available financial facility to the

lessee. The appellant has, admittedly, not made

available any loan to the lessee. No advance payment

is made by the appellant. It is for the lessee to

fund the project and make the payment from its own

sources. It is entirely for the lessee to finance the

payment of the rent, premium and interest due to the

appellant under the lease. The claim of the

180

appellant, it must be noticed, is for the amount due

by way of premium and interest, besides the lease

amount due as on the date of the claim. As far as

these amounts are concerned, they are not amounts,

which have been raised by the lessee from the

appellant. They would have been either from its own

sources or by availing financial facilities from

others. It is vital to notice that as far as the

amount saved by the corporate debtor, to pay the

amounts to the appellant, there would be a financial

debt incurred by the lessor to its lender. The

acceptance of the appellants argument would involve

that for the said amount the possibility of two

financial creditors being present. This is

unacceptable. In fact, the provision relating to

limited power of mortgaging, available to the lessee,

is for the purpose of financing the construction of

the flats over the leasehold property. While, under

the lease, the lessee may have incurred debt towards

third party, which may be a financial debt. We are of

the view that we would be placing a wholly strained

and unreasonable interpretation on Section 5(8)(f),

181

if we were to hold that lessee has raised funds from

the lessor (appellant) under the lease in question.

Merely granting a moratorium, followed by the

staggered payment in sixteen half-yearly installments

of the balance of premium, cannot possibly lead to

the conclusion that the respondent has raised the

funds, under the lease, from the appellant.

141. We may notice that what Section 5(8)(d) of the

IBC provides for is, any liability in respect of any

lease, inter alia, which is, however, confined to a

finance or capital lease. We are not ruling out the

possibility that, in a lease, not a finance or a

capital lease, falling under Section 5(8)(d), if it

otherwise fulfils the requirements of Section

5(8)(f), it would not fall under the definition of

the word ‘financial debt’. In other words, Section

5(8)(d) includes only a finance or a capital lease,

which is deemed, as such, under the Indian Accounting

Standards. Section 5(8)(f) is a residuary and catch

all provision. A lease, which is not a finance or a

capital lease under Section 5(8)(d), may create a

financial debt within the meaning of Section 5(8)(f),

182

if, on its terms, the Court concludes that it is a

transaction, under which, any amount is raised,

having the commercial effect of the borrowing. All

that we are finding, in the facts of this case, is

that the lease in question does not fall within the

ambit of Section 5(8)(f). This is for the reason that

the lessee has not raised any amount from the

appellant under the lease, which is a transaction.

The raising of the amount, which, according to the

appellant, constitutes the financial debt, has not

taken place in the form of any flow of funds from the

appellant/lessor, in any manner, to the lessee. The

mere permission or facility of moratorium, followed

by staggered payment in easy installments, cannot

lead us to the conclusion that any amount has been

raised, under the lease, from the appellant, which is

the most important consideration.

WHETHER THE APPELLANT IS AN OPERATIONAL

CREDITOR?

142. As far as the case of the respondents that the

appellant is a Local Authority goes, the case of the

respondent was largely premised on the Judgment of

183

this Court in Union of India and Others v. R.C. Jain

and Others14. In short, the case of the respondent was

that the appellant is a Local Authority and the

rental and premium in question, claimed by the

appellant, constitutes amount due to the appellant

under a law, viz., the UPIAD, read with Section 40 of

the UP Act of 1973, made applicable to the UPIAD.

Upon this Court pointing out the decision of this

Court reported in New Okhla Industrial Development

Authority v. Chief Commissioner of Income Tax and

others15, wherein this Court has taken the view in the

case of the appellant itself, that it is not a Local

Authority. The parties would point out that the said

Judgment, may not apply, as it was rendered in the

context of the Income Tax Act. It is also pointed out

that Judgments, which have been rendered after R.C.

Jain (supra), which includes Housing Board of Haryana

v. Haryana Housing Board Employees’ Union and Others16

and Commissioner of Income Tax, Lucknow v. U.P.

14 (1981) 2 SCC 308

15 (2018) 9 SCC 351

16(1996) 1 SC 95

184

Forest Corporation17, are also distinguishable. It is

contended that of the five tests propounded in R.C.

Jain (supra), there is substantial fulfilment of the

same qua the appellant.

143. It was pointed out that under Section 3(r) of the

UP Act of 2010, a cognate law, the appellant is

treated as a Local Authority. It is also pointed out

that the appellant does provide civic amenities to

the local inhabitants and, for the purpose of the

IBC, it is, indeed, a Local Authority. It is also

pointed out that the appellant is treated as a Local

Authority under the Goods and Services Act. Prima

facie the decision in Noida (supra) may not detract

from the appellant being found to be a local

authority for the purpose at hand. No doubt, we do

notice that in the context of the proviso to Article

131 of the Constitution of India, this Court did

notice the distinction between the words ‘arising out

of’ and the words ‘arising under’ and held that the

words ‘arising under’ bears a narrower meaning (See

also the discussion of the meaning of the word

17(1998) 3 SCC 530

185

‘arises’ as meaning ‘coming into existence’, in a

Judgment of this Court by Justice Mukherji in Re:

Rogers Pyatt Shellac Co. v. The Secretary of State

for India in Council18, which stands approved in The

Commissioner of Income Tax, Bombay v. Ahmedbhai

Umarbhai and Co., Bombay19.

144. The appellant would, in fact, point out that it

is not necessary to probe the matter further, in view

of the concurrent findings that the appellant is an

operational creditor. No doubt, Smt. Madhavi Divan

does point out that the words ‘arising under any

law’, may not be the same as amounts being made

recoverable under a law. Of course, she would point

out that as far as the rental part of the claim, it

may be relatable to the first limb of an operational

debt. When questioned further, as to what her

position is, if this Court found that the appellant

is not a financial creditor, the appellant may be

entitled, at least, to be treated as an operational

creditor. We would think that, having regard to the

18 AIR 1925 Calcutta 34

19 AIR 1950 SC 134

186

fact that both the NCLT and NCLAT have proceeded on

the basis that the appellant is an operational

creditor, we need not stretch the exploration further

and pronounce on the questions, which may otherwise

arise. We must not be oblivious to the following

prospect, should we find that the appellant is not an

operational creditor, even under the IBC Regulations

apart from claims by financial creditors and

operational creditors, claims can be made by other

creditors. However, there are, undoubtedly, certain

advantages, which an operational creditor enjoys over

the other creditors. We would proceed on the basis

that, while the appellant is not a financial

creditor, it would constitute an operational

creditor.

145. The upshot of the above discussion is that the

appeals must fail. The appeals are, accordingly,

dismissed. Parties to bear their own costs.

……………………………………,J

(K.M. JOSEPH)

…………………………………,J.

NEW DELHI; (HRISHIKESH ROY)

MAY 17, 2022.

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