New Okhla Industrial Development Authority. vs Anand Sonbhadra on 16 April 2021

J U D G E M E N T

(16th April, 2021) A.I.S. Cheema, J. :

1. This Appeal has been field by the Appellant – New Okhla Industrial Development Authority (NOIDA - in short) against Respondent – Resolution Professional of Corporate Debtor – M/s. Shubhkamna Buildtech Pvt. Ltd. In the Corporate Insolvency Resolution Process (CIRP – in short) started against the Corporate Debtor, the Appellant a Statutory Authority filed Form ‘B’ as Operational Creditor for dues outstanding against lease of plot granted in favour of the Corporate Debtor which amount was of Rs.99,32,55,183. The Representative of the Appellant even attended COC (Committee of Creditors) as Operational Creditor. Later, the Appellant filed claim in Form ‘C’ seeking status of NOIDA as Financial Creditor. As there was no response by the Resolution Professional (RP – in short), the Appellant entered into correspondence and even moved Adjudicating Authority (National Company Law Tribunal, New Delhi) which passed Orders on 26.07.2019 and sent matter to the Resolution Professional but still when the Appellant was not treated as Financial Creditor, Application CA 257/ND/2019 was filed claiming that RP had disobeyed earlier directions and that Appellant deserved to be treated as Financial Creditor and should be permitted to participate in COC with voting rights.

2. The matter was taken up before the Adjudicating Authority and the Adjudicating Authority after hearing both sides held that the lease deed

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concerned was not a financial lease as per the terms laid down under the guidelines of “Indian Accounting Standards”. Thus, the present Appeal.

3. It is argued and the Appeal claims that the Adjudicating Authority did not record reasons for its findings and thus, the Order is bad in law. The Appeal claims that the Corporate Debtor had entered into a lease deed with the Appellant on 30th July, 2010 (Annexure A-2 – Page 57). According to the Appellant, it is a finance lease under the Indian Accounting Standards and thus, a financial debt under Section 5(8)(d) of Insolvency and Bankruptcy Code, 2016 (IBC – in short). It would be appropriate to reproduce the concerned portion of the definition. Section 5(8)(d) reads as under:- “(8) "financial debt" means a debt alongwith interest, if any, which is disbursed against the consideration for the time value of money and includes—

…………………

(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;”

4. The lease deed concerned is dated 30th July, 2010 (Annexure A-2 – Page 57). We will refer to the contents of the lease deed later. At present, it would be appropriate to reproduce relevant portions from “Indian Accounting Standards”, filed by the Appellant. The Appellant claimed that the copy of the Companies (Indian Accounting Standards) Amendment Rules, 2019 is enclosed as Annexure A-12. Annexure A-12 (Page – 136)

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states that these Rules may be called the Companies (Indian Accounting Standards) Amendment Rules, 2019. With regard to leases (which starts at Page – 146 of the Appeal Paper Book), the portions referred to, and relied on for the claim and defence are paragraphs – 61 to 67 which read as under:- “61 A lessor shall classify each of its leases as either an operating lease or a finance lease.

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.

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;

(c) the lease term is for the major part of 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

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(e) the underlying asset is of such a specialised nature that only the lessee can use it without major modifications.

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 equalling most of the sales proceeds at the end of the lease); and

(c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

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.

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

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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.”

5. In the above context, the Appeal claims and it is argued (Appeal para – 7.15) that the RP failed to consider that the lease is financial lease under Section 5(8)(d) of IBC. That, a financial lease under the Indian Accounting Standards is a lease which transfers substantially all the risks and rewards incidental to ownership. Appellant claims that under the lease deed dated 30.07.2010 (hereafter referred as lease deed), the risks and rewards pertaining to the use of allotted land are all incidental on Corporate Debtor because after payment of the lease deed according to the schedule provided, the permission to transfer ownership of flat (which were to be built) or to part with possession of whole or any part of the land would have been given to the Corporate Debtor. The Appellant claims that it is development authority and holds land in public trust and it is held in greater interest of the public at large. The transaction is clearly “money borrowed against payment of interest” or clearly has the “commercial effect of a borrowing” (Para – 7.17 of Appeal). The upfront premium has to be paid by 16 half yearly instalments starting from 11.09.2010 till 11th March, 2020. The Appeal gives breakup of the instalments. According to the Appellant, interest @ 11% per annum was to be paid on “outstanding balance of upfront lease premium” which was secured by creation of first charge in

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favour of the Appellant over the leased land. On this basis, it is claimed (in Appeal Para – 7.18) as under:- “Thus, even though no monies were directly disbursed by the Appellant to the Corporate Debtor, there was effectively, a deemed disbursement whereby the payment of upfront lease premium was financed by way of an inbuilt financial facility (availed from the Appellant itself), pursuant to which the Respondent was permitted to pay such upfront lease premium amount by way of instalments along with interest, representing time value of money for the Appellant. Therefore, the Lease Deed was a merger of a simpliciter lease transaction and a secured interest bearing financial ability. Thus, by virtue of the nature of the Lease Deed the debt payable by the Corporate Debtor to the Appellant, clearly constituted a ’Financial Debt” under Section 5(8)(a) of the Insolvency and Bankruptcy Code, 2016 (“Code”) being money borrowed against the payment of interest.”

6. It is claimed that under the Lease Deed, risks and rewards of ownership were transferred to the Corporate Debtor “if the dues are paid according to the schedule of payment in the Lease Deed”. For such reasons, the Appeal claims that the lease deed should have been treated as financial lease.

7. Referring to the definition of finance lease (para – 62 of Accounting Standards) (referred supra), Appellant claims that the lease deed put liability of maintenance and responsibility for misuse of the land allotted to the Corporate Debtor. The Corporate Debtor gained right to further transfer its interest “if the dues as per the lease deed are paid according to the schedule of payment” (Appeal Para – 9.3). The Appeal goes on to repeat that

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risks and rewards were incidental on the Corporate Debtor. The liability to pay tax and maintenance of land was also lying with the Corporate Debtor. The only liability of the Appellant was to ensure that the land is being used for the purpose mentioned in the lease deed. Para – 9.4 of the Appeal referred to the finance lease which requires that additional factor which leads to the classification of lease as financial lease under the Companies (Indian Accounting Standards) Amendment Rules, 2019 includes “the transfer of ownership of the asset to the lessee by the end of the lease term”. (However, the Appeal without referring to this aspect any further, states that the substance of the transaction determines the nature of the lease rather than the form of contract.) According to the Appellant, referring to para – 63 of the Indian Accounting Standards, (the Appeal claims that) the lease deed is financial lease as the Corporate Debtor has right to choose sub-lessee and dispose of the property allotted “in terms” of the lease deed. On such basis, it is argued that the Corporate Debtor was granted right of ownership over the land. Referring to the contents of the lease deed, the Appeal claims (para – 9.8) that there was effectively “deemed disbursement” whereby the payment of upfront lease premium was financed by way of an inbuilt financial facility availed from the Appellant, pursuant to which “Corporate Debtor was permitted to pay such upfront lease premium amount by way of instalments along with interest”. Thus, it is claimed that this represented value of money for the Appellant. It is argued and the Appeal refers to the portion in lease deed regarding transfer of plot and misuse, addition,

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subtraction, etc. to submit that the Appellant was “only exercising minor supervision over the land”.

8. On such basis, the learned Counsel for the Appellant has argued to submit that it was a financial lease under Section 5(8)(d). For such reasoning, the Appellant is also further arguing that the claim of the Appellant that it is financial debt, is not merely on the basis of Section 5(8)(d) but also on the basis that the transaction has “commercial effect of borrowing”, and so is covered under Section 5(8)(f).

9. Against this, the Respondent – Resolution Professional relies on the Reply filed to the Appeal (Diary No.16867) and referring to the contents of the lease deed as well as the Indian Accounting Standards, the Respondent has argued that it is not a financial debt and the Appellant initially correctly claimed itself to be only an Operational Creditor but later on, has been trying to bring the lease deed within the definition of financial lease which is not correct in law.

10. The parties were heard. Both the sides referring to the lease deed and the Indian Accounting Standards, have tried to show how the lease deed fits into the requirement under the Indian Accounting Standards or does not fit in the same. The parties were asked to file charts in support of the submissions they were making. We will reproduce the charts one below each other which will give birds eye view of the rival claims.

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11. The Appellant has filed the table with written submissions (Diary No.23977) as Annexure - 8 (Page - 14) which is as under:-

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12. The Respondent has filed the chart with Diary No.24099 which is as under:-

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13. Before discussing the Indian Accounting Standards and considering the arguments as submitted with regard to the requirements as can be seen from the respective charts, it would be appropriate to refer to Judgement in the matter of “Asea Brown Boveri Ltd. Versus Industrial Finance Corporation of India and Others” reported in (2004) 12 SCC 570 (SCC Online Web Edition) (copy is filed with Diary No.24100 by the Respondent). This matter of “Asea Brown” related to lease finance agreement dated 4th December, 1990 with Respondent No.3 of that matter, pursuant to which

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the Appellant took 56 cars under the lease finance from Respondent No.3 in that matter. Subsequently, Respondent No.3 became notified party under Section 3(2) of the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992 due to certain illegal transactions covering period between 1.4.1991 and 6.6.1992. The transaction dated 4th December, 1990 was not referable to the concerned period. The Central Government appointed Respondent No.1 of that matter under Section 3(1) of 1992 Act over properties belonging to Respondent No.3. The Appellant in that matter continued to make payments to Respondent No.1. Subsequently, Special Court refused to treat the transaction as one of lease finance and treated it only as lease. When the matter went to the Hon’ble Supreme Court of India, it was observed (in para -8 as under):- “Thus the Special Court has rigidly applied the rules of pleadings but a perusal of the order shows that there has been no effort to scrutinize and interpret the documents evidencing the transaction so as to determine the real nature thereof.”

14. The Hon’ble Supreme Court dealt with the issue as to what is a lease finance. Para – 13 to 17 of the Judgement of Hon’ble Supreme Court may be reproduced:- “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

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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)

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 long-term debt financing. In financial lease, the leasing company buys the equipment and leases it out to the use of a person known as the lessee. It is a full payout lease involving obligatory payment by the 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)

15. According to Lease Financing & Hire Purchase by Vinod Kothari (2nd Edn., 1986, at pp. 6 & 7), a finance lease, also called a capital lease, is nothing but a loan in disguise. It is only an exchange of money and does not result into creation of economic services other than that of intermediation. The learned author has quoted T.M. Clark, one of the most authentic writers on the subject who defines lease and operating lease in the undergoing words:

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"A financial lease is a contract involving payment over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit." *

*

* An operating lease is any other type of lease – that is to say, where the asset is not wholly amortised during the non-cancellable period, if any, of the lease and where the lessor does not rely for his profit on the rentals in the non- cancellable period."

16. The features of the financial lease, according to the learned author are as under:

"1. The asset is use-specific and is selected for the lessee specifically. Usually, the lessee is allowed to select it himself.

2. The risks and rewards incident to ownership are passed on to the lessee. The lessor only remains the legal owner of the asset.

3. Therefore, the lessee bears the risk of obsolescence.

4. The lessor is interested in his rentals and not in the asset. He must get his principal back along with interest. Therefore, the lease is non- cancellable by either party.

5. The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period.

6. The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation.

7. The lessor is typically a financial institution and cannot render specialized service in connection with the asset.

8. The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest."

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17. 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.”

In the above Judgement, we are not concerned with part where the Hon’ble Supreme Court referred to International Accounting Standards Committee. Rest of the Judgement is material. Under Section 5(8)(d), we are concerned with Indian Accounting Standards. With this in view, if para – 63 of the Indian Accounting Standards (referred supra) is perused, the present lease deed does not have any Clause of transfer of ownership of the underlying asset (which is land) (and not flats harped on by Appellant) to the lessee or flat buyers who would be sub-lessees at the end of the lease term. We are aware that under paragraph – 63, this is one of the factors but then it is an important factor when we read the Judgement of the Hon’ble Supreme Court in the matter of “Asea Brown” where Hon’ble Supreme Court referred to the issue as to what is a lease finance in the context of commercial transactions. Para – 61 of the Indian Accounting Standards,

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while dealing with classification of lease, states that the lessor shall classify each of its leases as either an operating lease or a fiancé lease. In the present matter, there is no such classification done by the lessor when the lease deed was executed. Of course, that would not be a deciding factor as, even if a document is stated to be a financial lease or an operating lease, it would be necessary to consider the contents to ascertain real nature of the transaction. Material is Para – 62 of Accounting Standards (referred supra) which states that a lease is classified as a finance lease “if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset.” Paragraphs – 63 and 64 records the factors or indicators which individually or in combination are required to be seen if it is a financial lease. The Respondent has in comparative chart filed, referred to various clauses to forcefully put on record that the present lease deed is not a finance lease. Even without referring to them when we keep in view the guiding factor if the lease transfers “substantially all the risks and rewards incidental to ownership”, we find that the present lease deed hopelessly fails in this regard. We have gone through the contents of the lease deed (Annexure A-2 – Page 57 to 87) (Page Nos.86 and 87 are a subsequent communication which is not part of the lease deed). The lease deed is heavily tilted in favour of the Appellant controlling almost all the aspects and while passing over the risks to the Corporate Debtor, keeps the rewards with Lessor, except the liberty to sell the flats which would be constructed.

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15. We proceed to refer to portions of the lease deed which would rather show that rewards incidental to ownership of the underlying asset which is land, were not transferred.

16. We will refer to page number of the lease deed (rather than page number of the Appeal) while referring to the contents of the lease deed with the Corporate Debtor. The Appellant put condition to the Corporate Debtor that the lessee will be allowed to transfer/sell upto 49% of its shareholding, subject to the condition that the original shareholder indicated (on the date of submission of the tender) shall continue to hold at least 51% of shareholding till the temporary Occupancy/Completion Certificate of at least one phase of the project is obtained from NOIDA”. (See Page – 3). The lease deed specifies that the same was being executed in consideration of total premium of Rs.46 Crores + and 10% i.e. Rs.4,61,46,999.65 has been paid by the lessee. Then there is chart of 20 dates between 11.09.2010 to 11.03.2020 relating to instalments and interest to be paid. There is provision of compounding interest in case of default. Page – 4 of the lease deed states that premium referred to in the document means total amount payable to the lessor for the allotted plot. At Page -5 of the lease, it is stated that in consideration of the “yearly lease rent hereby reserved”, the lessor hereby demise on lease to the lessee the plot concerned. Page – 5 shows that the demised premises is for a term of 90 years commencing from 30th July, 2010 reserving rights as mentioned in (a) & (b). The rights under or above the demised premises with regard to mains, drains, sewers or electrics are

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saved in favour of the Appellant. Clause (b) (Page – 6 of the Lease Deed) reads as under:- “b) The lessor reserves the right to all mine and minerals, claims, washing goods, earth oil, quarries, in 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 time 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.”

[Emphasis supplied]

17. The figure mentioned at Page – 3 as 10% of the amount paid towards premium is repeated at Page – 6 referring to the same amount as lease rent. It is stated Lessee has paid Rs.46,14,699.96 as lease rent being 1% of the plot premium for the first 10 years of lease period. Thus lease rent and premium are used interchangeably. There is one Clause (V) giving option to the lessee to pay lease rent equivalent to “11 years @ 1% of the premium of the plot per year as “One Time Lease Rent”” (which is a subject to) “unless the Lessor decides to withdraw this facility”. The Clause states that on payment of onetime lease rent, no further annual lease rent would be required to be paid for the balance lease period and that this option may be exercised at any time during lease period provided the lessee has paid the earlier lease rent due and lease rent already paid will not be considered in onetime lease rent option. Page – 7 shows that liabilities to pay all rates,

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taxes, charges, etc. assessed or imposed by the lessor or any Government Authority were that of the lessee. Relevant part (at Page -7 of Lease Deed) reads as under:- “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.”

Then the Clause goes on to state that the allottee/sub-lessee should be citizen of India and should be competent and that the husband wife and that dependent children would be considered single entity. Sub-Clause (iii) at Page – 7 and 8 reads as under:- “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

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transfer charges as per the policy prevailing at the time of such permission of transfer.”

18. Thus the lessee was entitled to sub-lease to the allottees in terms specified by the Appellant. Even the permission to transfer the part of the built up space was controlled with conditions as specified at Page – 8 of the lease deed where one of the conditions “e” reads as under:- “e) 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.”

Thus, it can be seen that even the sublease to be created by the lessee, the form and format was being prescribed by the Appellant.

19. Page – 9 of the lease deed shows that the Appellant laid down norms of development and Page – 10 shows into how many phases, the work should be completed was also specified. Under the head of construction (Page – 10 of the Lease Deed), Appellant specified as to the time to submit building plan, time within which the construction should start, requirement of getting Occupancy Certificate of first phase and also the project. Clause 3 and 4 (Page – 10 of the Lease Deed) referred to the right of the Appellant to cancel lease if the construction is not executed in time. Even the number of phases were fixed which were stated to be 5 phases to be completed in 7 years.

20. Page -11 of the Lease Deed refers to Mortgage. Even here, if the lessee was to mortgage the land to financial institutions/banks to raise loan,

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permission of the Appellant was necessary and priority of charge of the Appellant was kept. Page – 13 refers to misuse, additions, alterations, etc. with regard to the flats that the lessee shall not use flat for any purpose other than residential purpose and in case of violation of the above condition, the allotment shall be liable to be cancelled and possession of the premises along with structure thereon, if any, shall be resumed by the Appellant. There are further conditions put with regard to alterations or additions, etc. The liability to pay taxes, charges, etc. was put on lessor (Page – 14 of the Lease Deed). At Page – 14, there is Clause with regard to overriding power over Government properties with right to mines, minerals, etc. on or under the concerned plot, which is similar to the Clause noticed at Page – 6 of the lease deed. Thus, the Appellant reserved right to even remove the vertical support for the surface of the plots/flats and what should be the compensation, the right was reserved with the Appellant which is stated to be “final and binding on the lessee/sub-lessee”. Page – 15 of the Lease Deed states that in addition to 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 case of incidents as mentioned at the concerned page. Clause – 7 at Page – 17 of the Lease Deed reads as under:- “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.”

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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.

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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

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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.

25. The Appellant has argued that the Adjudicating Authority did not record reasons while rejecting the Application. When we were going through the Impugned Order, the Adjudicating Authority referred to the claims made by the Appellant on the basis of Indian Accounting Standards and the Lease Deed and the arguments of the RP. While going through the details recorded by the Adjudicating Authority, by the time when we reached the points of determination recorded by the Adjudicating Authority, it appeared to us that the Appellant was clearly not making out a case for itself. The Adjudicating Authority recorded in para – 18(b) of the Impugned Order that considering various terms of the types of financial lease versus operational lease, the Adjudicating Authority was finding that the lease deed is not a financial lease as per terms laid down under guidelines of Indian Accounting Standards. No doubt that Adjudicating Authority should have recorded further reasons. However, this by itself would not be a reason to interfere with the Impugned Order.

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26. In Appeal, the Appellant has alternatively tried to claim that the transaction had “a commercial effect of borrowing”. We have already referred (in above paragraph – 5 of the Judgement) to the contents of the Appeal in this regard. We do not find any substance in the effort of the Appellant to strain facts for us to accept that there is “a deemed disbursement” whereby the payment of upfront lease premium was financed by way of an inbuilt finance facility from the Appellant when it permitted the Respondent to pay premium in instalments. We do not think that by such artful use of words, the transaction can be converted into one of a financial debt.

27. Learned Counsel for the Appellant submitted that Section 5(8)(f) shows that it is not necessary that there should be disbursement of money to make the same of financial debt. According to the Appellant permitting payment of premium in instalments by the lessee should be treated as having commercial effect of borrowing. Reliance is placed on Judgement in the matter of “Pioneer Urban Land and Infrastructure Limited and Another Versus Union of India and Others” (2019) 8 SCC 416 – SCC OnLine SC 1005 where Section 5(8)(f) was discussed by the Hon’ble Supreme Court in paragraphs – 75 to 77.

28. Pursuant to a Report prepared by Insolvency Law Committee dated 26th March, 2018 “amendments were made which deem allottees of real estate projects to be Financial Creditors so that they may trigger the IBC under Section 7 against real estate developers”. In that context, various Writ Petitions were filed before the Hon’ble Supreme Court and the Hon’ble

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Supreme Court considered the constitutional validity of the amendments made. It was in that context that in para – 77, Hon’ble Supreme Court observed as under:- “77. A perusal of these definitions would show that even though the petitioners may be 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.”

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

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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.

31. We do not find any substance in the Appeal. The Appeal is dismissed. No Orders as to costs.

[Justice A.I.S. Cheema] Member (Judicial)

[Justice Anant Bijay Singh] Member (Judicial)

[Shreesha Merla] Member (Technical) rs