NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITY versus ANAND SONBHADRA

[2022] 5 S.C.R. 319

NEW OKHLA INDUSTRIAL DEVELOPMENT AUTHORITYv.

ANAND SONBHADRA

(Civil Appeal No. 2222 of 2021)

MAY 17, 2022

[K. M. JOSEPH AND HRISHIKESH ROY, JJ.]

Insolvency and Bankruptcy Code, 2016: ss. 21, 27, 28, 30 –Proceedings involving Corporate Debtor – Committee of Creditors– Importance and Procedure – In the idea of resurrecting an ailingcorporate debtor, the Code contemplates the formation of Committeeof Creditors as per s.21 – The Committee consists of financialcreditors as per s. 27 – The Committee is conferred with the duty toappoint Resolution Professionals – The Resolution Plan scrutinizedby such professionals then awaits the decision of the Committee asper s. 30 – It is fundamental aspect of the committee that it consistsof Financial Creditors and not operational Creditors – Therefore.the one seeking to exercise the powers of such Committee, must, atthe very first instance, establish the fact of being FinancialCreditors.

Insolvency and Bankruptcy Code, 2016: Financial Creditorsand Operational Creditors – Distinction with respect to Privileges– s.5(7) defines ‘financial creditor’ as person to whom financialdebt is due besides an assignee or transferee from such person –Financial Creditors constitutes the Committee of Creditors as perthe policy of IBC – Such policy does not includes OperationalCreditors in the aforesaid constitution of committee – HenceOperational creditors, unlike Financial Creditors, do not enjoy thepowers of the Committee – Apart from this aspect, the peculiar benefitof being Operational Creditor is that they enjoy priority overOperational Creditors in matters of payment of amount.

Insolvency and Bankruptcy Code, 2016 – s. 2(20) –Operational Creditor – person is operational creditor to whomthe operational debt (a debt in respect of dues arising under anylaw for the time being in force and payable to any local authority)is owed and includes any person to whom such debt has been legallyassigned or transferred.

AInsolvency and Bankruptcy Code, 2016: s. 5 (8) – FinancialDebt – When an amount could be termed as such – The policy oflaw under IBC requires “Disbursement” leading to debt alongwith interest – Interest, as such, is not necessary requirement of s.5(8), but the fact of disbursement from the creditor to the debtor isa necessity for looking debt as financial debt, as contemplated byBthe said section – Such Disbursement has to be understood in termsof money which has been paid by the creditor and debtor.

Insolvency and Bankruptcy Code, 2016: ss 5(8), 3(33) –Words ‘Transaction’ and ‘Disbursed’ – Distinguished – The word“transaction” includes transfer of assets, funds or goods andservices from or to the corporate debtors – But imposing such ameaning of the word “Transaction” as inclusive in the word“Disbursed” will lead to unnecessary straining of the provision –Interpretation of the term Disbursed, as occurring u/s.5(8), shouldmean the payment of money, which flows to the debtor.

Insolvency and Bankruptcy Code, 2016: ss 3(6), 5(8) – Words‘Claim’ and ‘Debt’ – Claim, as defined u/s.3(6), may or may not befixed, disputed or undisputed, secured or unsecured but it bears anindispensable element of “right to payment” – Claim cannot existsindependent of the element of “right to payment” – The source ofEsuch “right to payment” can be either under judgment or underany other circumstance – When claim is accompanied by liability itgives rise to debt – Debt, as defined under the Code includesfinancial as well as operational debt and the same appears to beintertwined with the definition of “claim” – Debt denotes liabilityFor obligation which relates to claim.Insolvency and Bankruptcy Code, 2016: s.5(8)(d) – IndianAccounting Standards – rr.61 to 67 – Financial Lease – Financiallease as such is not defined under IBC – s.5(8)(d) refers lease asinclusive of Financial lease as given under Indian AccountingGStandards – r.62 declares that lease is classified as financiallease if it transfers, substantially, all the risks and rewards incidentalto ownership of an underlying asset – As per r.63, what matters fora lease to be financial lease is its substance and not the form – Inthe instant case, the rights are transferred in favour of the alloteesonly by way of sub-lease, and therefore there is no transfer ofH

ownership of the underlying asset (plot) by the end of the leaseterms – Further the criteria u/r.63 that the lease will be financiallease even if the title is not transferred provided the lease term isfor the major part of economic life – In the instant case the “principleof economic life of underlying asset” is inapposite as here theunderlying asset is land and the economic life of the land is notlimited as the land does not depreciate with the passage of time – Inthe instant case, there is no substantial transfer of risks and rewardsincidental to ownership since the appellant (lessor) has reservedthe right of cancellation of lease in larger public interest andtherefore such appellant is not financial lessor u/s.5(8)(d) of IBC.

Lessee and sub-lease – Rights and Limitations – Lessee canassign his rights as lessee which amounts to assignment of hisrights and, therefore, can create sub-lease – But the creation ofsuch sub-lease has limitation and it must conform to the terms ofcontract between the lessor and lessee.

Lessee and his right to Mortgage – Extent and Limitation – Alease may enable the lessee to mortgaged the leased property – Butin cases where the mortgage by the lessee can be only with theprior permission of lessor, his rights are not absolute and isconditional upon the approval or denial by the lessor of thepermission to make such mortgage.

Insolvency and Bankruptcy Code, 2016: s.5(8)(f) –Interpretation – “Financial Debt includes any amount raised underany other transaction, including any forward sale or purchaseagreement, having the commercial effect of borrowing” – Scopeof – The phrase has relevance as the same is residuary in nature– For this phrase to apply so as to enable person for being termedas Financial Creditor, there has to be raising of funds in atransaction which has commercial effect – The first and foremostrule for making such phrase to apply there has to be “raising offunds” – The raising of funds can be by issuing bonds, notes,debentures or loan stock etc – In the instant case, the raising offunds was done by the lessee from the allottees and not by theappellants and hence the appellant is not entitled to the applicationof the said residuary provision and therefore he cannot avail thebenefit of being called “Financial Creditor”

322SUPREME COURT REPORTS

ADismissing the appeals, the Court

HELD: 1. It is undoubtedly true that in the scheme of theIBC, Section 21 of the IBC contemplates the constitution of theCommittee of Creditors. The Committee of Creditors is to consistof all financial creditors of the corporate debtor. It is theBCommittee of Creditors, which has power to appoint and replacethe Interim Resolution Professional as the ResolutionProfessional. Under Section 27 of the IBC, the Committee ofCreditors, which would consist of only the financial creditors,would have the right to replace Resolution Professional. UnderSection 28, the approval of the Committee of Creditors isCmandatory in respect of various powers which need to beexercised by the Resolution Professional. Central to the IBC,and what would, in fact, constitute its very soul, is the idea ofresurrecting an ailing corporate debtor. The means,contemplated, is the submission, consideration and approval ofDResolution Plans to be given by Resolution Applicants. Hereagain, Section 30 contemplates that the Resolution Plan is to beinitially scrutinised by the Resolution Professional, who is topresent the Resolution Plan, which conforms to Section 30(2), tothe Committee of Creditors. The Committee of Creditors mayapprove the Resolution Plan in the manner provided in SectionE30(4). Regulation 38 of the Insolvency Bankruptcy Board of India(Insolvency Resolution Process for Corporate Persons)Regulations, 2016, no doubt, provides for the mandatory contentsof the Resolution Plan, which may be approved. The Plan mustinclude the submission as to how the interests of stakeholders,Fincluding financial creditors and operational creditors, are to bedealt with. Regulation 38(1), inter alia in fact, contemplates thatthe Resolution Plan must provide that the amount payable to theoperational creditors shall be paid in priority over the financialcreditors. [Para 49][364-A-F]

G2. The essential requirements to attract Section 5(8) arethat there must be debt along with interest, if any, which isdisbursed against consideration for the time value of money.There can be no dispute that there is debt in this case. Eventhe respondents would contend that it is actually debt but an

operational debt under Section 5(21). That interest is payable inconnection with the debt, cannot be disputed, having regard tothe terms of the lease deed. It is another matter that liability topay interest is not an essential feature to attract Section 5(8).The next requirement is that there be disbursement.Disbursement is an indispensable requirement to constitute adebt, financial debt, within the meaning of Section 5(8) and thatdisbursement must be from the creditor to debtor. [Para 53][366-C-E]

Orator Marketing Private Limited v. Samtex DesinzPrivate Limited 2021 SCC Online SC 513 – relied on.

3. debt is liability or an obligation in respect of right topayment. Irrespective of whether there is adjudication of thebreach, if there is breach of contract, it may give rise to debt.In the context of Section 5(8), in Pioneer, disbursement has beenunderstood as money, which has been paid. In the context of thetransaction involved in the said case, the homebuyers advancedsums to the builder, who would then utilise the amount towardsthe construction in the real estate project. That there must be adisbursement, was clearly present in the mind of the Court, isclear from the fact that it has expressly proceeded on the basisthat when the money was paid by the homebuyer to the builder,the amount disbursed was no longer with the homebuyer. Thehomebuyer was paying lesser sums by way of installments thanhe would have to pay for the ultimate price of the flat/apartment.The Court went on to hold that the expression ‘borrow’ was wideenough to include the advance by the homebuyer to the real estatedeveloper for the temporary use. Both parties had commercialinterests, which was further found. But what is relevant is toattract Section 5(8), on its plain terms, is disbursement. While, itmay be true that the word ‘transaction’ includes transfer of assets,funds or goods and services from or to the corporate debtor, inthe context of the principal provisions of Section 5(8) of the IBC,to import the definition of ‘transaction’ in Section 3(33), involvingthe need to expand the word ‘disbursement’, to include promiseto pay money by debtor to the creditor, will be uncalled forstraining of the provisions. ‘Disbursement’, within the meaningof Section 5(8), is the payment of money, which flows to the debtor.

AIn the word ‘claim’, as defined in Section 3(6), right to paymentis one of the components. The golden thread that runs throughthe word ‘claim’, is the right to payment. The right to paymentmay arise from Judgement. It may or may not be fixed. It maybe disputed or undisputed. It may be legal or equitable. It maybe secured or unsecured, but what is indispensable is, there mustBbe right to payment. Similarly, in cases of breach of contract,under any law in force, if it gives rise to right to payment,irrespective of whether it is reduced to Judgment or fixed ormatured or unmatured, disputed or undisputed, secured orunsecured, as long as there is right to payment, claim arises.CWhen there is claim and, in regard to such claim, there is aliability or obligation, which is due from any person, it gives riseto debt. debt includes financial debt and an operational debt.It is after defining the word ‘debt’ with reference to the existenceof right to payment in the broadest terms, as defined in theterm ‘claim’ and including the word ‘financial debt’ within theDexpression ‘debt’, the word financial debt, in turn, is elaboratelydefined in Section 5(8). What is relevant for the purpose of Section5(8), has been clearly articulated and can be understood withreference to what is expressly provided. It is unnecessary to bringin the concept of transaction, as defined in Section 2(33), forEappreciating its scope. perusal of definition of the word ‘debt’,no doubt, reveals that it is closely intertwined with the definitionof the word ‘claim’ in Section 3(6). The word ‘transaction’ isconspicuous by its absence in the definition of both the word‘claim’ and the word ‘debt’. Therefore it is held that ‘debt’ meansa liability or obligation, which relates to claim. The claim orFright to payment or remedy for breach of contract occasioning aright to payment must be due from any person. Now, if it is duefrom any person, it must be due to someone who would then bethe creditor. Section 5(7) defines ‘financial creditor’ as person towhom financial debt is due besides an assignee or transfereeGfrom such person. While it may be true that there would be thebrooding omnipresence of transaction, as defined, underlying adebt and claim as defined, it would be unnecessary andunreasonable to import in the concept of transfer of funds, fromor to corporate debtor, to glean the meaning of disbursementin Section 5(8), at least, in the facts of the instant case. The CourtH

is of the view that, in the lease in question, there has been nodisbursement of any debt (loan) or any sums by the appellant tothe lessee. The appellant would, therefore, not be financialcreditor within the ambit of Section 5(8). [Para 56][367-H;368-A-H; 369-A-F]

Pioneer Urban Land and Infrastructure Limited andAnother v. Union of India (UOI) and Others (2019) 8SCC 416 : [2019] 10 SCR 381 – relied on.

4. The Rules, which are relevant in regard to thespecification of lease as financial lease are set down as Rules61 to 67 of Indian Accounting Standards [for short “IAS”]. Theyhave been made under Section 133 of the Companies Act, 2018.Rule 62, the sheet anchor of the appellant, declares that leaseis classified as financial lease if it transfers, substantially, all therisks and rewards incidental to ownership of an underlying asset.Moving on to Rule 63, it undoubtedly, declares that what mattersis not the form but the substance. Thereafter, under the examplesof situations, either individually or in combination, which wouldlead to lease being classified as finance lease, certainsituations have been depicted. As far as the first situation isconcerned, it would involve lease, where, there is transfer ofownership of an underlying asset to the lessee by the end of thelease term. There is no case for the appellants that the leasecontemplates transfer of ownership of the underlying asset. Theunderlying asset is the land.In fact, the case of the appellantwould appear to be also that there is no transfer of ownershipbecause by the end of lease term third party rights would havebeen created over the dwelling unit/ built up space/ plotconstructed by the Lessee. It is also the further case set up thatthe Lessee alone brings third parties on to the property and getspaid by such parties. It will be relevant to notice that the so calledthird parties do not get ownership rights as such. The rights aretransferred in favour of the allotees of dwelling units /built upspace/ plot only by way of sub-lease. Therefore, there is notransfer of the ownership of the underlying asset by the end ofthe lease term. The third criteria in Rule 63 is, where the leaseterm is for the major part of the economic life of the underlyingasset, even if the title is not transferred. The definition of

A‘economic life’, as provided in Indian Accounting Standards Thelease in question is for period of ninety years. In regard to land,the underlying asset, ‘the principle of economic life of underlyingasset’, is inapposite. The economic life of land is not limited. Theprinciple in the said situation is predicated with reference tomeasuring the economic life of an asset. More importantly, itBspeaks of the major part of the economic life of the asset. Boththese concepts are inapposite and even inapplicable with regardto land. Land does not depreciate with the passage of time.Ordinarily, the price of land would only increase, unlikeother assets. [Paras 62, 64, 68][373-F-G; 375-G-H; 376-A-D;C377-C-G]Asea Brown Boveri Ltd. v. Industrial FinanceCorporation of India and Others (2004) 12 SCC 570 :[2004] 5 Suppl. SCR 671 – relied on.

5. Undoubtedly, in law, generally the lessee can assign hisDrights as lessee which amounts to assignment of his right. Alessee may create sub- lease. lessee can also create amortgage. All of these rights vest with lessee, subject to acontract to the contrary. In the lease in question what is prohibitedin Clause 12 under other clauses is the right to assign his rightsEas lessee. Any reward which the lessee could have obtained if itwished to absolutely assign its right, is clearly denied by virtueof the provision in the lease which acts as contract to thecontrary. [Para 111][395-E-G]6. As far as the right to mortgage is concerned the lesseeFis indeed permitted to mortgage the land. However, the mortgagecan be effected only with prior permission of the lessor. The rightto mortgage which flows as an incident of ownership is one of thebundle of rights which vests with an owner. It is undoubtedly alesser right and the owner would be possessed of the residualright. However, it is one of the many rights which is incidental toGownership but there is no absolute right to create mortgage.The requirement of prior permission to create mortgage wouldmean that the permission may be forthcoming or it can be denied.If there is denial of the right to create mortgage, then it wouldimpliedly mean that to the said extent the right to raise funds forH

the purpose of financing the investment is impaired. Dependingon whether or not the right is permitted actually the rewardsincidental to ownership is transferred. The clause relating tomortgage, in fact, indicates that the purpose contemplated, isthat the mortgage can only be for the purpose of raising loan orfor 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 oron receipt of assurance of payment by the bank or under anyother suitable arrangement. In this regard, the lease contemplateda mutual settlement amongst the lessor, the developer and thefinancial institution/bank. It clearly constitutes foray into theright of person ‘if an owner’ to deal with the property includingthe right to create mortgage. The suitable arrangement in mutualsettlement contemplates the lessor giving its consent to the termsof the mortgage. It includes the right of the lessor to prevailupon, in regard to the terms of the mortgage. Its object may belofty and in keeping with its role as statutory authority but itsimpact on the true interpretation of the lease and as to whether itinvolves transfer of rewards incidental to ownership is anothermatter. The terms and conditions of the NOC which iscontemplated as necessary for mortgaging the land to facilitatehousing loans of final purchaser will be as decided by the lessor.Still further it may be noticed that under the proviso if there is asale or foreclosure of the mortgaged property, the lessor isgiven the right to such percentage of the unearned increase invalue as will be decided by the lessor. [Paras 113, 114][396-F-H;397-A-E]

7. Section 5(8) defines ‘financial debt’ as meaning ‘a debtalong with interest, if any, which is disbursed against theconsideration of time value of money’. Thereafter, Clauses (a) to(i) deal with transactions which are included as financial debt. Itis, thereafter, that Clause (f) provides that financial debt includesany amount raised under any other transaction, including anyforward sale or purchase agreement, having the commercial effectof borrowing. To further simplify the concept, in Section 5(8)(f),it would be appropriate to eclipse the words ‘includes any forwardsale or purchase agreement’, and then, the provision would readas ‘any amount raised any other transaction having commercialeffect of borrowing’. The word ‘transaction’ has been defined

ABC

Ain Section 2(33) to include ‘an agreement or arrangement inwriting for the transfer of an asset, or funds, goods or servicesfrom or to the corporate debtor. At this very juncture, it maynoticed that ‘operational debt’ has been defined in Section 5(21),which means ‘a claim in respect of provision of goods or servicesincluding employment’. Operational debt also means debt inBrespect of payment of dues arising under any law for the timebeing in force and payable to any Local Authority, inter alia.‘Operational creditor’ is defined in Section 2(20) as meaning ‘aperson to whom operational debt is owed and includes any personto whom such debt has been legally assigned or transferred’.CUnder Section 5(8)(f), the words used, inter alia, are ‘any amountraised under any other transaction’. In our quest for similar words,namely, any amount raised, it may be discovered that similar wordsare used namely ‘any amount raised’ specifically in clauses 5(8)(b)and 5(8)(c). It may noticed that, in fact, Section 5(8)(a) specificallydeals with money borrowed against the payment of interest. ItDhas already been found that under the main provision an interestfree loan has been held by this Court to entitle the unpaid creditorto describe himself as financial creditor. The words ‘any amountraised pursuing to any note purchase facility or issue of bonds,notes, debentures, loans stocks’ are followed by the words or byEany similar instrument. Since, Part II of the IBC deals withresolution and liquidation for corporate persons and the definitionof financial debt is found in Section 5(8) falling under Part II, itmay be born in mind that Section 3(8) defines corporate debtoras corporate person who owes debt to any person. The wordcorporate person has in turn been defined under Section 3(7) asFa company under the Companies Act as defined in Section 2(20)of the Companies Act, 2013, limited liability partnership asdefined in the Limited Liability Partnership Act, 2008 or any otherperson incorporated with limited liability but under any law forthe time being in force but will not include any financial serviceGprovider. In fact, perusal of Part III of IBC which deals withInsolvency Resolution for individuals and partnership firms willshow that it does not contain the concept of financial debt asindicated in Section 5(8). Section 5(8)(c) comprehensively refersto raising of any amount based on note purchase facility, issue ofbonds, notes, debentures, loan stock or any similar instrument.H

Thus, what is contemplated is ordinarily the corporate debtorraises funds by issuing bonds, notes, debentures or loan stockwhich are well known instruments usually used by corporatebodies to generate funds for its needs. These instruments areordinarily transferable. [Paras 122, 132][406-E-H; 417-E-H;418-A-C]

State of Orissa v. State of A.P. (2006) 9 SCC 591 –relied on.

8. In the present case it cannot be hold that the lessee hasraised any amounts from the appellant. The question, therefore,of considering the last limb of Section 5(8)(f), namely, whether ithas commercial effect of borrowing could not arise. But it canbe safely said that the obligation incurred by the lessee to paythe rental and the premium cannot be treated as an amount raisedby the lessee from the appellant. [Para 138][421-F-G]

State of Tamil Nadu v. Binny Ltd., Madras (1980) Suppl.SCC 686; State of Orissa and Another v. M/s. ChakobhaiGhelabhai and Company AIR 1961 SC 284 : [1961]1 SCR 719; Jaypee Infratech Limited v. Axis BankLimited and Others (2020) 8 SCC 401; Swiss RibbonsPrivate Limited and Another v. Union of India andOthers (2019) 4 SCC 17 : [2019] 3 SCR 535; Mohd.Noor and Others v. Mohd. Ibrahim and Others (1994)5 SCC 562 : [1994] 1 Suppl. SCR 790; Aneeta Hadav. Godfather Travels and Tours Private Limited (2012)5 SCC 661 : [2012] 5 SCR 503; M/s. Shroff and Co. v.Municipal Corpn. of Greater Bombay and Another(1989) 1 Suppl. SCC 347 : [1988] 2 Suppl. SCR 406;Pioneer Urban Land and Infrastructure Limited andAnother v. Union of India and Others (2019) 8 SCC416 : [2019] 10 SCR 381; Union of India and Othersv. R.C. Jain and Others (1981) 2 SCC 308 : [1981]2 SCR 854; New Okhla Industrial DevelopmentAuthority v. Chief Commissioner of Income Tax andOthers (2018) 9 SCC 351 : [2018] 7 SCR 781; Haryanav. Haryana Housing Board Employees’ Union andOthers (1996) 1 SC 95 : [1995] 4 Suppl. SCR 533;

ACommissioner of Income Tax, Lucknow v. U.P. ForestCorporation (1998) 3 SCC 530 : [1998] 2 SCR 22; inRe: Rogers Pyatt Shellac Co. v. The Secretary of Statefor India in Council AIR 1925 Calcutta; TheCommissioner of Income Tax, Bombay v. AhmedbhaiUmarbhai and Co., Bombay AIR 1950 SC 134 : [1950]BSCR 335 – referred to.

Case Law Reference

From the Judgment and Order dated 16.04.2021 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)G(Ins.) No. 1183 of 2019.

With

Civil Appeal Nos. 2367-2369 of 2021.

Tushar Mehta, SG, Ms. Madhavi Goradia Divan, ASG, RachitMittal, Sahil Monga, Ms. Pooja Kapur, Vinod Yadav, Sudhir Naagar,H

Sourav Roy, Kanu Agarwal, Prabudh Singh, Kaushal Sharma, Advs. forthe Appellant.

Dr. Abhishek Manu Singhvi, Sr. Adv., Prateek Gupta, LokeshMalik, Krishna Dev Jagarlamudi, Abhishek Agarwal, Abhijeet Sinha, MilanSingh Negi, Nikhil Kumar Jha, Pulkit Srivastava, Ritin Rai, Gaurav Mitra,Abhishek A., Ms. Ritika Sinha, Parth Maniktala, Akshay Goel, Ms. UditaSingh, Ninad Dogra, Som Raj Choudhury, Anand Varma, Ms. ApoorvaPandey, Shohit Chaudhry, Pankaj Agarwal, Advs. for the Respondent.

The Judgment of the Court was delivered by

K. M. JOSEPH, J.

1. Hardly six years old, the Insolvency and Bankruptcy Code(hereinafter referred to as the ‘IBC”) continues to be fertile ground tospawn litigation. Born in the year 2016, the IBC this time around hasgiven rise to the question as to whether the appellant would be financialcreditor and entitled to be so treated in the Corporate InsolvencyResolution Process (CIRP, in short) commenced against the corporatedebtor under the ‘IBC’.

THE APPEALS

CIVIL APPEAL NO.2222/2021

2. The appellant ‘NOIDA’ initially submitted Form ’B’ and claimedas anoperational creditor in regard to the dues outstanding under thelease. Subsequently the appellant filed claim in Form ‘C’ and claimedas financial creditor.There was some correspondence which revealsthat the appellant insisted upon being treated as financial creditor.Finally,the matter was considered by the adjudicating authority (NCLT) whichheld that there was no financial lease in terms of the Indian AccountingStandards and there was no financial debt.By the impugned order, NCLAThas 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 stayingthe order passed by the NCLT. By the order passed by the NCLT, theappellant herein was directed to be admitted as financial creditor andadjudicating authority also directed to admit the whole of the claim ofthe appellant. In view of the order passed, which is the subject matter of

AC.A. No. 2222/2021,NCLAT found it fit to pass an order staying theorder passed by the NCLT. Hence the appeals.

4. Since common question arises namely whether the appellantis entitled to be treated as financial creditor within the meaning of theIBC, we are rendering the common judgment.B

5. We have heard Shri Tushar Mehta, Learned Solicitor Generalappearing for the appellant in C.A. No.2222/2021 and Smt. MadhaviDivan, learned Additional Solicitor General for the appellant in C.A.No.2367-2369/2021. We have also heard Shri Ritin Rai, learned SeniorCounsel appearing on behalf of the respondent in CA 2222/2021. BesidesCwe heard Dr. A.M. Singhvi, learned Senior Counsel who was allowed tointervene in the matter on the basis that there is case involving theappellant NOIDA which is pending consideration.We also heard ShriDevashish Bharuka on behalf of the first respondent in C.A. Nos. 2367-2369/2021.

THE LEASED

6. The terms of the lease are as found in C.A.No. 2222/2021.The lease was entered into on the 30[th] day of July, 2010. The appellantis the lessor described as the Authority under Section 3 of the UttarPradesh Industrial Area Development Act, 1976 (hereinafter referredEto as the ‘UPIAD Act’). The lease deed recites that the leasehold propertyforms part of the land acquired under the Land Acquisition Act anddeveloped by the lessor for the purposes of setting up of an ‘Urban andIndustrial Township’. The purpose of the lease is the construction of theresidential flats according to the setback and building plan approved bythe appellant. The lessee earned its right as lessee under the process ofFtwo bid tender system in favour of aconsortium of which it is member.The lease deed provides that the shareholding of the lessor shall remainunchanged till the temporary occupancy/completion certificate of at leastthe first phase of the project is obtained from the lessor and the lessee ispermitted to transfer upto 49% of the shareholding subject to conditions.GThereafter, it is recited that of the consideration of Rs.46,14,69,996.50,10% stood paid. The lease deed further contemplated moratorium of 24months from the date of allotment. Only the interest at 7% per annumcompounded half yearly which accrued during the moratorium periodshall be payable in equal half yearly instalments.The lease deed furthercontemplated payment of the balance 90% of the amount after expiry ofHthe moratorium in 16 half yearly instalments along with interest as

specifically set out. Relevant portions of the lease deed to be noticedread as follows:

“And also, in consideration of the yearly lease rent hereby reservedand the covenants provisions· and agreement herein containedand on the part of the Lessee. to be respectively paid observedand performed, the Lessor doth hereby demise on lease to thelessee! 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 alittle more or less and bounded:

On the North by :As per SiteOn the South by :As per SiteOn the East by:As per SiteOn the West by:As per Site

And the said plot is more clearly delineated and shown In theattached plan and therein marked red.

TO HOLD the said plot (hereinafter referred to as the demisedpremises with their appurtenances up to the lessee for the term of90 (ninety) years commencing from 30, JULY, 2010 except andalways reserving to the Lessor.

a) right to lay water mains, drains, sewers or electrical wiresunder or above the demised premises, if deemed necessary bythe 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 plotand full right and powerat the time to do all acts and things whichmay be necessary or expedient for the purpose of searching forworking and obtaining removing and enjoy the same Withoutproviding or leaving any vertical support for the surface of theresidential plot or for any building for the lime being standingthereon provided always that the lessor shall make reasonablecompensation to the Lessee for all damages directly occasionedby the exercise of such rights. To decide the amount of reasonablecompensation the decision of the Lessor will be final and bindingon the Lessee.

(II) AND THE LESSEE DOTH HEREBY DECLARE ANDCONVENANTS WITH THE LESSOR IN THE MANNERFOLLOWING: .

a) Yielding and paying therefore yearly in advance during the saidterm unto the lessor In the month of MARCH for each year theyearly lease rent indicated below: -

(i) Lessee has paid Rs. 46,14,699;96 say Rs.46,14,700,00 as leaserent being 1% of the plot premium for the first 1O years of leaseperiod.

(ii) The lease rent may be enhanced by 50%after every 10 yearsi.e., 1.5 times of the prevailing lease rent.

(ii) The lease rent shall be payable In _advance every year. Firstsuch payment shall fall due on the date of execution of lease deedand thereafter, every year, on or before the last date of previousfinancial year.

(iv) Delay In payment of the advance lease rent will be subject toInterest @14% per annum compounded half yearly on the defaultedamount for the defaulted period.

(v) The lessee has the option to pay lease rent equivalent to 11years @ 1 % of the premium of the plot per year as ‘One TimeELease Rent unless the Lessor decides to withdraw this facility:On payment of One Time Lease Rent, no further annual leaserent would be required to be paid for the balance lease· period.This option may be exercised at any time during the lease periodprovided the lessee has paid the earlier lease right due and leaseFrent already paid will not be considered· in One Time Lease Rentoption.

b) The Lessee shall be liable to pay all rates, taxes, charges andassessment leviable by whatever name called for every descriptionin respect of the plot of land or building constructed thereonGassessed or Imposed from time to time by the lessor or anyAuthority/ Government. In exceptional circumstances the time ofdeposit for the payment due may be extended by_the lessor. Butin such case of extension of time an interest@ 14% p.a.compounded every half yearly shall be charged for the defaultedamount 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 GroupHousing, however, the lessee shall be entitled to lot the dwellingunit on sublease basis to its allottee and also provide space forfacilities like Roads, Parks etc. as per their requirements,convenience with the allotted plot, fulfilling requirements or buildingbye-laws and prevailing and under mentioned terms and conditionsto the lessor. Further transfer/sub lease shall be governed by thetransfer policy of Lessor:

(i) Such allottee/sub lessee should be citizen of India and competentto contract.

(ii) Husband/wife and their dependent children will not beseparately eligible for the purpose of allotment and shall be treatedas single entity.

(iii) The permission for part transfer of plot shall not be grantedunder any circumstances. The Lessee shall not be entitled tocomplete transaction for sale, transfer, assign or otherwise partwith possession of the whole or any part of the building constructedthereon before making payment according to the schedulespecified in the lease deed of the plot to the Lessor. However,after making payment of premium of the plot to the lessor as perschedule specified in the lease deed, permission for transfer ofbuilt up flats or to part with possession of the whole or any part ofthe building constructed on the group housing plot, shall be grantedand subject to payment of transfer chargers as per policy prevailingat the time of granting such permission of transfer. However, theLessor, reserves the right to reject any transfer application withoutassigning any reason. The lessee will also be required to paytransfer charges as per the policy prevailing at the time of suchpermission of transfer.

The permission to transfer the part Or the built up space will begranted subject to execution of tripartite sub- lease deed whichshall be executed in form and format as prescribed by thelessor.”On the fulfillment of the following conditions: -

a) The Lease Deed of plot has been executed and the Lessee hasmadethe payment according to the schedule specified in the lease

deed of the plot, interest and one time lease rent. Permission ofsub-lease deed shall be granted phasewise on payment of fullpremium (with interest upto the date of deposit) of the plot of thatphase.

b) Every sale done by the lessee shall have to be registered beforethe physical possession of the property is handed over.

c) The Lessee has obtained building occupancy certificate fromPlanning Department, Greater Noida (Lessor).

d) The Lessee shall submit list ofindividual allottees of flats within6 months formthe date of obtaining occupancy certificate.

e) The Lessee shall have to execute tripartite sub lease in favourof the individual allottees for the developed flats/plots in the formand format as prescribed by the LESSOR.

f) The Sub-Lessee undertakes to put to use the premises for theresidential use of residential area only.

g) The Lessee shall pay an amount of Rs. 1000/- towardsprocessing fee and proportionate (pro-rate basis) transfer chargesand lease rent as applicable at the time of transfer and shall alsoexecute sub lease deedbetween Lessor, Lessee and proposedtransferee (sub-Lessee). The Lessee/ Sub Lessee shall also endureadherence to the building regulations and directions of the Lessor.The Lessee as well as sub Lessee shall have to follow rules andregulations prescribed in respect of lease hold properties and shallhave to pay the charges as per rules of the Lessor/Governmentof U.P.

The transfer charges shall not be payable in case of transferbetween son/daughter, husband/wife, mother/father and vice versaor between these six categories. processing fee of Rs.1000/-will be payable in such case. The transfer of the flat in favour of1[st] sub-Lessee shall be allowed without any transfer charges butsub lease deed will be executed between the Lessor & Lesseeand allottee. However, processing fee of the Rs. 1000/- will bepayable at the time of transfer/execution of the sub-lease deed.The physical possession of dwelling units/ flats/plots will bepermitted to be given after execution of sub-lease deed.

i) Every transfer done by the Lessee shall have to be registeredbefore 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 tosub lease the same with the prior approval of lessor on paymentof transfer charges. However, the area of each of such sub dividedplot should not be less than 10,000 sq. metres.

k) Rs.1000/- shall be paid as processing fee in each case oftransfer of flat in addition to transfer charges.

7. Norms of development are specifically set out as maximumpermissible FAR, maximum ground coverage and maximum height. Theconstruction is to be completed in maximum five phases within periodof seven years from the date of execution of the lease deed. Delayspecifically entitled the appellant to cancel, as also gave rise to power toextend time in the manner provided therein with penalty. The period ofextension is fixed at 3 years with penalty.It further provided that furtherextension will normally be not permitted. If the lease is cancelled, theLessee is to lose all rights and the building appurtenant thereto. Thelessee is at total liberty to design the size of the flat/plots. The FARearmarked for commercial/institutional use would be admissible but theallottee/lessee may utilize the same for their residential use as per theirconvenience. The clause relating to mortgage reads as follows:

MORTGAGE

“The lessee may with prior permission of the Lessor, mortgagethe land to any Financial Institution(s)/ Bank(s) for raising loanfor the purpose of financing his investment in the project on receiptof payment by allottee or on receipt of assurance of payment bybank or under any other suitable arrangement. In mutual settlementamongst the LESSOR, developer and the financial institution(s)/Bank(s). As regards the case of mortgaging the land to anyFinancial Institution(s)/ Bank(s) to mortgage the said land tofacilitate the housing loans of the final purchasers, N.O.C may beissued subject to such terms and conditions as may be decided bythe 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 andrecover such percentage, as decided by the LESSOR of the

unearned increase in values of properties in respect of the marketvalue of the said land as first chare, having priority over the saidmortgage charge, the decision of the LESSOR in respect of themarket value of the said land shall be final and binding on all theparties concerned.

The LESSOR’S right to the recovery of the unearned increaseand the pre-emptive right to purchase the property as mentionedherein 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 asCfollows:

“TRANSFER OF PLOT

Without obtaining the completion certificate the lessee shall havethe right to sub-divide the allotted plot into suitable smaller plotsDas per planning norms and to transfer the same to the interestedparties upto 30.09.2010 with the prior approval of LESSOR onpayment of transfer charges @ 2% of allotment rate. However,the area of each of such sub-divided plots should not be less than20,000 sq. mtrs. However, individual flat/plot will be transferablewith prior approval of the LESSOR as per the following conditions:

(i) The dues of LESSOR towards cost of land shall be paid inaccordance with the payment schedule specified in the LeaseDeed before executing of sub-lease deed of the flat.

F(ii) The lease deed has been executed.

(iii) Transfer of flat will be allowed only after obtaining completioncertificate for respective phase by the Lessee.

(iv) The sub-lessee undertakes to put to use the premises for theresidential use only.

(v) The lessee has obtained building occupancy certificate fromBuilding Cell, NOIDA.

(vi) First sale/transfer of flat/plot to an allottee shall be througha Sub-lease/ Lease Deed to be executed on the request of theHLessee 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) asdescribed above. However, on subsequent sale, transfer chargesshall be applicable on the prevailing rats as fixed by the LESSOR.

(viii) Rs. 1000/- shall be paid as processing fee in in each case oftransfer of flat in addition to transfer charges.”

8. Under the heading “Misuse, addition, alteration etc.”, it isprovided that the lessee shall not use the flat for any purpose other thanresidential purpose. Violation would open the doors for cancellation. Thelessee is liable to pay all rates, taxes, charges and assessment of everydescription imposed by any lessor empowered in this behalf, whether itbe imposed on the plot or the building constructed thereon from time totime.

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, washinggold earth’s olls, quarries on or under the plot and full right andpower at any time to do all acts and things which may be necessaryor expedient for the purpose of searching for, working and obtainingremoving and enjoying the same without providing or leaving anyvertical support for the surface of the plot(s)/ flats or for thestructure time being standing thereon provided always that theLessor shall make reasonable compensation to the Lessee for alldamages directly occasioned by exercise of the rights herebyreserved. The decision of the Chief Executive Office/ Lessor onthe amount of such compensation shall be final and binding on thelessee/ 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 arenecessary for the maintenance of the building and commonservices and · If the building Is not maintained properly.The ChiefExecutive Officer or any officer authorized by· Chief. ExecutiveOfficer of the Lessor will have power to get the maintenancedone through the Lessor and recover the amount so spent from

Athe lessee/sub lessee. The lessee/sub lessee will be individuallyand severally liable for payment of the maintenance amount. Therules/regulation of UP Flat ownership act 1975 shall be applicableon the lessee/sub lessee. No objection on the amount spent formaintenance of the building the lessor shall be entertained anddecision of the Chief Executive Officer of the Lessor In this regardBshall 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 ofcancellation of lease in the case of:-

1. Allotment being obtained through misrepresentation/suppressionof material facts, misstatement and/or fraud.

2. Any violation of directions issued or rules and regulation framedby Lessor or by any other statutory body.

3. Default on the part of the lessee for breach/violation of termsand conditions of registration/allotment/lease and/or non-depositof allotment amount.

E4. If at the same time of cancellation, the plot is occupied by theLessee thereon the amount equivalent to 25% of the total premiumof the plot shall be fortified and possession of the plot will beresumed by the Lessor with structure thereon, if any, and thelessee will have no right to claim compensation thereof. Thebalance, if any shall be refunded without any interest. The forfeitedFamount shall not exceed the deposited amount with the Lessorand no separate notice shall be given in this regard.

5. If the allotment is cancelled on the ground mentioned in subclause 1 above, then the entire amount deposited by the lessee, tillthe date of cancellation shall be forfeited by the Lessor and noGclaim 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/Halternations or modifications in the terms and conditions of

allotment/lease deed/sub lease deed from time to time, as may beconsidered just and expedient.

2. In case of any clarification or interpretation regarding theseterms and conditions the decision of Chief Executive Officer orthe lessor shall be final and binding.

3. If due to any “Force Majeure” or such circumstances beyondthe lessor’s control, the lessor is unable to make allotment orfacilitate the Lessee to undertake the activities in pursuance ofexecuted lease deed, the deposits depending on the stages ofpayments 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 demisedpremised resulting in nuisance, it shall be lawful for the lessor toask the Lessee to remove the nuisance within reasonable periodfalling which the LESSOR shall itself get the nuisance removedat the Lessee’s cost and charge damages from the Lessee duringthe period of submission of nuisance.

5. Any dispute between the lessor and Lessee/ Sub-Lessee shallbe subject to the territorial jurisdiction of the Civil Courts havingjurisdiction over District Gautam Budh Nagar or the Courtsdesignated by the Hon’ble High Court of Judicature at Allahabad.

6. The Lease Deed/ allotment will be governed by the provisionsof the U.P. Industrial Area Development Act, 1978 (U.P. Act no.6 of 1976) and by the rules and/ or regulations made or directionsissued, under this act.

7. The lessor will monitor the implementation of the project.Applicants who do not have firm commitment to implement theproject within the time limits prescribed are advised not to availthe allotment.

8. The lessee/ sub-lessee of the Lessee shall be liable to pay alltaxes/ charges livable from time-to-time lessor or any otherauthority duly empowered by them to levy the tax/charges.

9. Dwelling units flats shall be used for residential purpose only, incase of default, render the allotment/ lease liable for cancellationand the Allottee/Lessee/sub-lessee will not be paid anycompensation thereof.

A10. Other buildings earmarked for community facilities cannot beused for purposes other than community requirements.

11. All arrears due to the Lessor would be recoverable as arrearsof land revenue.

12. The Lessee shall not be allowed to assign or change his role,Botherwise the lease shall be cancelled and entire money depositedshall be forfeited.

13. The lessor in larger public interest may take back the possessionof the land/building/ by making payment at the prevailing rate.

14. In case the lessor is not able to give possession of the land inany circumstances deposited money will be refunded to the allotteewith simple interest.

15. All terms and conditions of brochure and its corrigendum,allotment, building bye-laws and as amended from time to timeshall be binding on the Lessee.

For and on behalf of LESSOR”

(Emphasis supplied)

FINDINGS OF THE NCLATE13. FINDINGS

I. The NCLAT finds that the lease deed does not have any clauseof transfer of ownership of the underlying asset, which is land and notflat, 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 classificationFof the lease as financial lease, however observing that it would not bea deciding factor. The NCLAT has proceeded to evaluate the contentsof the lease. It proceeds to remind itself that to be classified as financiallease, what is relevant is whether there is substantial transfer of all therisks and rewards incidental to ownership of an underlying asset. Itproceeds to further hold that the lease is heavily tilted in favour of theGappellant, controlling almost all the aspects and while passing over therisks keeps the rewards with lessor, except the liberty to sell the flatswhich would be constructed. Thereafter, the NCLAT proceeded toconsider whether rewards incidental to ownership of the underlying assetwere transferred. It is found that appellant put condition that the lesseeHwill be allowed to transfer/sell upto 49% of its shareholding, subject to

the condition that the original shareholders indicated on the date ofsubmission of the tender, shall continue to hold at least fifty-one per centof the shareholding, till the temporary occupancy completion certificateis obtained of at least one phase.

II. There is reference to total premium of Rs.46 crores and thedown payment of ten percent. So also, reference is made to half-yearlyinstalments to be paid between 2010 and 2020. The term of the lease isfor ninety years. Reference is made to the clause reserving rights to allmine and minerals under the allotted plot, inter alia. Reliance is placedon ten percent of the amount paid towards premium being repeated, byreferring to the same amount as lease rent. Lease rent and premium areused interchangeably. The option of paying the lease rent is referredto.The liability to pay taxes is adverted to. There is further reference tothe following clause:

“c) The Lessee shall use the allotted plot for construction of GroupHousing. However, the lessee shall be entitled to allot the dwellingunits on sublease basis to its allottee and also provide space forfacilities like Roads, Parks etc. as per their requirements,convenience with the allotted plot, fulfilling requirements or buildingbye-laws and prevailing and under mentioned terms & conditionsto the lessor. Further transfer/sub lease shall be governed by thetransfer policy of the Lessor.”

Reference is made to the clause that the allottee/sub-lessee, shouldbe citizen of India and should be competent and that husband, wife,and dependent children would be considered single entity. Furtherreference is made to the following clause:

“iii) The permission for part transfer of plot shall not be grantedunder any circumstances. The Lessee shall not be entitled tocomplete transaction for sale, transfer, assign or otherwise partwith possession of the whole or any part of the building constructedthereon before making payment according to the schedulespecified in the lease deed of the plot to the Lessor. However,after making payment of premium of the plot to the lessor as perschedule specified in the lease deed permission of transfer ofbuilt-up flats or to part with possession of the whole or any part ofthe building constructed on the Group Housing Plot, shall begranted and subject to payment of transfer charges as per policyprevailing at the time of granting such permission of transfer.

However, the Lessor, reserves the right to reject any transferapplication without assigning any reason. The lessee will also berequired to pay transfer charges as per the policy prevailing at thetime of such permission of transfer.”

III. Reference is made to the following clause, which reads asBfollows:

The lessee shall have to execute sub-lease in favour of theindividual allottees for the developed flats/plots in the form andformat, as prescribed by the lessor. This is relied upon by theNCLAT to conclude that rewards incidental to ownership is notCtransferred.

IV. Next, it is found that the lease deed contemplates that thenumber of phases within which the work needs to be completed. Theschedule of time had to be adhered to by the lessee. The power ofcancellation loomed large in this context.DV.

V. Next, reliance is placed on the clause relating to mortgage,which required permission of the appellant to mortgage the plot. Thepriority of charge of the appellant was maintained. The use of the flatwas limited to residential purpose only. Departure from the same wouldinvite the wrath of cancellation. The appellant reserved the right to evenEremove the vertical support for the surface of the plots/flats with onlyliability to pay compensation and the right to determine which was lodgedwith the appellant and it was to be binding on the lessee/sub-lessee. Thegeneral power of cancellation is maintained.

VI. Thereafter, we may notice the following:

F“21. Thus, the Appellant, even after creating the lease kept withitself all the rights to control and monitor the project which was tocome up. The Appellant of course now has tried to say in theAppeal that it was “only exercising minor supervision over theland use” (see 9.12 of the Appeal), which we do not agree to.What we can see from the Lease Deed which we have justGreferred in brief, is that the acts which could be performed by thelessee, were fully controlled by the Appellant. The lessee, ofcourse, had the liberty to construct and transfer the flats by wayof sublease. The above discussion shows that while risks andliabilities were transferred to the lessee, the rewards incidental toHownership were not transferred. There is no Clause of transferof ownership at the end of lease term. There is no option given tothe lessor to purchase the asset at price that is accepted to besufficiently lower than the fair value. The lease is for term of 90years. For life of land, 90 years cannot be said to be major partof economic life of the asset. There are no calculations available,and the Lease Deed does not state that the present value of thelease payments amounts to at least substantially all of the fairvalue of the asset i.e. the land. The right to cancel the lease bythe lessor are specified at various places in the lease deed,however, there is no option to the lessee to step out. There is nooption available in the lease deed for the lessee to continue leasefor secondary period. This is, leave apart, the indicator whichrequires that said secondary period should be at rent that issubstantially lower than market rent.

22. Thus, when we have gone through the Lease Deed keepingthe classification of leases and the indicators mentioned above,we do not find that the lease deed in question can be said to be afinance lease.

23. Keeping in view the Indian Accounting Standards, whatappears broadly is that when lease involves real estate (like landin present matter) with fair value different from its carryingamount, the lease can be classified as finance lease if the leasetransfers ownership of the property to the lessee by the end ofthe lease term or there is bargain purchase option. The lease musttransfer substantially all the risks and also rewards incidental toownership of the asset.

24. The argument of the Appellant trying to mix up transfer ofownership of the asset which is land with right to transfer flats tobe constructed has no substance. Merely, because the lessee wasgiven 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 afinance lease. The argument of the Appellant that lessee has anoption to pay onetime lease rent and that if such right was exercisedlessee would not be required to pay further rent and that thisshows that present value of the lease payment amounts to at leastsubstantially all of the fair value of the asset, is also baseless. Nomaterial is brought to show as to what is and would be the fairvalue. With regard to right to cancel lease, it is reserved with the

Alessor but not the lessee. The Appellant argues that the questionof cancellation of lease deed by lessee would not arise as lesseewould build and transfer dwelling units. This is speculative andcannot be helpful in construing the document. Again, it is not thatthe right to land would get transferred to the flat purchasers (whoare referred rather as sub-lessees). We do not find substance inBthe arguments being raised by the Appellant to bring the LeaseDeed within the requirements of Indian Accounting Standards.We rather find substance in the submissions of the Respondent asrecorded in the Chart reproduced supra.”

CVII. Finally, we may further also notice paragraphs-29 and 30 atpage 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, forpremium /rent with almost all rights controlled by the Lessor. Wehave gone through the provisions of Section 5(8)(f) and also whenDwe keep the above observations of the Hon’ble Supreme Courtof India, we are unable to persuade ourselves to accept thesubmission that when land is leased out, if premium is fixed andinstalments are given, it should be treated as financial lease. Wedo not find substance in this argument.

E30. We may record that we are not finding fault with the variousterms and conditions in the Lease Deed. It is Lease Deed froma development authority which has the object of developing thetownship and thus wants to control the manner in which theconstructions of housing come up. That purpose is alright. However,such lease does not fit in with the requirements of Indian AccountingFStandards which we have referred. Just to be part of COC, thelease of land between developing authority and the builders cannotbe considered or treated as financial lease.”

RELEVANT PROVISIONS OF THE IBC

G14. Section 5(8), which is at the centre of the controversy,defines‘financial debt’ as: -

“5(8) “financial debt” means debt alongwith interest, if any, whichis disbursed against the consideration for the time value of moneyand includes–

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance creditfacility or its dematerialised equivalent;

(c) any amount raised pursuant to any note purchase facility orthe issue of bonds, notes, debentures, loan stock or any similarinstrument;

(d) the amount of any liability in respect of any lease or hirepurchase contract which is deemed as finance or capital leaseunder the Indian Accounting Standards or such other accountingstandards as may be prescribed; (e) receivables sold or discountedother than any receivables sold on non-recourse basis; (f) anyamount raised under any other transaction, including any forwardsale or purchase agreement, having the commercial effect of aborrowing; 1 [Explanation. -For the purposes of this sub-clause, -(i) any amount raised from an allottee under real estate projectshall be deemed to be an amount having the commercial effect ofa borrowing; and (ii) the expressions, “allottee” and “real estateproject” shall have the meanings respectively assigned to them inclauses (d) and (zn) of section 2 of the Real Estate (Regulationand Development) Act, 2016 (16 of 2016);]

(g) any derivative transaction entered into in connection withprotection against or benefit from fluctuation in any rate or priceand for calculating the value of any derivative transaction, onlythe market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of guarantee,indemnity, bond, documentary letter of credit or any other instrumentissued by bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee orindemnity 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 liability or obligation in respect of claimwhich is due from any person and includes financial debt andoperational debt;”

16. Section 3(6) defines the word ‘claim’. It reads as: -

“(6) “claim” means—

(a) right to payment, whether or not such right is reduced tojudgment, fixed, disputed, undisputed, legal, equitable, secured orunsecured;

(b) right to remedy for breach of contract under any law for thetime being in force, if such breach gives rise to 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

“(21) “operational debt” means claim in respect of the provisionof goods or services including employment or debt in respect ofthe repayment of dues arising under any law for the time being inDforce and payable to the Central Government, any StateGovernment or any local authority;”

18. Section 5(20) defines the word ‘operational creditor’. It reads

“(20) “operational creditor” means person to whom an operationalEdebt is owed and includes any person to whom such debt hasbeen legally assigned or transferred;”

19. Section 3(33) defines the word ‘transaction’. It reads as:-

“(33) “transaction” includes agreement or arrangement in writingfor the transfer of assets, or funds, goods or services, from or toFthe corporate debtor;”

THE UTTAR PRADESH INDUSTRIAL AREADEVELOPMENT ACT, 1976 UNDER WHICH APPELLANTWAS CREATED (‘UPIAD’, FOR SHORT)

G20. The Act defines the word ‘transferee’ in Section 2(f) asfollows:-

“2(f) ‘Transferee’ means person (including firm or other bodyof individuals whether incorporated or not to whom any land orbuilding is transferred in any manner whatsoever, under this actand includes his successors and assigns,”

21. Section 3 deals with the Constitution of the authority and readsas follows:-

“3. (1) The State Government may, by notification, constitute forthe purposes of this Act, An authority to be called (Name of thearea) Industrial Development Authority, for any industrialdevelopment area.

(2) The Authority shall be body corporate.

(3) The Authority shall consist of the following: –

(a) The Secretary to the Government, Uttar Pradesh, MemberIndustries Department or his Nominee not below Chairman therank of Joint Secretary-ex-official.

(b) The Secretary to the Government, Uttar Pradesh, MemberPublic works Department or his nominee not below the rank ofJoint Secretary ex-official.

(c) The Secretary to the Government, Uttar Pradesh, LocalMember Self-Government or his nominee not below the rank ofjoint Secretary-ex official.

(d) The Secretary to the Government, Uttar Pradesh, FinanceMember Department or his nominee not below the rank of JointSecretary-ex official.

(e) The Managing Director, U.P. State Industrial DevelopmentMember Corporation-ex official.

(f) Five members to be nominated by the State GovernmentMember by notification.

(g) Chief Executive Officer. Member Secretary (4) Theheadquarters of the Authority shall be at such place as may benotified by the State Government.

(5) The procedure for the conduct of the meetings for the Authorityshall be such as may be prescribed.

(6) No act or proceedings of the Authority shall be invalid byreason of the existence of any vacancy in or defect in theconstitution of the Authority.”

22. Section 6 of the UPIAD deals with the functions of theAuthority, which in this case is the appellant. Section 6 reads as follows:

A“FUNCTION OF THE AUTHORITY

6. (1) The object of the Authority shall

be to secure the planned development of the industrial developmentarea.

B(2) Without prejudice to the generality of the objects of theAuthority, the Authority shall perform the following functions :–

(b) to prepare plan for the development of the industrialdevelopment area;

(c) to demarcate and develop sites for industrial, commercial andCresidential purpose according to the plan;

(d) to provide infrastructure for industrial, commercial andresidential purposes;

(e) to provide amenities;

D(f) to allocate and transfer either by way of sale or lease orotherwise plots of land for industrial, commercial or residentialpurposes;

(g) to regulate the erection of buildings and setting up of industries:and

E(h) to lay down the purpose for which particular site or plot ofland shall be used, namely for industrial or commercial or residentialpurpose or any other specified purpose in such area.”

23. Section 7 deals with the power to transfer. It reads as follows:-

F“7. The authority may sell, lease or otherwise transfer whetherby auction, allotment or otherwise any land or building belongingto the Authority in the industrial development area on such termsand conditions as it may, subject to any rules that may be madeunder this Act think fit to impose.”

The proviso deals with consequences of not utilising it for theGpurpose for which it was allowed.

24. Section 8 provides that for the proper planning and developmentof the industrial development area, the authority may issue such directionas it considered necessary regardingvarious aspects. They includearchitectural features of the elevation or frontage of any building, theH

alignment of building on any site, the number of residential buildings thatmay be erected on any site, the restrictions in regard to open spaces andheight to be maintained, maintenance of amenities, restrictions of use ofany site for purpose other than that for which it has been allocated.

25. Section 10 deals with power to require proper maintenance ofsite and buildings. Section 11 deals with power to levy taxes. It, interalia, reads as follows: -

“11. Levy such Taxes. — [(1) For the purposes of providing,maintaining or continuing any amenities in the industrialdevelopment area, the Authority may with the previous approvalof the State Government, levy such taxes as it may considernecessary in respect of any site or building on the transferee oroccupier thereof, provided that the total incidence of such taxshall not exceed one per cent of the market value of such site,including the site of the building.

Explanation—For the purpose of this sub-section, 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 rulesmade under the Indian Stamp Act, 1899, whichever is more]

2) If the State Government considers it necessary or expedient inthe public interest, it may, by general or special order, exemptwholly or partly-any such transferee or occupier or any classthereof from the taxes levied under sub-section (1).”

26. Section 11A inserted with effect from 21.03.2016 empowerscollection of tolls. Section 11B inserted likewise provides for levy ofadditional stamp duty.

27. Section 12 reads as follows: -

“12. Applications of certain provisions of President’s Act XI of1973.—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 PradeshUrban Planning and Development Act, 1973, as re-enacted andmodified by the Uttar Pradesh President’s Act (Re-enactmentwith Modifications) Act, 1974, shall mutatis mutandis apply to the

AAuthority with adaptation that— (a) any reference to the aforesaidAct shall be deemed to be reference to this Act; (b) anyreference to the Authority constituted under the aforesaid Actshall be deemed to be reference to the Authority constitutedunder this Act; and (c) any reference to the Vice-Chairman ofthe Authority shall be deemed to be reference to the ChiefBExecutive Officer of the Authority.”

28. Section 13 reads as follows: -

“(13) Where any transferee makes any default in the payment ofany consideration and money or instalment thereof or any otherCamount due — account of the transfer of any site or building bythe Authority or any rent due to the Authority in respect of anylease, or where any transferee or occupier makes any default inthe payment of any fee or tax levied under this Act, the ChiefExecutive officer may direct that in addition to the amount ofarrears, further sum not exceeding that amount shall be recoveredDfrom the transferee or occupier, as the case may be, by way ofpenalty.”

29. It is necessary to notice Section 12A and 12B inserted witheffect from 12.03.2016. They read as follows: -

E“12-A. No Panchayat for industrial township.—Notwithstandinganything contained to the contrary in any Uttar Pradesh Act, wherean industrial development area or any part thereof is specified tobe an industrial township under the proviso to clause (1) of Article243-Q of the Constitution, such industrial development area orpart thereof, if included in Panchayat area, shall, with effectFfrom the date of notification made under the said proviso, standexcluded from such Panchayat area and no Panchayat shall beconstituted for such industrial development area or part thereofunder the United Provinces Panchayat Raj Act, 1947 or the UttarPradesh Kshettra Panchayats and Zila Panchayats Adhiniyam,G1961, as the case may be, and any Panchayat constituted forsuch industrial development area or part thereof before die dateof such notification shall cease to exist,

Explanation:—The expression “Panchayat and Panchayat area”shall have the meanings respectively assigned to them in part IXof the Constitution.]H

12-B.—(1) The Governor may, by notification, specify underArticle 243-Q of the Constitution of India, the whole of SpecialInvestment Region or the Industrial Development Area or anypart thereof to be an Industrial Township.

(2) Notwithstanding anything to the contrary contained in any UttarPradesh Act, where an special investment region or industrialdevelopment area or any part thereof is specified to be an IndustrialTownship under the proviso to clause (1) of Article 243- Q of theConstitution of India, such industrial development area or partthereof, falling in Municipality shall from the date of notificationstand excluded from that Municipality area and all powers andfunctions performed with respect to such area shall be exercisedor performed by the Authority.

Explanation: —The expression “Municipality” shall have themeaning assigned to it in Part IX or Part IX-A of the Constitution ofIndia.]”

30. Section 14 reads as follows: -

“14. For feature for breach of conditions of transfer. —(1) In thecase of non-payment of consideration money or any installmentthereof on account of the transfer by the Authority of any site orbuilding or in case of breach of any condition of such transfer orbreach of any rules or regulations made under this Act, the ChiefExecutive Officer may resume the site or building so transferredand 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 anysite or building under sub-section (1) the Collector may, on hisrequisition, cause possession thereof to be delivered to him andmay for that purpose use or cause to be used such force as maybe necessary.”

31. We may further notice Section 17:

“(17) Upon any area being declared on industrial developmentarea under the provision of this act, such area, if included in themaster plan or the zonal development plan under the Uttar PradeshUrban planning and Development Act, 1973, or any developmentplan under any other Uttar Pradesh Act, shall with effect from

354SUPREME COURT REPORTS

Athe date of such declaration be deemed to be excluded from anysuch plan.”

THE PROVISIONS OF THE UTTAR PRADESH URBANPLANNING AND DEVELOPMENT ACT, 1973 MADEAPPLICABLE TO THE AUTHORITY VIDE SECTION 12 OFBTHE UPIAD ACT [For short, ‘the 1973 Act’]

32. Chapter VII dealing with Finance, Accounts and Audit beginswith Section 20. Section 20 provides for fund of the authorities. It readsas follows:

“20. (1) The authority shall have and maintain its own fund toCwhich shall be credited–

(a) all moneys received by the Authority from the StateGovernment by way to grants, loans advances or otherwise;

(b) all moneys borrowed by the Authority from sources other thanthe State Government by way of loans or debentures;

D(c) all fees, tolls and charges received by the Authority under thisAct;

(d) all moneys received by the Authority from the disposal oflands, buildings and other properties movable and immovable; and

E(e) all moneys received by the Authority by way of rents andprofits or in any other manner or from any other sources.

(2) The fund shall be applied towards meeting the expensesincurred by the Authority in the administration of this Act for noother purposes.

(3) Subject to any directions of the State Government, the Authoritymay keep in current account of any Scheduled Bank such sum ofmoney out of its funds as it may think necessary for meeting itsexpected current requirements and invest any surplus money insuch manner as it thinks fit.

(4) The state Government may, after due appropriation made byLegislature by law in that behalf, make such grants, advancesand loans to the Authority as that Government may deem necessaryfor the performance of the functions of the authority under thisAct, and all grants, loans and advances, made shall be on suchHterms and conditions as the State Government may determine.

(5) The Authority shall maintain sinking fund for the repaymentof moneys borrowed under sub-section (5), and shall pay everyyear into the sinking fund such sum as may be sufficient forrepayment within the period fixed of all moneys so borrowed.

(7) The sinking fund or any part thereof shall be applied in, ortowards, the discharge of the loan for which such fund was created,and until such loan is wholly discharged it shall not be applied forany other purpose.”

33. Section 21 provides that the authority shall prepare budgetin the form and at such time as the State Government may specify.

34. Section 22 providesthat the authority is to maintain properaccounts.The accounts of the authority shall be subject to audit annuallyby the Examiner Local Fund Accounts.

35. Section 23 mandates that the authority shall prepare reportand submit it to the State Government in such form and on or beforesuch date as specified by the State Government and the report is to belaid before both Houses of the Legislature.

36. Section 24 deals with Pension and Provident Fund. It reads asfollows: -

“24. (1) The Authority may constitute for the benefit of its whole-time paid members and of its officers and other employers insuch manner and subject to such conditions, as the StateGovernment may specify, such pension or provident funds as itmay deem fit.

(2) Where any such pension or provident fund has been constituted,the State Government may declare that the provisions of theProvident Funds Act, 1925, shall apply to such fund as if it were aGovernment Provident Fund.”

37. We must notice Section 40:

“40. Recovery of moneys due to Authority—Any money due toan Authority on account of any fee; or charges, or from disposalof land, building or any other property, movable or immovable, byway of rent, premium, profit or hire purchase instalment, may,without prejudice to the right of recovery by any other mode ofrecovery provided by or under this Act or any other law for thetime being in force, be realised—

A(a) either, as arrears of land revenue upon certificate of theamount due sent by the Authority to the collector, or (b) byattachment and sale of property in the manner provided in Sections504, 505, 506, 507, 508, 509, 510, 512, 513 and 514 of the [UttarPradesh Municipal Corporation, 1959) (2 of 1959)]; and suchprovisions of the said [Act] shall mutatis mutandis apply toBrecovery of dues of an Authority as they apply to recovery of atax due to [Municipal Corporation], so however, that referencesin the aforesaid section of the said Adhiniyam to ‘Mukhya NagarAdhikari’, [Corporation] and Executive Committee shall beconstructed as references to ‘Vice Chairman, ‘DevelopmentCAuthority’ and ‘Chairman respectively:Provided that no two or more modes of recovery shall becommenced 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:D“40, Mode of recovery of money due to Authority any moneycertified by the Authority as due to it on account of fees or charges,or from the disposal of lands, buildings or other properties, movableor immovable, or by way of rents and profits may, if the recoverythereof is not expressly provided for in any other provision of thisEAct, 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 StateGovernment for the administration of the Act being binding on theAuthority. Under Section 42 of the UP 1973 Act, the Authority is toFfurnish return and other information to the Government. Section 43 dealswith manner of service of notices, orders, and other documents. Section44 deals with how public notices areto be made known. Section 45mandates fixing of reasonable time in any notice, order, or document,unless time is otherwise fixed by the Act or Regulation. Section 47Gproclaims that every member and every officer and other employee ofthe Authority shall be deemed to be public servant within the meaningof Section 21 of the Indian Penal Code. Without sanction of the ChiefExecutive Officer of the Authority or any other officer authorised byhim, there cannot be prosecution for any offence under the Act. Section51 deals with power of delegation, both of the State Government and ofHthe Authority and the Chief Executive Officer. Section 53 empowers

the State Government to exempt, by notification, any land or buildingfrom the provisions of the 1976 Act or Rules or Regulations madethereunder. Section 58 of the UP 1973 Act, as made applicable to the1976 Act, provides for the dissolution of the Authority, on the StateGovernment forming the opinion, that the purpose for which the Authoritywas established, has been substantively achieved, rendering the continuedexistence 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 thatthe appellant is actually financial creditor. He would point out withreference to Section 5(8)(d) that careful analysis of the lease deedwould show that the lease in question is financial lease. In his endeavour,in this regard, he emphasised the part of the provision, which brings inthe concept of deeming provision. In other words, he contended thatthe Court is bidden to treat certain position as deemed. The NCLAThas proceeded as if what is involved is classification of financial leasehe complained. He took us through the statutory rules, which have cometo embody the Indian Accounting Standards (IAS) within the meaningof Section 5(8)(d), which have been enacted under the Companies Act,2013.

40. He would first and foremost point out that the most prominentand indispensable element to make lease financial lease is that thereshould be substantial transfer of the risks and rewards incidental toownership from the lessor to the lessee. What is contained in later rulesare essentially by way of examples or illustrations. The mere fact thatwith reference to each one of them, the appellant may not answer thedescription of financial lessor, may not suffice to deprive the appellantof the status of financial creditor, as the vital question to be posed andanswered is whether substantially there is transfer of risks and rewardsincidental to ownership. He does not dispute that in the case in question,appellant has not classified the lease as financial lease in the balancesheet. He would however point out that the NCLAT has erred in findingthat 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 amountof consideration it can charge from the buyers from the lessee. Theappellant cannot demand any share in the consideration received by thelessee. In other words, the lessee is free to appropriate the entire profits.

AThis is crucial in appreciating whether the rewards incidental to ownershiphas been transferred to the lessee. He highlights the fact the appellant isan Authority constituted under statute, namely the UPIAD. He tookus through the provisions of Section 6 and 7 of the Act. He would contendthat as the Authority is charged with the statutory duty to carry outplanned development of the area and group housing being residential inBnature and since the construction had to be carried out in accordancewith the laws in force and the appellant was also charged with the dutyto regulate the activity, all that has happened is that the lease deed containsprovisions for the regulatory regime.This cannot detract from the transferof rewards substantially to the lessee. he contends.C41. As far as Section 5(8)(f) of the IBC is concerned it is pointedout that the said provision is catch-all section and acts as residuaryreservoir, and what remains after what has been provided in the precedingprovisions, are captured within its scope. He would contend that theCourt must not overlook the object and scheme of the IBC. The financialDcreditors occupy position of dominance whereby they call the shotswhen it comes to ruling on the destiny of the corporate debtor. Underthe IBC, true power vests with the Committee of Creditors. It is thefinancial creditors, who are at the helm of affairs of the Committee. It isthe Committee which will vote and finally decide, on the Resolution Plan,which binds all. financial creditor would be in position to sway theEviews of others on the Committee. He would, in the context of the factspoint out that as things stand, the Committee isvirtually filled withhomebuyers. It would be unjust to deny the appellant its say in theproceedings of the Committee. Huge sums of public money are at stake.As the custodian of public interest, the appellant must be vouch-safedits

Flegitimate position in the Committee of Creditors. It is this importantperspective, which has been overlooked by the NCLAT, it is complained.The appellant cannot be treated as an operational creditor, whose interestis no more than the mere realisation of the money due to it. The appellantis more comparable with bank. In other words, the lease in question

provides the lessee with the mechanism, by which on payment of aGmere ten percent of the total premium upfront, the lessee gets possessionof the land. moratorium follows. Thereafter, under the lease, the lesseeis no doubt obliged to pay the balance ninety per cent of the premiumand that too in 16 half-yearly instalments. If the lessee had wanted topurchase the property and required finance from any other source,Hincluding bank, it would have had to receive financial accommodation

in some form or the other, under which, the respondent would becomeobliged to pay back the loan to the bank in terms of the arrangement. Inthis case, on the other hand, under the lease, lessee, instead ofapproaching bank, must be treated as raising funds in the mannerprovided 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 reprieve and thereafter, he is enabled to pay thelessor directly the balance amount. Therefore, this is transaction, asdefined in Section 2(33) of the IBC. He would submit that the amountsare to be paid back with interest. Therefore, on the whole, it must betreated as case where, there is raising of funds by the lessee, which,has commercial underpinning, as required under Section 5(8)(f) of theIBC. He would point out that the main provision, i.e., as contained inSection 5(8) contemplates debt, which is disbursed. Various clauses,which are enumerated thereafter, need not contain the aspect ofdisbursement. Therefore, raising of funds, within the meaning of Section5(8)(f), can be contemplated without actual disbursement. He wouldrely on the Judgement of this Court in Pioneer Urban Land andInfrastructure Limited and Another vs. Union of India (UOI) andOthers[1]

42. Smt. Madhavi Divan, learned Additional Solicitor General,appears for NOIDA in the connected matter. She adopts the contentionsof the learned Solicitor General appearing for the same party. However,the learned Additional Solicitor General, would make three-prongedsubmissions with regard to the appellant qualifying as financial creditor.She would contend that the appellant would fall in the main provisions ofSection 5(8). There is debt. There is time value of money. Interest ispredicated on the strength of the same. As far as the requirement ofdisbursement is concerned, she draws our attention to Section 2(33) ofthe IBC, which defines the word ‘transaction’. It is her contention thatthe disbursement need not be unidimensional. In the modern world, withthe sophistication and development of the financial market, thedisbursement can be from the creditor to the debtor or from the debtorto the creditor. Therefore, even without the aid of the provisions, whichappear by way of inclusion, the appellant fits the bill as financial creditor.She also highlighted the true role of the appellant under the Statute ofwhich it is an offspring. She would point out that there are long-term

Astakes, as far as the appellant is concerned. The appellant is chargedwith the sublime function of ensuring planned development. The leaseoperates as tool of financing. Whatever be the form, of which theCourt must not be prisoner, the substance cries out for labelling theappellant as financial creditor. Borrowing must not be viewed from theprism of convention. The lease contemplates an upfront payment, aBmoratorium and staggered payments of installments. She also drawsconsiderable inspiration from Pioneer (supra). She would contend thatin Pioneer (supra), which involved challenge to including homebuyersas financial creditors on the strength of the Explanation, which wasincluded in Section 5(8)(f) of the IBC, this Court recognised that aChomebuyer is not borrower in the traditional sense and yet the Courtfound that homebuyer was financial creditor and builder was beingfinanced by the payment of advances and staggered payment ofinstallments and, at the end of which, the equivalent in terms of the flat,was promised. It would involve manifest absurdity, if the appellant,who would be in better position, in fact, than the homebuyers, is yetDexcluded from the Committee of Creditors on the score that it is to betreated 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 holdthat the lessee, by entering into the lease, comes to enjoy the propertyEand also have other rights, including the right to entirely appropriate theprofit from the transfer of the flats constructed thereon. By the staggeredpayments, after the initial payments of advance of ten percent and amoratorium freeing the funds of the corporate debtor clearly takes place.There is generation of funds by the mechanism provided in the lease andFit plainly has the effect of borrowing and bringing into play the statutorymantra also, of commercial effect of borrowing. It works extremelywell for the lessee, in fact, in comparison to how it would have fared,had it approached the bank or financial institution. With regard to Section5(8)(d), the learned Additional Solicitor General also emphasised upon

the word ‘deemed’ to be financial lease with reference to the IndianGAccounting Standards. It is her case that, in fact, in the accounts of theappellant, the transaction is reflected as sale. This assumes significanceas, under the Indian Accounting Standards, the dominant test is, whether,substantially, the risks and rewards incidental to ownership has beentransferred. There cannot be more eloquent fulfilment of this requirementHthan the very action of the appellant in treating the transaction as sale

in the balance-sheet, and what is more, for the years, much prior to theenactment of the IBC. It is submitted that Court may not be obliviousthat the premium under the lease, is, indeed, linked to the market value,indicating, unerringly, in the direction of sale. She would make thinlyveiled threat that if the appellant is to be excluded in the manner fromthe Committee of Creditors, there can be possible cancellation of leasesbeing resorted to by the appellant, which may not augur well for the realestate world. She relied upon Swiss Ribbons Private Limited andAnother v. Union of India and Others[2].

SUBMISSIONS OF SHRI RITIN RAI

44. The respondent in Civil Appeal No. 2222/2021 namely theresolution professional who appears through Shri Ritin Rai, learned SeniorCounsel would make the following submission.

The case of the appellant that the disbursal can flow in eitherdirection ignores that what is disbursed is debt and not its repayment.The appellant has not parted with any money that is now with the corporatedebtor. Section 5(8) does not use the word ‘transaction’ and any otherinterpretation other than flow of funds from creditor to the debtorshould not be accepted, and it will lead to absurdity. As far as the caseunder Section 5(8)(d) is concerned, it is submitted that the appellant hasnot classified in its books of accounts classifying the lease as financiallease. The classification as operating lease or financial lease is to bemade from the inception date. Neither at the time of entering into thelease deed nor subsequently has any classification been made. Underthe Indian Accounting Standards, Lessee under capital leasetransaction recognises the lease as an asset in his Balance Sheet and itis presented as Receivable at an amount equal to net investment. Theobjective of IAS 116 is that both the Lessor and Lessee provides relevantinformation. In the case of financial lease, lessor is required to disclosein its financial statement selling profits or loss, finance income on the netinvestment in the lease, income relatable to variable lease, payment, notincluded in the measurement of the net investment of the lease. patternis expected. Lease payment under an operating lease are on the otherhand on straight line basis or another systematic basis. There is differenceof substance between the two cases. The absence of classificationamounts to non-compliance with mandatory requirement as to standards

CDE

Arequired under Section 133 of the Companies Act for which penalty isprovided. The lease in question does not countenance substantially thetransfer of all the rewards. The Lessee in terms of clause 12 of otherclauses is not permitted to assign leasehold interest. Restrictions are puteven on the lessee’s shareholding.The clause relating to mortgage wouldinter alia indicate apart from restriction otherwise that any unearnedBincrease in the value of the lease premises will be at the disposal of theappellant.Therefore, the gains would enure to the appellant. There is norenewal of the lease. Support is drawn otherwise from the order ofNCLAT. Reliance is placed on the following judgment of this Court inMohd. Noor and Others v. Mohd. Ibrahim and Others[3] :C“..The ownership concept does not accord with the status of aperson who is paying the rent. tenant under various legislationseither urban or rural property, agricultural or otherwise, enjoysright of heritability and transferability. At the same time, he doesnot become owner of the property. Transfer of ownership is distinctDand different from transfer of interest in the property. licenseeor even tenant may be entitled by law to transfer his interest inthe property but that is not transfer of ownership.” lessee’s right to sub-lease comes with certain restrictions.Theappellant continues to be the owner. The reward incidental to ownershipEis not to be read as profit from the commercial practice. The reward hasto be considered as purely emanating from the rights of ownership.Towards the development, selling and promotion, the appellant has norole. The word ‘reward’ bears the meaning that which is offered orgiven for some service or attainment. Therefore, the rewards cannot beFsaid to mean the profit generated from the commercial activities of sellingthe units by the Lessee. Land has no economic life. As regards Section5(8)(f) goes, it is contended that the claim of the appellant in view of theterms of the lease under which after the initial payment there is amoratorium and the Lessee is permitted to pay the balance premium ineasy instalments overlooks the fact that claim under any lease wouldGthen be termed as financial debt.Leases are already covered underSection 5(8)(d). There is no amount raised pursuant to any othertransaction in the present case. The situation in Pioneer (supra) isdistinguishable as no amount is raised from the appellant.

SUBMISSIONS OF DR. ABHISHEK MANU SINGHVI

45. There are concurrent findings of two courts against theappellants. Findings have been rendered which should dissuade this courtfrom interfering in the matter. The appellants have understood itself tobe an operational creditor. This is sought to be substantiated withreference to the submission of the claim initially in form meant foroperational creditors except workmen and employee. Subsequently thatit was belatedly an amended claim in form was found. The appellanthas improved its case at each stage.

46. Before the NCLT it contended it must be treated as financialcreditor in view of Section 5(8)(d). Finding they will be unable to meetthe requirements under the Indian Accounting Standards set out in Section5(8)(d), for the first time in its written submission before the NCLAT thecontention was raised under Section 5(8)(f). The appellant cannotconcurrently claim that the lease deed is covered by specific provisionrelating to financial leases contained in Section 5(8)(d) and also underSection 5(8)(f) which is general provision. The dues to the appellantqualify as statutory dues. Reliance is placed on Section 12 of the UPIADwhich makes Section 40 of the U.P. Act. 1973 applicable.

47. Appellant under UPIAD is not permitted to carry out anyactivity which is of financial nature and consequently any dues arisingfrom disposal of land which are in the discharge of statutory duties, mustbe considered as statutory dues. In fact, NOIDA has been treated in abetter manner than afinancial creditor, having been given 41% share ofits admitted claim.

48. It is contended that the risks and rewards incidental toownership have not been transferred the leases not finance lease.There has been no disbursement under the lease deed within the meaningof Section 5(8). The repercussions of NOIDA being declared as afinancial creditor would be to frustrate the CIRP of the real estatecorporate debtor. Having regard to its position as public authority andthe nature and transactions commercial wisdom of NOIDA would infact compel the appellant to vote against all resolution plans proposed.Thehome buyers will be most adversely affected. Shri DevashishBharuka, appearing for the flat owners contended that the flat ownershave heritable and transferable right under Section 5 and 7 of the U.P.Apartments Flat Owners Act, 2010.

ATHE IMPORTANCE OF BEING FINANCIALCREDITOR UNDER THE IBC

49. In this context, it is undoubtedly true that in the scheme of theIBC, Section 21 of the IBC contemplates the constitution of the Committeeof Creditors. The Committee of Creditors is to consist of all financialBcreditors of the corporate debtor. It is the Committee of Creditors, whichhas power to appoint and replace the Interim Resolution Professional asthe Resolution Professional. Under Section 27 of the IBC, the Committeeof Creditors, which would consist of only the financial creditors, wouldhave the right to replace Resolution Professional. Under Section 28,the approval of the Committee of Creditors is mandatory in respect ofCvarious powers which need to be exercised by the Resolution Professional.Central to the IBC, and what would, in fact, constitute its very soul, isthe idea of resurrecting an ailing corporate debtor. The means,contemplated, is the submission, consideration and approval of ResolutionPlans to be given by Resolution Applicants. Here again, Section 30Dcontemplates that the Resolution Plan is to be initially scrutinised by theResolution Professional, who is to present the Resolution Plan, whichconforms to Section 30(2), to the Committee of Creditors. The Committeeof Creditors may approve the Resolution Plan in the manner provided inSection 30(4). Regulation 38 of the Insolvency Bankruptcy Board ofIndia (Insolvency Resolution Process for Corporate Persons) Regulations,E2016, no doubt, provides for the mandatory contents of the ResolutionPlan, which may be approved. The Plan must include the submission asto how the interests of stakeholders, including financial creditors andoperational creditors, are to be dealt with. Regulation 38(1), inter alia infact, contemplates that the Resolution Plan must provide that the amountFpayable to the operational creditors shall be paid in priority over thefinancial creditors.

50. It is true that, in given case, it may appear that the interestsof operational creditors have been best looked after in the circumstancesunder particular approved Resolution Plan. In fact, this is also one ofGthe contentions of the respondents, who would point out that the appellantsinterests have been adequately and fairly addressed in the ResolutionPlan. However, what is pointed out is that, as matter of principle, itisvital, both from the point of view of the interest and rights of the appellantand also the object of the IBC itself, that the appellant must be treatedas financial creditor. By being Member of the Committee of Creditors,H

the appellant would have the right to place its perspective. It would havethe opportunity to persuade the other Members of the Committee ofCreditors to either accept or reject or modify Resolution Plan. Thecorporate debtor slipping into liquidation, is matter, which would,undoubtedly, impact the appellant in considerable manner. None of theseaspects 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 appellantis recognised as financial creditor, since it claims itself to be publicauthority and it holds the property as trustee, it will not agree to anyhair cut proposed by any resolution applicant does not appeal to us. Theprovisions in question cannot be construed on the basis of prophecy ofhow financial creditor will behave in its capacity as financial creditor.If the appellant falls within the ambit of the financial creditor as definedin Section 5(8), then as to how it will conduct itself being public authoritycannot be relevant factor. Equally unimpressive is the argument thatthe appellant would have the largest claim in most real estate resolutionswhere it is lessor and would therefore have the largest vote share inthe committee of creditors and consequently have domineering role indeciding on the fate of any resolution plan. If the appellant falls withinthe scope of the financial creditor, then none of these aspects can weighwith the court. Apparently, the respondent/intervenor represent theinterests of flat owners. It is undoubtedly true that being financial creditorwho perhaps fall under particular class, they have their own intereststo espouse. But if the appellant is actually financial creditor, then themere fact that the interest of the appellant clashes with that of the restof the body of financial creditors cannot detract from the court holdingthe appellant financial creditor if otherwise it establishes the case thatit is financial creditor. We cannot overlook the fact that large sums ofmoney form the subject matter of the debt claimed by the appellant asdue to it. There can be no objection to the appellant setting up the claimto be financial debt and succeeding on the strength of the provisionsentitling it to be so treated and therefore, the court should not hesitate torecognize the appellant as financial creditor if it is one. The contentionalso that the appellant would be more interested in realizing the greatervalue of its assets and would allow the corporate debtor to descend intoliquidation and would not allow any resolution plan to pass muster are allarguments which we must only mention before it is rejected as it seeks

Ato deflect usfrom proper understanding of the relevant provisions withthe 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 INQUESTION?

B52. Out of deference to submissions addressed by Smt. MadhaviDiwan, learned Additional Solicitor General, appearing on behalf ofappellant-NOIDA, that appellant would be financial creditor, even withreference to Section 5(8), though such line was not taken by the learnedSolicitor General, who purported to appear for NOIDA in the main matter,we shall deal with the said submission.C

53. The essential requirements to attract Section 5(8) are thatthere must be debt along with interest, if any, which is disbursed againstconsideration for the time value of money. There can be no dispute thatthere is debt in this case. Even the respondents would contend that it isactually debt but an operational debt under Section 5(21). That interestDis payable in connection with the debt, cannot be disputed, having regardto the terms of the lease deed. It is another matter that liability to payinterest is not an essential feature to attract Section 5(8), as held by thisCourt in Orator Marketing Private Limited v. Samtex Desinz PrivateLimited[4]. The next requirement is that there be disbursement.EDisbursement is an indispensable requirement to constitute debt, afinancial debt, within the meaning of Section 5(8) and that disbursementmust be from the creditor to debtor. Or is it that, our understanding ismistaken? Our understanding, in this regard, is sought to be shaken bythe learned Additional Solicitor General by raising the following argument.It is her case that the requirement of disbursement is fulfilled by theFpayment of ten per cent down payment, which takes place upfront in thefacts of the case before us. Further, it is her case that disbursal can flowboth from the debtor to the creditor and the other way also. Myriadmethods of availing financial facilities can render the flow of funds ineither direction. It need not be unidirectional. It is, in this regard, that themeaning of the word ‘transaction’, as defined in Section 3(33), is invoked.GSection 3(33) of the IBC reads as follows:

“3(33) “transaction” includes agreement or arrangement inwriting for the transfer of assets, or funds, goods or services,from or to the corporate debtor;

H4 2021 SCC Online SC 513

54. What is contemplated in the principal provisions of Section5(8) is transaction, she contends. This is as Section 5(8)(f) refers to‘any other transaction’, and therefrom, the provisions which precedeSection 5(8)(f) would also involve transactions. The Legislature has notchosen to use suffix ‘from creditor to debtor’ before the word‘disbursed’. So long as there is disbursal against consideration for thetime value of money, which is present in the case, and from which, thedebt arises, viz., liability or an obligation, Section 5(8) stands attracted.A default, by way of breach by the lessee, gives rise to cause of actionfor breach of contract where the appellant can seek to recover damagesfor the lost opportunity in developing the land. The word ‘claim’ includesa right to remedy for breach of contract, it is pointed out.

55. The word ‘transaction’, as such, is not used in Section 5(8), aspointed out by the respondents. Unless there is disbursement of the debt,Section 5(8) will not apply. We do bear in mind the following expositionof law in regard to the interplay between the words ‘debt’ and ‘claim’ inPioneer (supra):

“69. It is precisely to do away with judgments such as RamanIron Foundry [Union of India v. Raman Iron Foundry, (1974)2 SCC 231] that “claim” is defined to mean right to payment ora right to remedy for breach of contract whether or not suchright is reduced to judgment. What is clear, therefore, is that adebt is liability or obligation in respect of right to payment,even if it arises out of breach of contract, which is due from anyperson, notwithstanding that there is no adjudication of the saidbreach, followed by 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 SinghRana [H.P. Housing & Urban Development Authority v. RanjitSingh Rana, (2012) 4 SCC 505 : (2012) 2 SCC (Civ) 639] (atparas 13 and 14 therein), where Webster’s ComprehensiveDictionary (International Edn.), Vol. 2 and Law Lexicon by P.Ramanatha Aiyar (2nd Edn., Reprint) are quoted.”

56. Thus, debt is liability or an obligation in respect of right topayment. Irrespective of whether there is adjudication of the breach, ifthere is breach of contract, it may give rise to debt. In the context ofSection 5(8), in Pioneer (supra), disbursement has been understood as

Amoney, which has been paid. In the context of the transaction involvedin the said case, the homebuyers advanced sums to the builder, whowould then utilise the amount towards the construction in the real estateproject. That there must be disbursement, was clearly present in themind of the Court, is clear from the fact that it has expressly proceededon the basis that when the money was paid by the homebuyer to theBbuilder, the amount disbursed was no longer with the homebuyer. Thehomebuyer was paying lesser sums by way of installments than he wouldhave to pay for the ultimate price of the flat/apartment. The Court wenton to hold that the expression ‘borrow’ was wide enough to include theadvance by the homebuyer to the real estate developer for the temporaryCuse. Both parties had commercial interests, which was further found.But what is relevant is to attract Section 5(8), on its plain terms, isdisbursement. While, it may be true that the word ‘transaction’ includestransfer of assets, funds or goods and services from or to the corporatedebtor, in the context of the principal provisions of Section 5(8) of theIBC, we are of the view that to import the definition of ‘transaction’ inDSection 2(33), involving the need to expand the word ‘disbursement’, toinclude promise to pay money by debtor to the creditor, will be uncalledfor straining of the provisions. ‘Disbursement’, within the meaning ofSection 5(8), is the payment of money, which flows to the debtor. In theword ‘claim’, as defined in Section 3(6), right to payment is one of theEcomponents. The golden thread that runs through the word ‘claim’, isthe right to payment. The right to payment may arise from Judgement.It may or may not be fixed. It may be disputed or undisputed. It may belegal or equitable. It may be secured or unsecured, but what isindispensable is, there must be right to payment. Similarly, in cases ofbreach of contract, under any law in force, if it gives rise to right toFpayment, irrespective of whether it is reduced to Judgment or fixed ormatured or unmatured, disputed or undisputed, secured or unsecured, aslong as there is right to payment, claim arises. When there is claimand, in regard to such claim, there is liability or obligation, which isdue from any person, it gives rise to debt. debt includes financialGdebt and an operational debt. It is after defining the word ‘debt’ withreference to the existence of 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 elaboratelydefined in Section 5(8). What is relevant for the purpose of Section 5(8),has been clearly articulated and can be understood with reference toH

what is expressly provided. It is unnecessary to bring in the concept oftransaction, as defined in Section 2(33), for appreciating its scope. Aperusal of definition of the word ‘debt’, no doubt, reveals that it is closelyintertwined with the definition of the word ‘claim’ in Section 3(6). Theword ‘transaction’ is conspicuous by its absence inthe definition of boththe word ‘claim’ and the word ‘debt’. We do hold that ‘debt’ means aliability or obligation, which relates to claim. The claim or right topayment or remedy for breach of contract occasioning right to paymentmust be due from any person. Now, if it is due from any person, it mustbe due to someone who would then be the creditor. Section 5(7) defines‘financial creditor’ as person to whom financial debt is due besides anassignee or transferee from such person. While it may be true that therewould be the brooding omnipresence of transaction, as defined,underlying debt and claim as defined, it would be unnecessary andunreasonable to import in the concept of transfer of funds, from or to acorporate 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 transfer of fund, inter alia, to corporatedebtor, it is unnecessary to explore the converse situation projected bythe learned Additional Solicitor General, for understanding the scope ofthe word ‘financial debt’, as contained in Section 5(8), viz., the principalprovision. As to the employment of the word ‘transaction’ in the variousclauses of Section 5(8) and the true scope of Section 5(8)(f), it is amatter, which will be discussed separately. We are of the view that, inthe 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 financial creditor within the ambit of Section 5(8).

SECTION 5(8)(D): WHETHER THE APPELLANT IS AFINANCIAL LESSOR

57. The IBC was enacted in the year 2016. It is interesting tonote that the word ‘financial lease’ has been defined in the Recovery ofDebts Due to Banks and Financial Institutions Act, 1993 by insertion ofSection 2 (ha). This insertion was effected by Act 44 of 2016. It readsas follows:

“2(ha) “financial lease” means lease under lease agreementof tangible asset, other than negotiable instrument or negotiabledocument, for transfer of lessor’s right therein to the lessee for acertain time in consideration of payment of agreed amount

ABC

FGH

370SUPREME COURT REPORTS

Aperiodically and where lessee becomes the owner of the suchassets at the expiry of the term of lease or on payment of theagreed residual amount, as the case may be.”

Section 2 (ma) of the Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act, 2002 which is alsoBinserted by Act 44 of 2016 w.e.f. 1.9.2016 defines the word ‘financiallease’ identically to Section 2(ha) in the Recovery of Debts Due to Banksand financial Institutions Act, 1993. We notice this for the reason thatthe same law giver has enacted Section 5(8) defining financial debt inthe IBC including lease which is financial lease in manner which isdifferent in scope from the words ‘financial lease’ as defined in theCaforesaid two enactments. In the definition of ‘financial lease’ in thetwo Acts which we have adverted to, the conventional concept of a‘financial lease’ inevitably and indispensably involving the transformationof lessee into the owner of the assets when the lease ends, is essentiallycaptured whereas for purpose of IBC, Parliament has set out the definitionDwhich we will recapitulate here

Section 5(8)(d)- “the amount of any liability in respect of anylease or hire purchasecontract which is deemed as finance orcapital lease under the Indian AccountingStandards or such otheraccounting standards as may be prescribed;”

E58. The concept of financial lease has engaged the attention ofthis court in decision which has been applied by the NCLAT.

In Asea Brown Boveri Ltd. v. Industrial Finance Corporationof India and Others[5] the appellant entered into lease and financeagreement with the third respondent therein under which the subjectFmatter of the lease was 57 cars. The third respondent became notifiedparty under law under which the special court found that the transactionwas only lease and nota finance lease. In this context this court wenton to hold as follows:

“13. What is lease finance? According to Dictionary ofGAccounting & Finance by R. Brockington (Pitman Publishing,Universal Book Traders, 1996 at p. 136):

“A finance lease is one where the lessee uses the asset forsubstantially the whole of its useful life and the lease payments

H5 (2004) 12 SCC 570

are calculated to cover the full cost together with interestcharges. It is thus disguised way of purchasing the assetwith the help of loan. SSAP 23 required that assets held undera finance lease be treated on the balance sheet in the same way, asif they had been purchased and loan had been taken out toenable 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 long-term lease on fixed assets, it may not becancelled by either party. It is source of long-term fundsand serves as an alternative of long-term debt financing. Infinancial lease, the leasing company buys the equipment and leasesit out to the use of person known as the lessee. It is full payoutlease involving obligatory payment by the lessee to the lessor thatexceeds the purchase price of the leased property and financecost.

Financial lease has been defined by International AccountingStandards Committee as ‘a lease that transfers substantially allthe risks and rewards incident to ownership of an asset. Title mayor may not eventually be transferred’. Lessor is only financierand is not interested in the assets. This is the reason that financiallease is known as full payout lease where contract is irrevocablefor the primary lease period and the rentals payable during whichperiod are supposed to be adequate to recover the total investmentin the asset made by the lessor.”

(emphasis supplied)

16. In our opinion, financial lease is transaction current in thecommercial world, the primary purpose whereof is the financingof the purchase by the financier. The purchase of assets orequipments or machinery is by the borrower. For all practicalpurposes, the borrower becomes the owner of the propertyinasmuch as it is the borrower who chooses the property to bepurchased, takes delivery, enjoys the use and occupation of theproperty, bears the wear and tear, maintains and operates themachinery/equipment, undertakes indemnity and agrees to bearthe risk of loss or damage, if any. He is the one who gets the

Aproperty insured. He remains liable for payment of taxes and othercharges and indemnity. He cannot recover from the lessor, any ofthe abovementioned expenses. The period of lease extends overand covers the entire life of the property for which it may remainuseful divided either into one term or divided into two terms withclause for renewal. In either case, the lease is non-cancellable.”B

59. We shall take up Section 5(8)(d) of the IBC. The subjectmatter of Section 5(8)(d) is lease or hire-purchase contract. Thematter does not end there. In other words, it is not any lease or hire-purchase contract, which would entitle the lessor to be treated as thefinancial creditor. There must be lease or hire-purchase contract, whichCis deemed as finance or capital lease. The Law Giver has not left thecourts free to place, its interpretation on the words ‘finance or capitallease’. The Legislature has contemplated the finance or capital lease,which is deemed as such lease under the Indian Accounting Standards.It could also be deemed as financial or capital lease under any otherDaccounting standards as may be prescribed. The word ‘prescribed’ hasbeen defined in Section 3(26) as meaning prescribed under Rules madeby the Central Government. There is no case for the appellant that CentralGovernment has made any Rules providing for other accounting standardsunder Section 5(8)(d) of the IBC.In Section 5(8)(d), it is necessary tonotice the opening words of the provision, viz., ‘the amount of any liabilityEin respect of’. The Law Giver, in other words, has contemplated thatshould there be any liability arising out of lease or hire-purchase, whichis deemed as finance or capital lease in terms of the Indian AccountingStandards,then, the person, who has incurred the liability, would becomethe debtor and the person, in respect of whom, the liability has beenFincurred, 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 IndianAccounting Standards, there would be provision providing for deemedfinance or capital lease. The inquiry in this direction, however, did leaveGus with failure and even disillusionment. We found that there is noprovision, which articulates deeming provision, as such, providing for alease or hire-purchase contract, which is deemed as finance or capitallease. The word ‘deemed’ is used as verb. It is legislative devise byway of fiction. In other words, the provision requires the Court toimagine state of affairs as true. The province of deeming provision isH

the subject matter of large body of case law. Suffice it to notice thefollowing paragraphs from Aneeta Hada v. Godfather Travels andTours Private Limited[6]:

“34.Lord Asquith, in East End Dwellings Co. Ltd. v. FinsburyBorough 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 asreal the consequences and incidents which, if the putative state ofaffairs had in fact existed, must inevitably have flowed from oraccompanied it. … The statute says that you must imagine certainstate of affairs; it does not say that having done so, you mustcause or permit your imagination to boggle when it comes to theinevitable corollaries of that state of affairs.”

38. From the aforesaid pronouncements, the principle that can beculled out is that it is the bounden duty of the court to ascertain forwhat purpose the legal fiction has been created. It is also the dutyof the court to imagine the fiction with all real consequences andinstances unless prohibited from doing so. That apart, the use ofthe term “deemed” has to be read in its context and further, thefullest logical purpose and import are to be understood. It is becausein modern legislation, the term “deemed” has been used formanifold purposes. The object of the legislature has to be kept inmind.”

61. It is apposite, at this juncture, to advert to the Indian AccountingStandards relevant to our inquiry.

62. The Rules, which are relevant in regard to the specification ofa lease as financial lease are set down as Rules 61 to 67 of IndianAccounting Standards [for short “IAS”]. They have been made underSection 133 of the Companies Act, 2018.

“Classification of leases (paragraphs B53–B58)

61 lessor shall classify each of its leases as either an operatinglease or finance lease.

62 lease is classified as finance lease if it transfers substantiallyall the risks and rewards incidental to ownership of an underlyingasset. lease is classified as an operating lease if it does nottransfer substantially all the risks and rewards incidental toownership of an underlying asset.

63 Whether lease is finance lease or an operating lease dependson the substance of the transaction rather than the form of thecontract. Examples of situations that individually or in combinationwould normally lead to lease being classified as finance leaseare:

C(a) the lease transfers ownership of the underlying asset to thelessee by the end of the lease term;

(b) the lessee has the option to purchase the underlying assetat price that is expected to be sufficiently lower than the fairvalue at the date the option becomes exercisable for it to bereasonably certain, at the inception date, that the option will beexercised;

(c) the lease term is for the major part of the economic life ofthe underlying asset even if title is not transferred;

(d) at the inception date, the present value of the lease paymentsEamounts to at least substantially all of the fair value of theunderlying asset; and

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

64 Indicators of situations that individually or in combination couldalso lead to lease being classified as finance lease are:

(a) if the lessee can cancel the lease, the lessor’s lossesassociated with the cancellation are borne by the lessee;

(b) gains or losses from the fluctuation in the fair value of theresidual accrue to the lessee (for example, in the form of arent rebate equaling most of the sales proceeds at the end ofthe lease); and

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

65 The examples and indicators in paragraphs 63–64 are not alwaysconclusive. If it is clear from other features that the lease doesnot transfer substantially all the risks and rewards incidental toownership of an underlying asset, the lease is classified as anoperating lease. For example, this may be the case if ownershipof the underlying asset transfers at the end of the lease for avariable payment equal to its then fair value, or if there are variablelease payments, as result of which the lessor does not transfersubstantially all such risks and rewards.

66 Lease classification is made at the inception date and isreassessed only if there is lease modification. Changes inestimates (for example, changes in estimates of the economic lifeor of the residual value of the underlying asset), or changes incircumstances (for example, default by the lessee), do not giverise to new classification of lease for accounting purposes.

Finance leases

Recognition and measurement

67 At the commencement date, lessor shall recognise assetsheld under finance lease in its balance sheet and present themas receivable at an amount equal to the net investment in thelease.”

63. The analysis of the said criteria in the context of the lease inquestion, would yield the following results. Under Rule 61, the lessor isobliged to classify each of its leases as an operating lease or financelease. 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 otherCivil 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 afinance lease as such, the transaction is characterised as sale in thebalance sheet.

64. Rule 62, the sheet anchor of the appellant, declares that alease is classified as financial lease if it transfers, substantially, all therisks and rewards incidental to ownership of an underlying asset. Movingon to Rule 63, it undoubtedly, declares that what matters is not the formbut the substance. Thereafter, under the examples of situations, eitherindividually or in combination, which would lead to lease being classifiedas finance lease, certain situations have been depicted. As far as the

Afirst situation is concerned, it would involve lease, where, there is atransfer of ownership of an underlying asset to the lessee by the end ofthe lease term. There is no case for the appellants that the leasecontemplates transfer of ownership of the underlying asset. Theunderlying asset is the land.In fact, the case of the appellant would appearto be also that there is no transfer of ownership because by the end ofBlease term third party rights would have been created over the dwellingunit/ built up space/ plot constructed by the Lessee. It is also the furthercase set up that the Lessee alone brings third parties on to the propertyand gets paid by such parties.

It will be relevant to notice that the so called third parties do notCget ownership rights as such. The rights are transferred in favour of theallotees of dwelling units /built up space/ plot only by way of sub-lease.Therefore, there is no transfer of the ownership of the underlying assetby the end of the lease term.Under the next situation considered relevantunder the Indian Accounting Standards, is the granting of an option toDthe lessee to purchase the underlying asset at price, which is expectedto be sufficiently lower than the fair value at the date of option becomingexercisable for it to be reasonably certain at the inception date, that theoption will be exercised. The underlying asset is the plot.

65. From the Table presented before the NCLAT by the appellant,Ewe find that appellant appears to have taken the stand that the lease rentis paid for the leasing of the land and the premium is paid for the rights todevelop and construct the buildings on the lease land. Therefore, theunderlying asset is not just land but the right to develop or construct abuilding.F66. lease of immovable property is defined in Section 105 of theTransfer of Property Act, inter alia, as transfer of right to enjoysuch property. The property, which is leased, under the lease is the plotof land. Section 105 speaks about the terms on which the lease takesplace. The right to enjoy the leased property and the terms, on which itis to be enjoyed, must be distinguished from the property, which is theGsubject matter of lease. The subject matter of the lease is such property.It is such property, viz., immovable property, in the case of lease of animmovable property, which can be treated as the underlying asset, forthe purpose of the Rules made under Section 133 of the Companies Act,2013. The contention of the appellant that the underlying asset is alsoHthe right to develop or construct building on the leased land, does not

appear to be tenable. The very contention contains an irreconcilablecontradiction. On the one hand, the land is correctly described as theleased land. The right to develop or construct building on the leasedland, cannot be treated as the underlying asset. In fact, there is no casethat the buildings that are put up on the leased land, would also constitutepart of the underlying asset. We may firstly notice that there is no optionto purchase ‘the right to develop or construct the building’. This itselfsuffices to expose the fallacy that the right to develop or construct thebuilding is also part of the underlying asset.

67. At any rate there is no right within the meaning of criteria withthe Lessee to purchase the asset. This criterion is also not fulfilled asthere 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 themajor part of the economic life of the underlying asset, even if the title isnot transferred. The definition of ‘economic life’, as provided in IndianAccounting 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 economicallyusable by one or more users; or

(b) the number of production or similar units expected to beobtained from the asset by one or more users.”

(Emphasis supplied)

The lease in question is for period of ninety years.In regard toland, the underlying asset, ‘the principle of economic life of underlyingasset’, is inapposite. The economic life of land is not limited. The principlein the said situation is predicated with reference to measuring theeconomic life of an asset. More importantly, it speaks of the major partof the economic life of the asset. Both these concepts are inappositeand even inapplicable with regard to land. Land does not depreciatewith 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 beingcompleted the lease land shall be of no value to the lessor and the thirdparty right being created, results in the economic life and the value ofthe asset being exhausted. We find no merit in this argument having

Aregard to the fact that the underlying asset is the land.There is anotherimportant reason which we must set out here. sub- lease has beenproduced before this Court in C.A.No.2369 of 2021. Originally it wasreferred to in the course of argument by Shri Devashish Bharuka.However, it has subsequently been filed under an affidavit on behalf ofRespondent No..1 in C.A.No.2367-2369 of 2021. The sub-lease, no doubt,Bis entered into between the appellant as Lessor and one M/s. Cloud 9Projects Pvt. Ltd., the Lessee in the said lease and the sub-lessee. Thesub-lease dated 12.11.2018 would show that the land admeasuring 40087sq.mtr. bearing Plot NO.GH-02 was the subject matter of the lease.The lease was, as in the facts of this case, for period of 90 years. TheClease 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 toallot to its applicants, the dwelling units including the undividedproportionate share in the land, inter-alia. It is further provided that thesub-lessee will observe the covenants, terms and conditions, laid downDin the original lease. Thereafter, it is provided that in consideration of theamount paid, which included the cost of super structure and the undividedproportionate 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 landunderneath the building. It is next provided that the lessee simultaneouslyEsub-leases to the sub-lessee for the unexpired period of ninety yearslease, the undivided unidentified title to the land proportionate to the areaallotted to the sub-lessee in relation to the total area subject to variousterms and conditions. In Condition 6, it is mentioned inter-alia that thesub-lessee shall get exclusive possession of the built-up covered area of

Fthe dwelling unit, and is being transferred the title of the same along withthe right over the land, through the sub-lease. The lessee and the sub-lessee are to perform the covenants and conditions in the lease deedbetween the lessee and the lessor as applicable in relation to the landand the unit being leased under these present. The sub-lessee cannot

mortgage the dwelling unit to secure ‘any loan’ at any stage except withGthe prior permission of the lessor. Sub lessee is to also obtain anappropriate NOC from the lessee/lessor, in this regard. The sub-lesseecan use the dwelling unit only for residential purposes and for no otherpurpose. The right of the sub-lessee is made subject to the provisions ofthe UP Act of 2010. It is thereafter that condition 21 deals with what isHto 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 leaseof the land, peacefully hand over the said land unto the Lessorafter 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, theSub-Lessee shall have the right of usage of common areas andwill not have any independent right of possession of the same.

It is further provided in condition 24 that the terms and conditionsof the parent lease deed, inter-alia, shall be binding on the parties afterexecution of the sub-lease. Condition 27 provides that in case of anybreach of the terms and conditions of the sub-lease by the lessee/sub-lessee, the lessor will have the right to re-enter the demised dwellingunit, after determining the sub lease. It is further provided that at thetime of re-entry of demised dwelling unit, the lessor may re-allot thesame to any other person. All the clauses of the parent lease deed aremade applicable and they are to prevail in case of any repugnancybetween them and the sub-lease.

71. perusal of the same would reveal that in keeping with thelease deed and the provisions of Section 9 of the U.P. Apartment OwnersAct, it is that the sub-lease deed is executed. The sub-lessee or theallottee pays the cost of the structure and the undivided proportionateinterest in the land. The transfer to him is described as sale andconveyance. There is simultaneous sub-lease also in regard to theunidentified title to the proportionate land. The sub-lease appears to effecta sale of the dwelling unit. However, certain conditions appear to militateagainst an absolute transfer. They include the condition that the sub-lessee cannot mortgage the dwelling unit for securing any loan at anystage except with prior written permission of the lessor. The use of thedwelling unit being limited to residential purpose is perhaps another featurewhich is unique. The power of the lessor to re-enter the dwelling unit,which is described in condition 27 as the ‘demised’ dwelling unit, afterdetermining the sub-lease and also the power to re-allot the same to anyperson are clearly inconsistent with completed sale. This is apart fromcondition 21 which we had extracted which obliges the sub-lessee onthe expiry of the lease of the land to deliver to the lessor the land, afterremoving the super structure within the stipulated time. It will be noticedfurther, that the rent and the premium which is the amount claimed bythe appellant has no relation with what the lessee would get from the

Asub-lessee. There is no such case that the amount which is claimedrelates 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 bythe lessee. The lessee can subject to the lease transfer the built-up flats.BThe transfer is secured through sub- lease. The transferor in the sub-lease of the dwelling unit is the lessee in regard to which the sub-leaseappears to evidence the sale. We have noticed the features in terms ofthe conditions. If the built-up area/flats is to be treated as part of theunderlying 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 isCentirely constructed by the lessee and it is the lessee who transfers thesame to the sub-lessee, and gets the entire consideration. The title flowsfrom the lessee to the sub-lessee. The subject matter of the sub-lease isthe dwelling unit as also the undivided right in the land. The question iswhether on the basis of Section 5(8)(d), under the lease, what is theDunderlying asset as between the appellant and the corporate debtor?Though the flats to be constructed are contemplated in the lease, it is notthe same as understanding them as the subject matter of the lease. Theflats would be the subject matter of the sub-lease. No doubt, from thelease and the sub-lease the right of the lesseeor ratherits obligationunder the lease is to put up the residential flats which he can transfer inEterms of the lease. It may be true that the terms of the lease are madebinding on the sub- lessee. However, as between the lessor and thelessee, the underlying asset would be the plot of land. From the terms ofthe sub lease which is as per the decision of the Lessor (appellant) goesto show the extent of the control by the Lessor and consequent intrusionFinto the power of the lessee namely, despite power to effect an apparentsale of the flat the term includes barring the purchaser from mortgagingthe dwelling unit for any loan except with the prior consent of the lessor,the power of re-entry of the lessor and to re-allot the “sold dwellingunit” to any other person and the obligation of the lessee/sub lessee toGsurrender the land after demolishing the super structure on the expiry ofthe period of lease.

73. The lease before us is stated to be for period of 90 years.The lease is intended and structured to attain the objective of putting upresidential structures as part of the planned development of the area.Theconstructed area or the flats can be transferred to the allottees by theH

Lessee on the strength of tripartite sub-leases. This is borne out by theterms of the sub-lease produced before this court. This is also clearfrom the provisions of the clause before us which contemplate theexecution of sub-lease. There is no provision for renewal. The partieshave clearly contemplated that the terms of the sub-lease will be in theform and format as provided by the Lessor (appellant). It is accordinglythat the clause in the lease actually contemplates inter aliathat theconstruction be completed within 7 years from the date of execution ofthe lease deed with maximum extension of another 3 years with penalty.Ordinarily, there would be no further extension. Therefore, theconstruction can be used till the expiry of the 90 years period by the sub-lessee and the terms of the lease and sub-lease would clearly indicatethat at the end of 90 years, far from any enlargement of the rights of thesub-lessee, the sub-lessee is to deliver back the land directly to the Lessorafter removing the superstructure. It is another matter that with thepassage of long period of time, the superstructure itself may be inastate of disrepair. However, what is relevant is that the concept ofeconomic life is ill-suited to the facts as the lease is in respect of landwhich is to be taken as the underlying asset. It may not be possible tohold that the lease is for the major part of the economic life of land.Itcannot be said that at the expiry of 90 years the land will cease to beeconomically usable. Therefore, we cannot accept the argument of theappellant that after 90 years appellant would not getthe empty parcel ofland and the land would not be of any commercial use to the appellantafter the expiry of the lease. The argument that the land will be of novalue to the lessor, has no force, having regard to the nature of underlyingasset, namely, land which indeed ordinarily would have perennial value.In clause 12 under other clauses, it is provided that lessee shall not beallowed to assign or change his role. Any breach would lead tocancellation and entire money deposited will be forfeited. Though thewords used are the lessee cannot assign or change his ‘role’, it would insubstance mean that it is contract to the contrary within the meaningof Section 108 of the Transfer of Property Act. The position would indeedbe that the lessee cannot assign his right.We must at this juncture noticeunder the heading ‘Transfer of Plot” that the lease does contemplatethat upto 30.09.2010, the lessee has right to sub-divide the allotted plotinto suitable smaller plots as per the planning norms and to transfer thesame to the interested parties with prior approval of the lessor on paymentof transfer charges. However, the area of the sub-divided plot cannot be

DEF

Aless than 20,000 sq. meters. We would notice that the leasehold plot inthe case is only 22565.77 sq.meters. We would understand the scope ofthe said provision as right given to the lessee, no doubt, to transfer theallotted plot after sub-division into smaller plots and to transfer the plotsso sub-divided.This is subject to two conditions. This is permitted onlyfor period of two months from the date of execution of the agreementBnamely till 30.09.2010. This can be only done if the lessor permits it byprior approval. More importantly, the sub-plots which can be sotransferred, cannot be less than 20000 sq. meters. As we have noticedthis will appear to be standard clause and we have noticed that thelease in the case of M/s Cloud 9 which we have adverted to, consistedCof about 40000 square meters. We do note that the lease deed in civilappeal no. 2367-69 of 2021 is for plot of 69998.73 square metres.Also, therein the minimum size of the sub divided plot is not less than10,000 square metres. But the other conditions including prior approvalremains the same.Further provisions under the heading ‘transfer of plot’

deal with only cases of individual flat/plot being transferrable subject toDthe various conditions, the most pertinent being that it contemplatesessentially sub-lease. We do not think that we can permit the matter tobe appreciated on the basis of the situation contemplated in case whereunder the lease within 2 months on sub-division of the plot assignmenttakes place of the plot without the construction and without obtaining theEcompletion certificate. In fact, no argument was advanced based on thesaid provision. The claim relates to rental and premium on the basis thatthe lease continued and the lessee (corporate debtor) persevered in thelease.

74. The underlying principle appears to be that even if it is by wayFof lease, the rights are vested with the lessee, for the lion’s share ofthe 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 theprinciple is laid down that the transfer of title is not necessary. In otherwords, sans transfer of title, the lessee enjoys the asset for the fruitfulGperiod of the life of the asset. At the end of the major part of the economiclife of an underlying asset, the life of which is limited by time, the assetwould be mostly depreciated, if not, without any value. Such situationcan never apply, in the case of land.

75. The fourth example of the situation, whereunder lease is tobe classified as financial lease, is, if at the inception date, the presentH

value of the lease payments, amounts to at least substantially all of thefair value of the underlying asset. ‘Fair Value’ is defined in the IAS, asfollows:

“Fair value is the amount for which an asset could be exchanged,or liability settled, between knowledgeable, willing parties in anarm’s length transaction.”

76. Inception date is different from the commencement of leaseas ordinarily understood under the IAS. Inception date has been definedin the IAS, as follows:

“The inception of the lease is the earlier of the date of the leaseagreement and the date of commitment by the parties to theprincipal provisions of the lease. As at this date: (a) lease isclassified as either an operating or finance lease; and (b) in thecase of finance lease, the amounts to be recognised at thecommencement 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 onlyten percent of the total premium.There is neither transfer of ownership,at the end of the lease term. There is also no option to purchase with thelessee.The payment of ten percent of the premium, in the first place,does not represent substantially all of the fair value of the underlyingasset. The lease is for period of ninety years. At the end of ninetyyears, there is, in fact, no provision for renewal of the lease. The amountof the premium paid cannot be linked with the fair value of the land. Therelationship between the appellant and the lessee, was to remainthroughout as lessor and lessee. It may not be possible to even find thatthe total premium and the rent would represent substantially all of fairvalue of the underlying asset.

78. The fifth example in Rule 63 is clearly inapplicable as it is notthe appellant’s case that the underlying asset is of such specialisednature that the lessee could only use it without major modification.Therefore, as far as Rule 63 is concerned, to sum-up, none of the situationsmentioned in Rule 63 are present in the instant lease.

79. Rule 64 continues with situations, which, individually or incombination, would also lead to lease being classified as financelease. The first situation is power reserved with the lessee to cancel thelease and the lessor’s losses associated with the cancellation being borne

Aby the lessee. This example also does not apply for the simple reasonthat lease does not confer even the power to cancel the lease on thelessee. On the other hand, by stark contrast, the lessor is abundantlyclothed in various contexts to cancel the lease.

80. The second situation in Rule 64 is, when the gains or lossesBfrom the fluctuation in the fair value of the residual accrue to the lessee.The specific example, which is given in the said situation is case of arent 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 endof the lease. In other words, finance lease posits ordinarily lease tobegin with and sale, when the curtains are finally wrung down. WeChave already noticed that no sale of the underlying asset is contemplated.The lease is for period of ninety years. The expression ‘residual value’is also defined. It reads as follows:

“The residual value of an asset is the estimated amount that anentity would currently obtain from disposal of the asset, afterDdeducting the estimated costs of disposal, if the asset were alreadyof the age and in the condition expected at the end of its usefullife.”

Residual value is predicated with reference to the end of the usefullife of an asset. Useful life is, inter alia, the period over which an asset

Eis expected to be availablefor use by an entity. The ‘end’ of useful lifeis hard to conceive in respect of land. Also, nothing is shown to establishhow the ingredients are attracted.

81. The last example in Rule 64 is the ability of the lessee tocontinue for secondary period at rent that is substantially lower thanFthe market rent. As far the lease in question is concerned, the period ofthe lease is ninety years. The lease, as such, does not contemplate arenewal of the lease. No secondary period is contemplated.

82. Rule 65 goes on to declare that the examples and indicators inRules 63 and 64 are not always conclusive. Though the learned SolicitorGGeneral seized upon this enunciation, the very next sentence would beliethe possibility of any expectation on the basis of the aforesaid declaration.What is stated is that even despite the presence of the examples andindicators in Rules 63 and 64, if other features of the lease do not persuadethe Court to conclude that the lease transfers substantially all the risksand rewards incidental to ownership, it is to be classified as an operatingH

lease. It would not be financial lease. In this case, the position obtainingis the converse situation. None of the features in Rules 63 and 64, advancethe case of the appellant that the lease in question is financial lease.No doubt, perusal of Rule 65 does give an impression that the mostimportant criteria is that the lease must effect, substantially, the transferof 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 ofthe lease for payment, which is equal to the fair value at the time oftransfer and which is variable. The other example furnished is variablelease payment, as result of which, the lessor does not substantiallytransfer all the risks and the rewards.

83. Rule 66 provides that the classification of the lease must bemade at the inception date, for which, there is no claim made by theappellants. Reclassification is permitted only, if there is modification ofthe lease. Changes in estimates, which is again related to in the exampleto the changes in the estimates of the economic life or the residual valueof the underlying asset, will not occasion new classification of thelease for accounting purposes. So also, changes in circumstances, suchas default by the lessee would not warrant new classification beingeffected. The appellants have, admittedly, not classified the lease inquestion at the inception date as finance lease. This, undoubtedly, is acircumstance, which would militate against the lease of the appellantbeing treated as finance lease.

84. Rule 67 again provides that at the commencement date, whichmeans the date of commencement of the lease, the lessor shouldrecognise the assets under finance lease in its balance sheet and theasset so recognised must be presented as receivable. The matter doesnot end there. The asset must be presented as an amount equal to thenet investment of the lease. There is nothing on record to establish thatthe underlying asset has been dealt with in the aforesaid manner by theappellants.

85. Having made survey of the various situations and examplesunder the Statutory Rules, which would persuade the Court to ‘deem’ alease as finance lease and, having found that none of the situations orindicators suit the case of the appellant, the case should rest and thepoint must be answered against the appellant. However, the time is nowripe to examine the contents of Rule 62 and Rule 65. They declare as towhen lease is to be classified as financial lease. It provides that

Alease may be so classified as financial lease, if it transfers substantiallyall the risks and rewards incidental to ownership of an underlying asset.The converse position applies to an operating lease and lease is to beclassified as an operating lease, if the lease does not substantially transferall the risks and the rewards incidental to the ownership of the underlyingasset.B

86. The concept revolves around the transfer substantially of risksand 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, 12[th] Edition:C

“Ownership denotes the relation between person and an objectforming the subject matter of his ownership. It consists in acomplex of rights, all of which are rights in rem, being good againstall the world and not merely against specific person(a). Though incertain situations some of these rights may be absent, the normalDcase of ownership can be expected to exhibit the followingincidents(b).”

87. Thereafter, the following are treated as the rights associatedwith ownership. An owner of property will have the right to possessthe thing which he owns, it is stated. Secondly, the second principle isEdescribed as follows: -

“Secondly, the owner normally has the right to use and enjoy thething owned: the right to manage it, i.e., the right to decide how itshall be used; and the right to the income from it. Whereas theright to possess is right in the strict sense, these rights are in factFliberties: the owner has liberty to use the thing, i.e., he is underno duty not to use it, in contrast with others who are under dutynot to use or interfere with it.”

88. The third right is described as follows: -

“Thirdly the owner has the right to consume, destroy or alienateGthe thing. The rights to consume and destroy are straight-forwardliberties. The right to alienate, i.e., the right to transfer his rightsover the object to another, involves the existence of power. Anon-owner even though he has possession, cannot normallytransfer the rights of ownership over thing to another; for theHlaw acts on the principle nemo dat quod habet. To this principle

there are certain exceptions: for example, the Factors Acts enablenon-owners in possession to transfer ownership in certaincircumstances.”

89. Fourthly, the right is one associated with the indeterminateduration of the right. It is here that we find the following discussion inthis regard: -

“Fourthly, ownership has the characteristic of being indeterminatein duration. The position of an owner differs from that of non-owner in possession in that the latter’s interest is subject to bedetermined at some future set point, whereas the interest of theowner can endure theoretically for ever. The interest of baileeor lessee comes to an end when the period of hire or of the leasedetermines; the owner’s interest is perpetual, being determinedneither by any set point nor by the owner’s death, because theproperty 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 newowner’s interest would continue unaffected by the previousowner’s death.”

90. Fifthly, there is residual nature, in regard to the concept ofownership, and it is described as follows: -

“If, for example, landowner gives lease of his property to A,an easement to and some other right such as profit to C, hisownership now consists of the residual rights, i.e., the rightsremaining when all these lesser rights have been given away.Moreover, in English law the general rule is that the extinction ofsuch lesser rights will revive in the owner all his original rights.”

91. question may arise as to whether in approaching the subject,we are to be guided by an examination of the question as to whether thelessee in this case possesses the rights incidental to ownership or theexpression ‘rewards incidental to ownership’ is different from rightsincidental to ownership. Can there be rewards if the rights which wehave indicated herein before are not transferred? Can there be rewardswhich must be interpreted in different manner from the idea of rights?In this regard, we must also remind ourselves that to constitute lease,a financial lease, it is not indispensable that the ownership is in all casestransferred from the lessor to the lessee. However, we have noticed theexample hereinbefore wherein the said concept is declared. That is, it is

Arelevant when the lease termis for the major part of the economic life.Undoubtedly, ordinarily financial lease would be lease which is bornas lease but ends as sale. The lease does involve transfer of ownershipfrom the previous owner, namely the lessor to the lessee. In this context,Parliament has defined financial lease in two enactments throughAmendment Act no. 44/2016 as hereinbefore noticed.B

92. We may at once bear in mind two concepts, in the overarchingprinciple. The two concepts are “substantially” and “all”. In other words,substantially all the risks and rewards incidental to ownership must betransferred under the lease. While we do agree with the appellants thatan element of flexibility is allowed by the presence of the conceptC‘substantially’, at the same time, it cannot be case where predominantlyall the risks and rewards incidental to ownership are not transferred. Inother words, on conspectus of all the terms of the lease and thereference to the situations and examples which have already been setout, if there is for the most part, transfer of all the risks and rewardsDincidental to ownership, in effect, it can be treated as finance lease.93. In Black’s Law Dictionary 11[th] 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 addictiveEdrug illegal.”

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

“(i) Of, relating to, or involving substance; material. (ii) Real andnot imaginary; having actual, not fictitious, existence. (iii) Important,Fessential, and material; of real worth and importance (iv) Strong,solid, and firm; large and strongly constructed (v) At leastmoderately wealthy; possessed of sufficient financial means (vi)Considerable in extent, amount, or value; large in volume or number(vii) Having permanence or near-permanence; long-lasting (viii)Containing the essence of thing; conveying the right idea even ifGnot the exact details (ix) Nourishing; affording sufficient nutriment.”

95. We would find the word ‘substantially’ occurring in theprovision in question would mean that what matters is not the form butthe substance. In other words, largely and in substance all the risks andrewards incidental to ownership is to be transferred in lease to constituteHit as finance lease.

96. In the context of the word ‘incidental’, the contention thatwith reference to the definition of the word incidental in Black’s LawDictionary which is referred by the appellant, namely that it is subordinateto something of greater importance or having minor role, and thereforethe interpretation must be that it can be less than the absolute, does notappear to us to be correct. No doubt, the word incidental has been definedas follows: -

“Subordinate to something of greater importance; having minorrole”

97. In this case we may notice the definition of the word “incidentto employment” in Black’s Law Dictionary wherein it has been definedas follows: -

“A risk that is related to or connected with worker’s job duties.”

98. The words “incident of ownership” itself has been defined asfollows: -

“Any right of control that may be exercised over transferredlife-insurance policy so that the policy’s proceeds will be includedin decedent’s gross estate for estate-tax purposes. The incidentsof ownership include the rights to change the policy’s beneficiaries”and to borrow against, assign, and cancel the policy.

(Emphasis supplied)

99. In Stateof Orissaand Another V. M/S. Chakobhai Ghelabhaiand Company,[7] one of the questions which arose was whether underSection 29 of the Orissa Sales Tax Act, 1947, the State had power toprovide 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 rulesproviding for the procedure and other matters including fees incidentalto the disposal of appeals and applications for revision and for reviewunder 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 theexpression “other matters (including fees) incidental to the disposalof appeals and applications for revision etc. We are unable toagree with the High Court that the word ‘incidental’ has reference

7 AIR 1961 SC 284

Ato matter of casual nature only.The procedure for disposal ofan appeal includes as necessary incidental matter the filing ofan appeal on proper fee.”

(Emphasis supplied)

B100. In State of Tamil Nadu V. Binny Ltd., Madras,[8 ]the questionarose whether the sales of provisions effected by the assessee in aworkman store, was assessable to tax under State law. Section 2(d)(ii)defined business as including any transaction in connection with orincidental or ancillary to the trade, commerce, manufacture, adventure

or concern which formed the subject matter of section 2(d)(i). TheCcontention taken by the assessee was that it was necessary that theconnection between the sales of the provisions in the store andmanufacture of the goods in question must be direct and that directconnection was missing. In other words, the assessee was carrying onmanufacture and sale of textiles. It was also running store in question.DThe word “business” was defined as including trade and manufactureinter alia in the first limb of Section(2)(d) and also any transaction incidentalto such trade and manufacture. This Court took the view that there is nojustification in the contention of the assessee. We notice the followingexposition: -E“It is indeed difficult to see how it can at all be said that theactivity of selling provisions to the workmen in the Store was notincidental to the business of manufacture of textiles in the factory.The sales which were effected in the Store were to the workmenemployed in the factory where textiles were being manufacturedand the provision of this facility to the workmen was certainlyFincidental to the carrying on the business of manufacture of textiles.This view finds support from the decision of this Court in RoyalTalkies, Hyderabad v. Employees State Insurance Corporationwhere the question was as to whether canteen maintained by acinema owner in the premises of the cinema could be said to beGincidental 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 merelyappertains to something else as primary.Surely, such work should

not be extraneous or contrary to the purpose of the establishmentbut 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 tobe made out. In M/s. Shroff and Co. v. Municipal Corpn. of GreaterBombay and Another,[9] this Court reiterated the view that the expressionincidental means ‘necessary’ in certain contexts which does not mean amatter 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. Therewards must be those arising out of ownership. This in fact is central tounderstanding the concept of finance lease.

103. An argument is raised that paragraphs 15A to 17 of the IndianAccounting Standards (in IND AS) 17, it becomes evident that financeleases are contemplated in respect of lands. We may notice paragraphs15A to 17, which read as follows: -

“15A. When lease includes both land and buildings elements, anentity assesses the classification of each element as finance oran operating lease separately in accordance with paragraphs 7-13. In determining whether the land element is an operating or afinance lease, an important consideration is that land normally hasan indefinite economic life.

16. Whenever necessary in order to classify and account for alease of land and buildings, the minimum lease payments (includingany lump-sum upfront payments) are allocated between the landand the buildings elements in proportion to the relative fair valuesof the leasehold interests in the land element and buildings elementof the lease at the inception of the lease. If the lease paymentscannot be allocated reliably between these two elements, the entirelease is classified as finance lease, unless it is clear that bothelements are operating leases, in which case the entire lease isclassified as an operating lease.

A17. For lease of land and buildings in which the amount thatwould initially be recognised for the land element, in accordancewith paragraph20, is immaterial, the land and buildings may betreated as single unit for the purpose of lease classification andclassified as finance of operating lease in accordance withparagraphs 7-13. In such case, the economic life of the buildingsBis regarded as the economic life of the entire leased asset.”

104. It is clear that the subject matter of the lease mentioned inparagraphs 15A to 17 is not merely land alone. It contemplates situationwhere the lease relates to land and buildings. It is no doubt true that inparagraph 15A it is stated that in determining whether the land elementCis an operating or finance lease, an important consideration is that theland normally has an indefinite economic life. What is significant is thatwhat the provision contemplates is finding out whether the land elementin composite lease can be treated as finance lease or as an operatinglease. In lease which has only land element, the concept of limitedDeconomic life, which is apposite in the context of assets which have alife limited by time and which ordinarily depreciate over time, would notbe relevant. We need not deal with the case of the lease of land at theend of which there is sale. There may be instances of such leasesentered into by developmental authorities. It would then turn upon theterms of the lease.E

105. The lease in question, is lease of the plot of land, as alreadyfound by us. The underlying asset is the plot of land. Therefore, wecannot treat the subject matter of the lease, as containing both land andbuilding elements. We have already noticed, while dealing with Rule63(b) that the case of the appellant before the NCLAT, was only that,Fapart from the land, the right to develop or construct the building, is theunderlying 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 thelease. In fact, it is, no doubt, true that the lease actually contemplatesthat, as regards the build-up area/plot or land, the transfer to the allotteeGis to be made only by way of sub-lease. The sub-lease of the land infavour of the apartment owners, is also contemplated under Section 9 ofthe Uttar Pradesh Apartment Owners Act, 2010. The lease, indeed,does contemplate the execution of tripartite sub-lease. The form andthe format are to be dictated to by the lessor. The sub-lease can beexecuted subject to the fulfilment of certain conditions, which we haveH

already adverted to. This is, indeed, case where the lease is of the plotand the interest or the right to enjoy the lease is by way of constructionof residential buildings only and the use, both by the lessor and lesseeand even the sub-lessee is regulated and circumscribed by the terms ofthe lease and the sub-lease. Even, according to the appellant, it is thelessee, who is to find out the allottees and to transfer the rights in thebuilding, also the land, only by way of sub-lease. The consideration forthe transfer of apartments is subject to the transfer fee being paid, to beappropriated by the lessee. The lease, therefore, contemplates sub-lease, whereunder, the rights over the apartments, are regulated. Notunnaturally, therefore, the appellant cannot project the case that the flats/apartments, would constitute part of the underlying asset. We noticethis, as though it was not argued, we did toy with the idea that if thelease is composite lease of land and building, the Rules made under theIAS, may have to be appreciated differently. However, we need notexplore 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 whetherthis is correct. While we are on the concept of the rewards incidental toownership, we must record the assistance which was provided by thefairness of Shri Ritin Rai, learned Senior Counsel, who drew our attentionto the Clause B53 of IAS 116 which is as follows: -

“B53:”The classification of leases for lessors in this Standard isbased on the extent to which the lease transfers the risks andrewards incidental toownership of an underlying asset. Risksinclude the possibilities of losses from idle capacity or technologicalobsolescence and of variations in return because of changingeconomic conditions. Rewards may be represented by theexpectation of profitable operation over the underlying asset’seconomic life and of gain from appreciation in value or realisationof residual value.”

107. There is reference to ‘idle capacity or technologicalobsolescence’. In the context of risk, it appears to be irrelevant, in thecontext of land. Rewards are again predicated with reference to theexpectation of profitable operation over the underlying asset’s economiclife and the gain from appreciation in value or the realisation of residualvalue. The concept of ‘economic life’ in the first place is inapposite inthe case of lease of land alone. The residual value is predicated again

Awith the expiry of the term of the lease which is predicated with referenceto the end of the lease. In other words, it would be the value of an assetpredicated with reference to the end of the useful life of the asset [seein this regard definition of residual value in para 77] at the expiry of theterm of the lease. The lease in question contemplates period of 90years. The lease is only of the land.B

108. We may now turn to the provisions of the lease and thecontentions in the context of Section(5)(8)(d). Undoubtedly, the lesseeis put in possession of the land. Call it right or reward incidental toownership, possession, or the right to possession has been transferred tothe lessee. The lessee is entitled to hold the plot. The lease furtherCproclaims that the lessee shall use the allotted plot for the purposeindicated. Possession being in the context of lease does not partake ofa liberty to not use as would be the case of an owner. In fact, the mannerof 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’Dis borne in mind. The said clause unequivocablly declares that the lessorin larger public interest may take back the possession of the land/ buildingand making payment at the prevailing rate. This, no doubt, is subject towhat we will pronounce on its impact on the fate of this case.

109. Next, we may notice whether there is right with the lessee toEtransfer the leasehold property. In this regard, it is relevant to notice thatunder the law which is as contained in the Transfer of Property Act,1882, Section 108, thereof, provides for rights and liabilities of lessorand lessee. It declares that in the absence of the contract or local usageto the contrary, the lessor and lessee of immovable property would possessrights and be subject to liabilities as provided therein. Section 108(j) readsFas follows: -

“(j) the lessee may transfer absolutely or by way of mortgage orsub-lease the whole or any part of his interest in the property, andany transferee of such interest or part may again transfer it. Thelessee shall not, by reason only of such transfer, cease to be subjectGto any of the liabilities attaching to the lease:

nothing in this clause shall be deemed to authorise tenant havingan untransferable right of occupancy, the farmer of an estate inrespect of which default has been made in paying revenue, or thelessee of an estate under the management of Court of Wards,Hto assign his interest as such tenant, farmer or lessee:”

110. Therefore, in the case of lease where there is no contractplacing restrictions on the right of the lessee, the lessee can transferabsolutely or by way of mortgage or sub lease, the whole or any part ofhis interest in the property and any transferee of such interest or partmay again transfer. This is no doubt subject to the clause which dealswith the category of untransferable right of occupancy and the othercategories mentioned therein. In this context the lease in question mustbe probed in order to find out whether there is contract placingrestrictions on the right of the lessee to transfer. As far as an absoluteassignment by the lessee,Clause 12 under ‘other clauses’, clearly prohibitsany assignment by the lessee. It declares that the lessee shall not beallowed to assign or change his role. The lessee would be liable to bevisited with the penalty of cancellation of the lease itself for breach. Itfurther provides that the entire money which the lessee would havedeposited would stand forfeited. Therefore, while it may be that thisclause is to enable the proper and successful implementation of theobjective of the appellant which is tasked with the planned developmentof the area and the use of the property for the laudable purpose ofconstruction of group housing, it cannot detract from our finding thatthere is prohibition on assignment of the right within the meaning of acontract which is contrary under Section 108. Jurisprudentially, rightwhich is the soul of ownership and which is clearly incidental or arisingout of ownership is denied to the lessee, that is, the right to transfer theleasehold right.

111. Undoubtedly, in law, generally the lessee can assign his rightsas lessee which amounts to assignment of his right. lessee maycreate sub-lease. lessee can also create mortgage. All of theserights vest with lessee, subject to contract to the contrary. In thelease in question what is prohibited in Clause 12 under other clauses isthe right to assign his rights as lessee. Any reward which the lesseecould have obtained if it wished to absolutely assign its right, is clearlydenied by virtue of the provision in the lease which acts as contract tothe contrary.

112. No doubt, the lease deed would show that the subject matterof the lease is Plot No.GH-05/B Sector-137, Noida. It is further shownas measuring 22565.77 Sq. mts. The purpose of the lease is constructingthe residential flats. It is no doubt true that under the head ‘transfer ofplot’ it is indicated that without obtaining the completion certificate the

DEF

ALessee will have the right to sub-divide the allotted plot into suitablesmaller plots as per the planning norms and to transfer the same tointerested parties. This can be done upto 30.09.2010 with prior approvalof the appellant-Lessor on payment of transfer charges at the rate of2% of the allotment rate. However we notice that there is stipulationthat the area of each of the sub-divided plot should not be less thanB20,000 sq.mtrs. We have already noticed that the total extent of thelease property is only 22565.77 square mtrs. Thereafter, it is no doubtmentioned that individual flat /plot will be transferrable with prior approvalof the Lessor, subject to various conditions which include execution ofthe lease deed and the sub-lessee undertaking to put the premises forCresidential use only. Even though there is reference to transfer of plotwhich is to consist of not less than 20,000 sq.meters with the prior approvalof the Lessor, it was to be done before 30.09.2010. It is difficult toconceive 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 isthat the area of the sub divided plot should not be less than 20,000 sq.Dmeter and the construction has to be completed in the manner providedand yet the transfer in the aforesaid manner is permitted only upto30.09.2010. The parties contemplated transfer only if there is priorapproval of the plot of not less than 20,000 sq. metres before 30.09.2010.At least it is not case before us that this clause has been invoked orEworked. The transfer of the first sale/transfer of flat/ plot to an allotteeis to be done through sub-lease/ lease deed.No doubt, we have alreadynoticed the difference in area in the lease in the connected appeal andthe lease which is the subject matter of the sub-leaseprovided before us.

113. As far as the right to mortgage is concerned the lessee isFindeed permitted to mortgage the land. However, the mortgage can beeffected only with prior permission of the lessor. The right to mortgagewhich flows as an incident of ownership is one of the bundle of rightswhich vests with an owner. It is undoubtedly lesser right and the ownerwould be possessed of the residual right. However, it is one of the manyGrights which is incidental to ownership but there is no absolute right tocreate mortgage.

114. The requirement of prior permission to create mortgagewould mean that the permission may be forthcoming or it can be denied.If there is denial of the right to create mortgage, then it would impliedlymean that to the said extent the right to raise funds for the purpose ofH

financing the investment is impaired. Depending on whether or not theright is permitted actually the rewards incidental to ownership istransferred. In other words, if we were to imagine that the lessee stoodin the shoes of an owner of the property, he would be in position tocreate mortgage, raise funds as he chose and deal with the property inthe manner, he felt advised to. The clause relating to mortgage, in fact,indicates that the purpose contemplated,is that the mortgage can only befor the purpose of raising loan or for the purpose of financing the lessee’sinvestment in the project. This in turn is to be on receipt of the paymentby the allottee or on receipt of assurance of payment by the bank orunder any other suitable arrangement. In this regard, the leasecontemplated mutual settlement amongst the lessor, the developer andthe financial institution/bank. It clearly constitutes foray into the rightof person ‘if an owner’ to deal with the property including the right tocreate mortgage. The suitable arrangement in mutual settlementcontemplates 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 ofthe mortgage. Its object may be lofty and in keeping with its role as astatutory authority but its impact on the true interpretation of the leaseand as to whether it involves transfer of rewards incidental to ownershipis another matter. The terms and conditions of the NOC which iscontemplated as necessary for mortgaging the land to facilitate housingloans of final purchaserwill be as decided by the lessor. Still further wemay notice that under the proviso if there is sale or foreclosure of themortgaged property, the lessor is given the right tosuch percentage ofthe unearned increase in value as will be decided by the lessor.

115. Moving on to the transfer of the plot having regard to thepurpose of the lease it is as follows:-

The lease contemplates the lessee is to put up construction ofgroup housing. The lessee is entitled to allot the dwelling units on sub-lease basisto its allottee and shall provide space for facilities which areindicated which include roads, parks, etc. It is further indicated thathowever transfer/ sub lease shall be governed by the transfer policy ofthe lessor. No doubt, restrictions are put in regard to how allotment canbe made. Allotments can be made only to citizens of India competent tocontract. This means that if the law permits (Barring citizens of certaincountries, the law does permit citizens of other countries to acquireproperty in India) the allotment of what is constructed by the lessee by

Away of group housing to persons who are not citizens and make profitson such transfer, this clause indeed impacts such right and also takesaway the profits which it could make thereunder. The lease furtherindicates that there will be no permission to part transfer of plot. In thisregard, it must be noticed that what is permitted under the lease is thecreation of sub-lease of the dwelling units to the allottee. No doubtBthere would be sub-lease over the plot as well. The lease goes on tostate that the lessee shall not be entitled to complete transaction for sale,transfer, assign or otherwise part with the possession of whole or part ofany of the buildings constructed thereon, before making payment in termsof the schedule under the lease. Though it is described as sale, transfer,Cassignment or otherwise as all of it relates to the building which isconstructed on the underlying leased property. We must not lose sight ofthe fact that the subject matter of the lease is the plot described as plotno. GH-05/B Sec.137, Noida consisting of22565.77 square metres. Whatis essentially and in reality permitted apparently is the creation of onlythe sub-lease. Undoubtedly by the lessee the transfer of the built-upDarea is permitted subject to payment of transfer charges in terms of thepolicy. The lessor is given an absolute right to reject any application fortransfer. The lessee is to pay the transfer charges in terms of the policywhich is determined. The transfer of the built-up flats is to be premisedon tripartite sub lease. The terms of such sub-lease will be dictatedEto by the lessor. The sub-lease interchangeably is described as sale bythe lease. The sale in turn is to be captured in the terms of sub-leasefor it is clear that the lessee is obliged to execute sub-lease. We havereferred to the lease and the terms of sample sub lease.The sub lesseealso can use the premises only for residential purposes. In this case itFmust be noticed that being part of the fulfilment of its goal under theact to transfer plots for residential purposes inter alia and the lease inquestion being one for developing group housing, the lessee can transferthe built-up flats only for residential purposes. The argument of theappellant is that being necessary corollary of the lease being one toeffectuate the appellants duty and being reasonable restriction, it isGundoubtedly the duty of the appellant in the context of the purpose that aregulatory and the restrictive mechanism in question is put in place. Asto whether there is substantial transfer of all the rewards incidental toownership as an owner or whether the lessee would stand in the shoesof person resembling an owner is another matter. Were the lessee toHenjoy 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 onlyresidential purpose indeed robs the lessee of one of the cardinal rights ofa person who can be described as an owner. The lease, read as whole,contemplates the transfer to enjoy/use the leasehold property for theperiod of 90 years for the purpose limited to the construction of theresidential complex only. This is apart from all the concomitant constraintsand restrictions which have been put in place to achieve the goal of theappellant in its statutory role.

116. It is no doubt true that the appellants correctly point out thatthe lessor does not purport to seek any sharing of the considerationwhich may be received by the lessee from the allottees.In that sense‘rewards’ are transferred. We have in this regard noticed thequalifications and conditions such as forbidding transfer to non-citizensand the purpose for which the said property can be used.The otheraspects, which even limit the rights and therefore, dampen the prospectof profit, have been adverted to.

117. Though the rules under the Uttar Pradesh Ownership of FlatAct, 1975 is referred to in the lease as noticed by us earlier, the UttarPradesh Apartments (Promotion of Construction, Ownership andMaintenance) Act, 2010 (hereinafter referred to as ‘the UP 2010 Act’,for short) repealed the 1975 Act. The UP Act 2010 came into force on21.07.2010. The lease deed, in this case, came to be executed on30.07.2010. We notice that in the UP 2010 Act, Section 2 provides thatthe Act applies to all buildings having four or more apartments in anybuilding constructed or converted into apartment and land attached tothe apartment whether freehold or held on lease excluding shoppingmalls and multiplexes. Section 3 defines common areas and facilities asincluding 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 otherwisetransferred by the promotor, shall, subject to the provisions of the Act,be entitled to the exclusive ownership and possession of the apartmentso sold or otherwise transferred to him. The person, who is entitled tothe exclusive ownership and possession of the apartment, is also declaredentitled to such percentage of the undivided interest in the common areasand facilities as may be specified in the deed of apartment. Thepercentage is to have permanent character and cannot be altered exceptwith written consent of all the apartment owners. Section 7 reads asfollows:

“Section 7 - Apartment to be heritable and transferable

Each apartment, together with the undivided interest in the commonareas and facilities appurtenant to such apartment, shall, for allpurposes constitute heritable and transferable immovable propertywithin the meaning of any law for the time being in force, andaccordingly, an apartment owner may transfer his apartment andthe percentage of undivided interest in the common areas andfacilities appurtenant to such apartment by way of sale, mortgage,lease, gift, exchange or in any other manner whatsoever in thesame 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 otherimmovable property or make bequest of the same under the lawapplicable to the transfer and succession of immovable property.Provided that where the allotment, sale or other transfer of anyapartment has been made by any group housing cooperative societyor association in favour of any member thereof, the transferabilityof such apartment and all other matters shall be regulated by thelaw, which may provide transfer fee at maximum rate of 2percent but not less than 1 percent in any case of the sale value,applicable to such group housing cooperative society or associationwhosoever maintains the common areas and facilities. The transferfee shall no be leviable in case of heritability.”

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 person (hereafter in thissection referred to as the lessor) to another person (hereafter inthis section referred to as the lessee, which term shall include aperson in whose favour sublease of such land has been granted),and any building has been constructed on such land by the lesseeor by any other person authorised by him or claiming through him,such lessee shall grant in respect of the land as many subleasesas there are apartments in such building and shall execute separatedeeds of sub lease in respect of such land in favour of eachapartment owner before handing over the possession of apartmentin such building to him.The lessor shall be duty bound to supplythe plans and other legal documents to the lessee. Provided that

no sublease in respect of any land shall be granted except on thesame terms and conditions on which the lease in respect of theland has been granted by the lessor and no additional terms andconditions shall be imposed by the lessee except with the previousapproval of the lessor.

(2) Where the lessee has any reason to suspect that there hadbeen any breach of the terms and conditions of the subleasereferred to in subsection (1), he may himself inspect the land onwhich the building containing the concerned apartment has beenconstructed, or may authorise one or more persons to inspectsuch land and make report as to whether there had been anybreach of the terms and conditions of any sublease in respect ofsuch land and, if so, the nature and extent of such breach, and forthis purpose, it shall be lawful for the lessee or any personauthorised by him to enter into, and to be in, the land in relation towhich such breach has been or is suspected to have beencommitted.

(3) Where the lessee or any person authorised by him makesan inspection of the land referred to in subsection (1), he shallrecord in writing his findings on such inspection [a true copy ofwhich shall be furnished to the apartment owner by whom suchbreach of the terms and conditions of sublease in respect of theland appurtenant to the apartment owned by him has beencommitted (hereinafter referred to as the defaulting apartmentowner)] and where such findings indicate that there had been anybreach of the terms and conditions of the sublease in respect ofsuch land, the lessee may, by notice in writing, require thedefaulting apartment owner to refrain from committing any breachof the terms and conditions of the sublease in respect of suchland, or to pay in lieu thereof such composition fees as may bespecified in the notice in accordance with such scales ofcomposition fees as may be prescribed.

(4) The defaulting apartment owner who is aggrieved by anynotice served on him by the lessee under subsection (3) may,within thirty days from the date of service of such notice, preferan appeal to the Court of the District Judge having jurisdiction(hereinafter referred to as the District Court), either challengingthe finding of the lessee or any person authorised by him or disputing

the amount of composition fees as specified in the notice, and theDistrict Court may, after giving the parties reasonable opportunityof being heard, confirm, alter or reverse those finding or mayconfirm, reduce or increase the amount of composition fees orset aside the notice.

(5) Where, on the breach of any terms and conditions of anysublease in respect of any land, any composition fees becomepayable, the defaulting apartment owner shall be deemed to havebeen guilty of such breach and in default of payment thereof itshall be lawful for the lessee to recover the amount of thecomposition fees from the defaulting apartment owner as arrearsof land revenue.

(6) Where any composition fees are paid whether in pursuanceof the notice served under subsection (3) or in accordance withthe decision of the District Court or higher court on appeal, nofurther action shall be taken by the lessee for the breach of theterms and conditions of the sublease in respect of the land inrelation to which payment of such composition fees has beenrealised.

(7) If the defaulting apartment owner omits or fails to refrainfrom committing any breach of the terms and conditions of thesublease in respect of the land or, as the case may be, omits orfails to pay the composition fees in lieu thereof-

(i) in accordance with the notice issued by the lessee undersubsection (3); or

(ii) where the finding of the lessee or the person authorisedto inspect the land about any breach of the terms and conditionsof any sublease in respect of the land or the amount ofcomposition fees specified in the notice issued by the lesseeare altered by the District Court on appeal or by any highercourt on further appeal, in accordance with the decision of theDistrict Court or such higher court, as the case may be; thelessee shall be entitled,-

(a) where no appeal has been preferred under subsection(4), within sixty days from the date of service of the noticeunder subsection (3), or

(b) where an appeal has been preferred under subsection(4), within sixty days from the date on which the appeal isfinally disposed of by the District Court or, where any furtherappeal is preferred to higher court, by such higher court,to exercise the right of reentry in respect of the undividedinterest of the lessee in the land appurtenant to the apartmentowned by the defaulting apartment owner, and where suchright of reentry cannot be exercised except by the ejectmentof the defaulting apartment owner from his apartment, suchright of reentry shall include right to eject the defaultingapartment owner from the concerned apartment: Providedthat no such ejectment shall be made unless the defaultingapartment owner has been paid by the lessee such amountas compensation for such ejectment as may be determinedin 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 inthe notice served on the defaulting apartment owner has beendeposited to the credit of the District Court in savings bank accountto be opened by the District Court in any branch of an approvedbank:

Provided that the District Court may, on sufficient cause beingshown, either remit or reduce the amount of such deposit, and theinterest accruing on such deposit, shall ensure to the credit ofdefaulting apartment owner by whom such deposit has been made:Provided further that the amount of such deposit together withthe interest due thereon shall be distributed by the District Courtin accordance with the decision in such appeal, or where anyfurther appeal has been preferred against such decision, inaccordance with the decision in such further appeal.

(9) The defaulting apartment owner, who is aggrieved by theamount offered to be paid to him under the proviso to subsection(7) as compensation for ejectment from his apartment may, withinthirty days from the date of such offer, prefer an appeal to theDistrict Court and the District Court may, after giving the partiesa reasonable opportunity of being heard, maintain, increase orreduce the amount of compensation.

(10) On the ejectment of the defaulting apartment owner fromthe apartment under subsection (7), the lessee by whom suchejectment has been made may make fresh allotment of theconcerned apartment to any other person on such terms andconditions as he may think fit.

(11) Where any lessee omits or fails to take any action eitherin accordance with the provisions of subsection (2) or subsection(3) or subsection (7) the lessor may, in the first instance, requirethe lessee by notice in writing to take action against the defaultingapartment owner under subsection (2) or subsection (3) or, as thecase may be, under subsection (7), within period of ninety daysfrom the date of service of such notice, and in the event of theomission or failure of the lessee to do so within such period, thelessor may himself take action as contained in subsection (2) orsubsection (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 actionhad been taken by the lessee.

(12) For the removal of doubts, it is hereby declared that nowork in any apartment by the owner thereof shall be deemed tobe breach of the terms of the sublease in respect of the land onEwhich the building containing such apartment has been constructedunless the work is prohibited by subsection (2) of section 6.”

(Emphasis supplied)

119. Section 5 contemplates sale or transfer otherwise of anapartment by the promoter. Then subject to the other provisions of theFAct, the buyer or transferee becomes entitled to exclusive ownershipand possession. He becomes entitled to percentage of the undividedinterest in the common areas. Section 8 is provision which conditionsownership based on amounts remaining to be paid. Still further Section 9is another provision which conditions Section 5.

G120. The mere fact that Section 7 declares that each apartment,together with the undivided interest in common areas, is to be heritableand transferable, would not amount to creating freehold right over theland, which is the subject matter of the sub-lease, in favour of theapartment 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 freeholdH

owner of the land is contemplated. The mere fact that an undividedinterest in the common area, is created including the land (the definitionof ‘common area’ includes land) and is made heritable and transferable,would only mean that the specific right, which the sub-lessee (apartmentowner) 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 declaration to begiven by promotor containing, inter alia, the statement as to whether,land is freehold or leasehold. No doubt, the effect of Section 7 of the UPAct is that the proviso in Section 7 does contemplate that in the case ofany allotment, sale or other transfer made by any group housingcooperative society or association, the transferability of the apartmentand all other matters, will be as regulated by the law and it may includethe transfer fee at the maximum rate of two per cent. Section 7, nodoubt, permits the apartment owner the right to transfer the apartmentwith the common area including the right in the land by way of sale,mortgage, lease, gift, in the same manner and to the same extent andsubject to the same rights, privileges, obligations and liabilities, inter alia,under the law applicable to the transfer and succession of an immovableproperty. Also since Section 9 contemplates sub-lease over the land,there cannot be claims of enlargement overthe same vide either Section5 or Section 7. The case of sale if it relates to landin the balance sheetprojected by the appellant represented by Ms. Madhavi Divan cannotbut be rejected.

121. We have noticed that the lessee has no power to cancel thelease. However, cancellation of lease deed under various contingenciesis permitted to the lessor. They include allotment obtained throughmisrepresentation/ suppression of material facts inter alia violation ofdirections issued or rules and the regulations framed by the lessee orany other statutory authority, default on the part of the lessee on theterms and conditions of registration/ allotment lease. The provisionsprovide for the extent to which the premium can be forfeited in theevent of cancellation among the other clauses. This is apart from theearlier reference to the power to cancel in specified contingencies. It isrelevant to notice that the lessor is clothed with an absolute power tomake additions/ alterations or modifications in the terms of the leasedeed inter alia apart from the sub lease. One clause which we havealready noticed is Clause 13 falling in other clauses. It empowers thelessor to take back possession of the land/ building. The only limitation is

Athat larger public interest must justify such taking back of the possession.It also must be attended/ accompanied by the lessor becoming liable toonly make the payment at what is described as the ‘prevailing rate.’ It isclear that it is incompatible with the lessee enjoying rights/rewardsincidental to ownership. The only requirement then being what the lessorperceives as larger public interest, the overriding power constitutes aBshadow over the rights of the lessee which is clearly incompatible withthe rights and therefore even rewards which would follow the normalexercise of rights as an owner. The right to possession and the rewardsassociated with it can be extinguished upon the lessor invoking the saidpower. Therefore, we would find on the whole that the appellant is notCthe financial lessor under section 5(8)(d) of the IBC. No doubt we wouldobserve that we have arrived at the findings based on the prevailingstatutory regime. Needless to say there is always power to amend theprovisions which essentially consist of the Indian Accounting Standardsin the absence of any rules prescribed under Section 5(8)(d) of the IBCby the Central Government.D

THE CASE UNDER SECTION 5(8)(f)

122. Section 5(8) defines ‘financial debt’ as meaning ‘a debt alongwith interest, if any, which is disbursed against the consideration of timevalue of money’. Thereafter, Clauses (a) to (i) deal with transactionsEwhich are included as financial debt. It is, thereafter, that Clause (f)provides that financial debt includes any amount raised under any othertransaction, including any forward sale or purchase agreement, havingthe commercial effect of borrowing. To further simplify the concept,in Section 5(8)(f), we may eclipse the words ‘includes any forward saleor purchase agreement’, and then, the provision would read as ‘anyFamount raised any other transaction having commercial effect of aborrowing’. The word ‘transaction’ has been defined in Section 2(33) toinclude ‘an agreement or arrangement in writing for the transfer of anasset, or funds, goods or services from or to the corporate debtor. At thisvery juncture, we may notice that ‘operational debt’ has been defined inGSection 5(21), which means ‘a claim in respect of provision of goods orservices including employment’. Operational debt also means debt inrespect of payment of dues arising under any law for the time being inforce and payable to any Local Authority, inter alia. ‘Operationalcreditor’ is defined in Section 2(20) as meaning ‘a person to whomoperational debt is owed and includes any person to whom such debtHhas been legally assigned or transferred’.

123. ‘Transaction’, as defined in Section 3(33), would, undoubtedly,include an agreement or arrangement in writing or the transfer of funds.The transfer of funds may take place from corporate debtor. transfercan also take place when there is transfer of funds to the debtor. Atransfer may include transfer of assets in writing again from or to thecorporate debtor. The definition of the word ‘debt’ in Section 3(11) isintertwined with the definition of the word ‘claim’ in Section 3(6). Theimpact of these provisions has been considered by this Court in PioneerUrban Land and Infrastructure Limited and Another v. Union ofIndia and Others[10]. It may be profitable to advert to the same.“68. Thus, in order to be “debt”, there ought to be liability orobligation in respect of “claim” which is due from any person.“Claim” then means either right to payment or right to paymentarising out of breach of contract, and this claim can be madewhether or not such right to payment is reduced to judgment.Then comes “default”, which in turn refers to non-payment ofdebt when whole or any part of the debt has become due andpayable and is not paid by the corporate debtor. The learned counselfor the petitioners relied upon the judgment in Union ofIndia v. Raman Iron Foundry [Union of India v. Raman IronFoundry, (1974) 2 SCC 231], and, in particular relied stronglyupon the sentence reading: (SCC p. 243, para 11)

“11. … Now the law is well settled that claim for unliquidateddamages does not give rise to debt until the liability is adjudicatedand damages assessed by decree or order of court or otheradjudicatory authority.”

69. It is precisely to do away with judgments such as Raman IronFoundry [Union of India v. Raman Iron Foundry, (1974) 2 SCC231] that “claim” is defined to mean right to payment or rightto remedy for breach of contract whether or not such right isreduced to judgment. What is clear, therefore, is that debt is aliability or obligation in respect of right to payment, even if itarises out of breach of contract, which is due from any person,notwithstanding that there is no adjudication of the said breach,followed by judgment or decree or order. The expression“payment” is again an expression which is elastic enough to include

A“recompense”, and includes repayment. For this purpose, see H.P.Housing & Urban Development Authority v. Ranjit SinghRana [H.P. Housing & Urban Development Authority v. RanjitSingh Rana, (2012) 4 SCC 505 : (2012) 2 SCC (Civ) 639] (atparas 13 and 14 therein), where Webster’s ComprehensiveDictionary (International Edn.), Vol. 2 and Law Lexicon by P.BRamanatha Aiyar (2nd Edn., Reprint) are quoted.”

124. The question, which fell for consideration in Pioneer(supra)was whether homebuyer, who made advances to the real estatedeveloper, utilising which, the real estate developer puts up the projectand what the homebuyer got in return or was expected to get in returnCwas developed flat or an apartment, would be covered as financialcreditor. It would be apposite to refer to the following observations:

“75. And now to the precise language of Section 5(8)(f). Firstand foremost, the sub-clause does appear to be residuary provisionwhich is “catch all” in nature. This is clear from the words “anyDamount” and “any other transaction” which means that amountsthat are “raised” under “transactions” not covered by any of theother clauses, would amount to financial debt if they had thecommercial effect of borrowing. The expression “transaction”is defined by Section 3(33) of the Code as follows:

3. (33) ”transaction” includes an agreement or arrangement inwriting 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 anFarrangement in writing for the transfer of funds to the corporatedebtor and would thus clearly include the kind of financingarrangement by allottees to real estate developers when they payinstalments at various stages of construction, so that theythemselves then fund the project either partially or completely.

76. Sub-clause (f) Section 5(8) thus read would subsume within itamounts raised under transactions which are not necessarily loantransactions, so long as they have the commercial effect of aborrowing. 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”. Theyare set out hereinbelow:

“borrow.—vb 1. to obtain or receive (something, such as money)on loan for temporary use, intending to give it, or somethingequivalent back to the lender. 2. to adopt (ideas, words, etc.) fromanother source; appropriate. 3. Not standard. to lend. 4. (intr)Golf. To putt the ball uphill of the direct path to the hole: makesure you borrow enough.”

“commercial.—adj. 1. of or engaged in commerce. 2. sponsoredor paid for by an advertiser: commercial television. 3. havingprofit as the main aim: commercial music. 4. (of chemicals, etc.)unrefined and produced in bulk for use in industry. 5. commerciallysponsored advertisement on radio or television.””

125. In the said example, therefore, the homebuyer, by providingamounts to the real estate developer, was found to be entitled to betreated as financial creditor on the basis that the real estate developermust be treated as having raised money under the transaction in question.In other words, it was case of transaction by reason of the fact thatthere was transfer of funds to the corporate debtor. The transfer offunds was in the form of the advance payments and the installmentspayable by the homebuyer under the agreement to the developer. Thus,this Court concluded that it must be treated as case falling under Section5(8)(f), even without the aid of the Explanation added by an amendment,which was challenged in the said case. The real estate developer, inother words, raised amounts within the meaning of Section 5(8)(f) underthe transfer of funds by the homebuyer to the developer and it wasfound to possess commercial effect. In this regard, the discussion is asfollows:

“77. perusal of these definitions would show that even thoughthe petitioners may be right in stating that “borrowing” is loanof money for temporary use, they are not necessarily right instating that the transaction must culminate in money being givenback to the lender. The expression “borrow” is wide enough toinclude an advance given by the homebuyers to real estatedeveloper for “temporary use” i.e. for use in the constructionproject so long as it is intended by the agreement to give “something

Aequivalent” to money back to the homebuyers. The “somethingequivalent” in these matters is obviously the flat/apartment. Alsoof importance is the expression “commercial effect”.“Commercial” would generally involve transactions having profitas their main aim. Piecing the threads together, therefore, so longas an amount is “raised” under real estate agreement, which isBdone with profit as the main aim, such amount would be subsumedwithin Section 5(8)(f) as the sale agreement between developerand home buyer would have the “commercial effect” of aborrowing, in that, money is paid in advance for temporary use sothat flat/apartment is given back to the lender. Both parties haveC“commercial” interests in the same—the real estate developerseeking to make profit on the sale of the apartment, and the flat/apartment purchaser profiting by the sale of the apartment. Thusconstrued, there can be no difficulty in stating that the amountsraised from allottees under real estate projects would, in fact, besubsumed within Section 5(8)(f) even without adverting to theDExplanation introduced by the Amendment Act.”126. It is, therefore, the appellants case that if the home buyercould be treated as covered under Section 5(8)(f), and therefore, afinancial creditor, the appellant also should be treated as financial creditorunder the lease. Instead of approaching bank or financial institution,Ethe lessee is facilitated to pay the consideration for the lease in thefollowing manner:

The lessee would pay ten percent of the total premium upfront.The balance of the premium is to be paid in sixteen half-yearlyinstallments with interest falling due after the expiry of the periodFof moratorium, which consisted of two years from the date of thecommencement of the lease. During the moratorium, the lessee,would, no doubt, have to pay the lease amount and the interestwhich is not to be confused with the premium. In other words, thelease contemplated payment of the named sum of premium andGalso lease rent. The rent could be paid on an annual basis or itcould be paid at one go as provided in the agreement. There was,thus, amount raised by the lessee in the manner in that, while noamount was paid or disbursed in the conventional sense by theappellant-lessor to the lessee, by permitting the lessee under thelease to effect the payments due from it under the lease after theH

moratorium was over in staggered manner, viz., by payment ofsixteen half-yearly installments with interest, it had the effect ofraising of funds in the sense that it operated as tool for raisingfinance. The expression ‘raising funds’ employed in Section 5(8)(f),it is the case of the appellant, must receive an expansiveinterpretation. In the modern world myriad manifestations not tobe pigeonholed to any set or finite number of transactions, may becontemplated. The legislative intention is to provide catch-all orresiduary provision. It is emphasised, in this context, before usthat the Court must adopt purposive interpretation. The conceptof financial creditor is that of person who is not merelyinterested in recovery of the money, which perhaps characterisesan operational creditor. The appellant, being an Authority underthe UPIAD Act, charged with the duty of developing the land forvarious purposes, including residential purposes, has long-termperspective and interest in the lease property like conventionalfinancial creditor who would do deep and due diligence andundertake careful and elaborate study before entering into atransaction. The appellant also has binding stake or interest inthe transaction. What is involved is public money. The land, whichis subject matter of the lease, came to vest with the appellant onthe strength of acquisition of land after payment of huge amountsas compensation. The said amount would represent the cost ofthe 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 itselfby not including it in the Committee of Creditors, is described asillegal and manifest absurdity.

127. Per contra, apart from pointing out that this Court is beingasked to overturn the concurrent findings rendered by the NCLT andNCLAT, the prevarication in the stand of the appellant is emphasised.Apart from the fact that originally appellant claimed as operational creditorin Form and filed the Form-C later, declaring it as financial creditor,it is pointed out that the appellant has attempted to shift its stand atdifferent stages. Initially, the stand was that appellant fell under Section5(8)(d) on the basis that what was involved was finance lease. Findingitself unable to fulfil the requirement of being financial lessor beforethe NCLAT, the focus shifted to Section 5(8)(f). Since, the case wasinitially set up under Section 5(8)(d), the case of the appellant involved

Areliance being placed on specific provision, and simultaneously, on ageneral provision. In other words, resort to Section 5(8)(d) would precludeinvoking of Section 5(8)(f). It is pointed out that there is no disbursementunder the lease deed. With reference to the Judgment of this Court inAnuj Jain, Interim Resolution Professional forJaypee InfratechLimited v. Axis Bank Limited and Others[11], it is contended that there isBno disbursement by the appellant, an indispensable element under themain provisions of Section 5(8) without which the appellant could notrely upon Section 5(8)(f).On facts, it is pointed out that the treatmentgiven to the appellant under the Resolution Plan dated 30.10.2019, isbetter than that of financial creditor, i.e., forty-one percent of the amountCclaimed.

128. In the context of the Explanation to Section 5(8)(f), interalia, by which, homebuyers were expressly brought within the scope ofSection 5(8)(f), this Court in Pioneer (supra), inter alia, laid down asfollows:

D“70. The definition of “financial debt” in Section 5(8) then goeson to state that “debt” must be “disbursed” against theconsideration for time value of money. “Disbursement” is definedin Black’s Law Dictionary (10th Edn.) to mean:

“1. The act of paying out money, commonly from fund or inEsettlement of debt or account payable. 2. The money so paid;an amount of money given for 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 thereal estate developer for the particular purpose of funding theFreal estate project in which the allottee is to be allotted flat/apartment. The expression “disbursed” refers to money whichhas been paid against consideration for the “time value of money”.In short, the “disbursal” must be money and must be againstconsideration for the “time value of money”, meaning thereby,Gthe fact that such money is now no longer with the lender, but iswith the borrower, who then utilises the money. Thus far, it isclear that an allottee “disburses” money in the form of advancepayments 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 definedthus:

“present value: today’s value of payment or stream of paymentamount due and payable at some specified future date, discountedby compound interest rate of discount rate. Also called the timevalue of money. Today’s value of stream of cash flows is worthless than the sum of the cash flows to be received or saved overtime. Present value accounting is widely used in discounted cashflow analysis.”

(Emphasis supplied)

That this is against consideration for the time value of money isalso clear as the money that is “disbursed” is no longer with theallottee, but, as has just been stated, is with the real estate developerwho is legally obliged to give money’s equivalent back to theallottee, having used it in the construction of the project, and beingat discounted value so far as the allottee is concerned (in thesense of the allottee having to pay less by way of instalments thanhe would if he were to pay for the ultimate price of the flat/apartment).

72. Shri Krishnan Venugopal took us to ACT Borrower’s Guideto the LMA’s Investment Grade Agreements by Slaughter andMay (5th Edn., 2017). In this book “financial indebtedness” isdefined thus:

“Definition of Financial Indebtedness (Investment GradeAgreements)

“Financial indebtedness” means any indebtedness for or inrespect of:

(a) moneys borrowed;

(b) any amount raised by acceptance under any acceptance creditfacility or dematerialised equivalent;

(c) any amount raised pursuant to any note purchase facility orthe issue of bonds, notes, debentures, loan stock or any similarinstrument;

(d) the amount of any liability in respect of any lease or hirepurchase contract which would, in accordance with GAAP, be

treated as balance sheet liability [(other than any liability in respectof lease or hire purchase contract which would, in accordancewith GAAP in force [prior to 1-1-2019]/[prior to []]/[] have beentreated as an operating lease)];

(e) receivables sold or discounted (other than any receivables tothe extent they are sold on non-recourse basis);

(f) any amount raised under any other transaction (including anyforward sale or purchase agreement) of type not referred to inany other paragraph of this definition having the commercial effectof borrowing;

(g) any derivative transaction entered into in connection withprotection 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 dueas result of the termination or close-out of that derivativetransaction, that amount) shall be taken into account];

(h) any counter-indemnity obligation in respect of guarantee,indemnity, bond, standby or documentary letter of credit or anyother instrument issued by bank or financial institution; and

(i) the amount of any liability in respect of any guarantee orindemnity 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 “financialindebtedness” that is contained for the purposes of investmentgrade agreements. Shri Venugopal argued that even insofar asFderivative transactions are concerned, it is clear that money aloneis given against consideration for time value of money and atransaction which is pure sale agreement between “borrowers”and “lender” cannot possibly be said to fit within any of thecategories mentioned in Section 5(8). He relied strongly on theGpassage in Slaughter and May’s book which is extractedhereinbelow:

“Any amount raised having the “commercial effect of aborrowing”

wide range of transactions can be caught by Para (f), includingfor example forward purchases and sales of currency and repo

agreements. Conditional and credit sale arrangements could alsobe covered here as could certain redeemable shares.

The precise scope of this limb can be uncertain. Ideally, from theborrower’s perspective, if there are additional categories of debtwhich should be included in “financial indebtedness”, these shouldbe described specifically and this catch-all paragraph, deleted. Afew strong borrowers do achieve that position. Most, howeverare required to accept the “catch all” and will therefore need toconsider which of their liabilities might be caught by it, and whetherspecific exclusions might be required.”

We have already referred to paragraphs 75 and 76 above andhence do not refer to it.

129. It is thereafter, while dealing with the impact of theemployment of the word ‘means’ followed by certain words and finallyfollowed by the word ‘includes’, be found in Section 5(8), this Court inPioneer(supra), inter alia, held as follows:

“82. This statement of the law, as can be seen from the quotationhereinabove, is without citation of any authority. In fact, in JagirSingh v. State of Bihar [Jagir Singh v. State of Bihar, (1976) 2SCC 942 : 1976 SCC (Tax) 204] , SCC paras 11 and 19 to 21and Mahalakshmi Oil Mills v. State of A.P. [Mahalakshmi OilMills 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) SCC348] ), this Court set out definition sections where the expression“means” was followed by some words, after which came theexpression “and includes” followed by other words, just as in KrishiUtpadan Mandi Samiti case [Krishi Utpadan MandiSamiti v. Shankar Industries, 1993 Supp (3) SCC 361 (2)] . Intwo 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. AssociatedContractors [State of W.B. v. Associated Contractors, (2015)1 SCC 32 : (2015) 1 SCC (Civ) 1] , SCC para 14, this Court hasheld that wherever the expression “means” is followed by theexpression “and includes” whether with or without additional wordsseparating “means” from “includes”, these expressions indicate

Athat the definition provision is exhaustive as matter of statutoryinterpretation. It has also been held that the expression “andincludes” is an expression which extends the definition containedin words which follow the expression “means”. From thisdiscussion, two things follow. Krishi Utpadan MandiSamiti [Krishi Utpadan Mandi Samiti v. Shankar Industries,B1993 Supp (3) SCC 361 (2)] cannot be said to be good law insofaras its exposition on “means” and “includes” is concerned, as itignores earlier precedents of larger and coordinate Benches andis out of sync with later decisions on the same point. Equally, DrSinghvi’s argument that clauses (a) to (i) of Section 5(8) of theCCode must all necessarily reflect the fact that financial debt canonly be debt which is disbursed against the consideration for thetime value of money, and which permeates clauses (a) to (i), cannotbe accepted as matter of statutory interpretation, as theexpression “and includes” speaks of subject-matters which maynot necessarily be reflected in the main part of the definition.”D

130. It is, therefore, the case of the appellant that it is not the lawthat in order that creditor is found entitled to be treated as financialcreditor under any of the inclusionary clauses, he must also satisfy therequirements in the main provision. In other words, the concept ofdisbursement of the debt to be found in Section 5(8), is not to be rigorouslyEinsisted upon in appreciating the scope of Section5(8)(f).

131. The stand of the respondents, on the other hand, is the decisionof this Court in Anuj Jain, Interim Resolution Professional for JaypeeInfratech Limited v. Axis Bank Limited and Others[12], wherein Benchof two learned Judges of this Court, inter alia, held as follows:F

“46. Applying the aforementioned fundamental principles to thedefinition occurring in Section 5(8) of the Code, we have not aniota of doubt that for debt to become “financial debt” for thepurpose of Part II of the Code, the basic elements are that itought to be disbursal against the consideration for time value ofGmoney. It may include any of the methods for raising money orincurring liability by the modes prescribed in clauses (a) to (f) ofSection 5(8); it may also include any derivative transaction orcounter-indemnity obligation as per clauses (g) and (h) of Section5(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 toin clauses (a) to (h). The requirement of existence of debt,which is disbursed against the consideration for the time value ofmoney, in our view, remains an essential part even in respect ofany of the transactions/dealings stated in clauses (a) to (i) ofSection 5(8), even if it is not necessarily stated therein. In anycase, 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 beforsaken in the manner that any transaction could stand alone tobecome financial debt. In other words, any of the transactionsstated in the said clauses (a) to (i) of Section 5(8) would be fallingwithin the ambit of “financial debt” only if it carries the essentialelements stated in the principal clause or at least has the featureswhich could be traced to such essential elements in the principalclause. In yet other words, the essential element of disbursal, andthat too against the consideration for time value of money, needsto 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 part of it is always requiredto be carrying, or corresponding to, or at least having some tracesof disbursal against consideration for the time value of money.”

132. Under Section 5(8)(f), the words used, inter alia, are ‘anyamount raised under any other transaction’. In our quest for similar words,namely, any amount raised, we discover that similar words are usednamely ‘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 moneyborrowed against the payment of interest. We have already found thatunder the main provision an interest free loan has been held by thisCourt to entitle the unpaid creditor to describe himself as financialcreditor. The words ‘any amount raised pursuing to any note purchasefacility or issue of bonds, notes, debentures, loans stocks’ are followedby the words or by any similar instrument. Since, Part II of the IBCdeals with resolution and liquidation for corporate persons and thedefinition 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 acorporate person who owes debt to any person. The word corporateperson has in turn been defined under Section 3(7) as company underthe Companies Act as defined in Section 2(20) of the Companies Act,

ABC

A2013, limited liability partnership as defined in the Limited LiabilityPartnership Act, 2008 or any other person incorporated with limited liabilitybut under any law for the time being in force but will not include anyfinancial service provider. In fact, perusal of Part III of IBC whichdeals with Insolvency Resolution for individuals and partnership firmswill show that it does not contain the concept of financial debt as indicatedBin Section 5(8). Section 5(8)(c) comprehensively refers to raising of anyamount based on note purchase facility, issue of bonds, notes, debentures,loan stock or any similar instrument. Thus, what is contemplated isordinarily the corporate debtor raises funds by issuing bonds, notes,debentures or loan stock which are well known instruments usually usedCby corporate bodies to generate funds for its needs. These instrumentsare ordinarily transferable. It is after enumeration of such instrumentsspecifically that the words ‘similar instrument’ are employed. Theexpression ‘similar instrument’ came to be considered by this Court inthe decision reported in State of Orissa v. State of A.P.[13]. Therein thequestion related to the jurisdiction of the Supreme Court under ArticleD131 of the Constitution. The proviso to Article 131 operates to oust thejurisdiction of this Court. It reads as follows:

“Provided that the said jurisdiction shall not extend to disputearising out of any treaty, agreement, covenant, engagement,sanador other similar instrument which, having been entered intoEor executed before the commencement of this Constitution,continues in operation after such commencement, or whichprovides that the said jurisdiction shall not extend to such adispute.”

(Emphasis supplied)

FIn the context of the said provision, we notice the followingdiscussion.

“15. The word “or” indicates that the succeeding phrase “othersimilar instrument” is to be read disjunctively. At the same timethe word “similar” means that the instrument must be of the sameGnature as those preceding. An instrument, to fall within this phrasewould, in the context, have to be formal writing by which rightor liability, is or purports to be, created, transferred, limited,extended, extinguished, or recorded. Thus document

acknowledging title in third person has been held to be aninstrument in Biswambhar Singh v. State of Orissa [1954 SCR842 : AIR 1954 SC 139] .”

(Emphasis supplied)

133. We need not further explore the scope of the said clause5(8)(c) except to notice that the word similar instrument would indicateinstruments similar to the instruments which are specifically enumerated.It is unnecessary for us to expound the different types of instrumentswhich answer the description of similar instruments and we need onlynotice that the golden thread that runs through the specific instrumentsis that they all contain an acknowledgement of debt. They are debtinstruments ordinarily issued by corporate bodies. They also aretransferable in the market and the holder can indeed bring an action onthe same even if he is not the person who has made the initial disbursementof funds to the corporate debtor. glance at another immediate neighbourwhich is the immediate predecessor of Section 5(8)(f), throws somelight on the mind of the Law-Giver. Section 5(8)(e) deals with receivablessold 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 thecreditor can expect payment within short time, ordinarily,during thebalance period of the financial year. If it were mere receivables, then itwould rightly belong to the fold of an operational debt as such debt includesa claim in respect of the provision of goods or services includingemployment. However, what legitimises its presence as financial debtis the sale or assignment of the receivables or its discounting. In otherwords, when amounts are due to the seller of goods or services whichrepresent receivables in his accounts, should he need payment immediately,it is open to such creditor to assign the right to recover the amount toa third party. The third party can recover it from the debtor.He can alsohave recourse from the assignor of the receivables. When there is anon-recourse clause, it is taken outside the category of financial debt. Itis also after providing explicitly for raising of funds under clause (b)which deals with acceptance of or under any acceptance credit facilityand through the issuance of various instruments and further providingfor residuary clause through the medium of similar instruments inSection 5(8)(c), seemingly exhaustive transactions, and further includingthe category of financial debt in section 5(8)(e) that the legislature hasthought it fit to provide for the catch-all or residuary provision in section

ABC

DEF

A5(8)(f). In section 5(8)(g), the legislature has included any derivativetransaction entered into or in connection with protection against or benefitfrom fluctuation in any rate or price as also financial debt. Derivativetransactions are essentially instruments which involve the deriving ofthe value of the instrument with respect to and in relation to an underlyingasset. It could be commodity or shareor any other asset having aBvalue.Ordinarily derivatives comprehend within its scope forwardcontracts, futures, options and swaps and an instance of swap wouldbe an interest rate swap (IRS). The derivative market is giganticfinancial market. They also share the quality of marketability not unlikeinstruments which are specifically dealt with in Section 5(8)(c). WhileCon any derivative transaction, derivative transaction is ordinarily intendedto hedge risk. This means it is intended to potentially protect the personfrom the ill-effects of the fluctuation in the price or the rate of anunderlying asset. resort is also made to derivatives as matter ofspeculation in which case it partakes of benefit. The words used inSection 5(8)(g) appear to suggest that the law giver has contemplatedDany derivative transaction, in connection with the protection of the benefitfrom fluctuation in the rate or price. There appears to be an intricate andcomplex web of transactions which can take place under derivativetransaction. The important aspect is, however, debt in the context ofits mention as financial debt.E134. While there may be again brooding omnipresence of

E134. While there may be again brooding omnipresence of adisbursement at some level as between the parties very often in suchtransactions referred to as counter parties, there may not be adisbursement. It is clear that the law-giver has provided for calculationpurposes, the market value of the transaction for determining the valueof the derivative transaction. We are making these observations only toFindicate that the device of the definition of the clause which employs theword ‘means’, followed by certain elements, and thereafter, ending withan inclusionary clause, providing for various distinct categories wouldindicate that for invoking the specified categories, there may not be aneed for the presence of all the elements included in the main provision.G

135. However, this is different from holding that the conditions insection 5(8)(f) would stand fulfilled even without person falling withinits four walls by satisfying even the requirements indicatedtherein. Inother words, as we have indicated the raising of any amount under anyother transaction having the commercial effect of borrowing isHindispensable to apply Section 5(8)(f).

136. The contention of the appellant on the one hand is that theterms of the lease under which as far as it provides for moratorium fortwo years after the initial upfront payment and facility of payment of thebalance amount of the premium with interest and spread over 16 half-yearly instalments, amounts to raising funds by the lessee from theappellant and it has the commercial effect of borrowing from theperspective of the lessee. This is to counter the case of the respondentsthat having regard to itsposition as statutory authority and publicauthority under the UPIAD, the transaction does not have the commercialeffect of borrowing. In other words, the case of the respondent is beingindispensable requirement under Section 5(8)(f) that the amount raisedunder any other transaction referred to must have commercial effectof borrowing, it would bring in its train profit motive which isincompatible with the position of the appellant as public authoritycharged with the sublime duty it claims of planned development of thearea. Shri Madhavi diwan would apparently point out along with thelearned solicitor general that from the point of view of the lessee, thereis commercial effect. She also submits that the appellant hasalsocharged interest.137. We have already noticed the view expressed by this Court inPioneer (supra). The view propounded is that the presence of profit asthe main aim is essential for the commercial effect of borrowing. ThisCourt found that both the real estate developer and the homebuyer areactuated 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 theappellant. The question, therefore,of considering the last limb of Section5(8)(f), namely, whether it has commercial effect of borrowing couldnot arise. But we can safely say that the obligation incurred by the lesseeto pay the rental and the premium cannot be treated as an amount raisedby the lessee from the appellant. It may be noticed that it is reasonablypossible to find that the lessee has raised this amount which it had to payto the appellant from some other sources. The reliance on the conceptof ‘a tool of raising finance’canvassed by the appellants would be carryingthings too far and to allow them to invoke it carries with-it far-reachingimplications and bears dangerous portent for the purpose of Section5(8)(f). We would think that the concept of disbursement as present inthe main provision appears to be mandatory in Section 5(8)(f). The purportof Section 5(8)(f) is to provide for an exhaustive catch-all provision.

A139. One of the contentions raised on behalf of the respondentthat, since the Law Giver has referred to lease in Section 5(8)(d) of theIBC and defined ‘financial lease’, as limited only to finance lease andcapital lease, deemed, as such, under the Indian Accounting Standards,no recourse can be made by the appellants to Section 5(8)(f), which is aresiduary provision. On the other hand, the appellant, while agreeingBthat all cases of financial or capital lease, covered by Section 5(8)(d),cannot be considered under Section 5(8)(f) contends thatthere can beno embargo on the Court, considering whether, in the lease in question,any amount is raised, having the commercial effect of borrowing. Thecase of the respondent can be understood differently by applying theCprinciple that, when there is special provision, no light must be allowedto emanate from the general provision. Another allied issue, which, atthis juncture, we must address is, whether the words, ‘any amount raisedunder any other transaction, in Section 5(8)(f), would involve attributingthe presence of transaction on the preceding provisions of Section5(8). To put it differently, the use of the word, ‘any other’, before theDword, ‘transaction’, would involve the presumption that the precedingsub-clauses of Section 5(8), embodied specific transactions. Going bythe wide definition of the word ‘transaction’ in Section 2(33), we findthat there is merit in the argument of the appellant. Section 5(8)(a) toSection 5(8)(e) proceed on the basis that there is transaction, asEconceived by the Law Giver. As far as the contention that, since thewords, ‘lease or hire-purchase contract’, is specifically confined to, whatis deemed as finance or capital lease, falling under the Indian AccountingStandards, and, therefore, any liability under such lease, is not fallingunder Section 5(8)(f).F140. It is, no doubt, true that in Section 2(33), transaction can bean arrangement in writing, under which, there is transfer of assets, funds,goods and services, from or to the corporate debtor. perusal of theterms of lease contemplate that the appellant must not make availablefinancial facility to the lessee. The appellant has, admittedly, not madeavailable any loan to the lessee. No advance payment is made by theGappellant. It is for the lessee to fund the project and make the paymentfrom its own sources. It is entirely for the lessee to finance the paymentof the rent, premium and interest due to the appellant under the lease.The claim of the appellant, it must be noticed, is for the amount due byway of premium and interest, besides the lease amount due as on theHdate of the claim. As far as these amounts are concerned, they are not

amounts, which have been raised by the lessee from the appellant. Theywould have been either from its own sources or by availing financialfacilities from others. It is vital to notice that as far as the amount savedby the corporate debtor, to pay the amounts to the appellant, there wouldbe financial debt incurred by the lessor to its lender. The acceptanceof the appellants argument would involve that for the said amount thepossibility of two financial creditors being present. This is unacceptable.In fact, the provision relating to limited power of mortgaging, available tothe lessee, is for the purpose of financing the construction of the flatsover the leasehold property. While, under the lease, the lessee may haveincurred debt towards third party, which may be financial debt. We areof the view that we would be placing wholly strained and unreasonableinterpretation on Section 5(8)(f), if we were to hold that lessee has raisedfunds from the lessor (appellant) under the lease in question. Merelygranting moratorium, followed by the staggered payment in sixteenhalf-yearly installments of the balance of premium, cannot possibly leadto the conclusion that the respondent has raised the funds, under thelease, from the appellant.

141. We may notice that what Section 5(8)(d) of the IBC providesfor is, any liability in respect of any lease, inter alia, which is, however,confined to finance or capital lease. We are not ruling out the possibilitythat, in lease, not finance or capital lease, falling under Section5(8)(d), if it otherwise fulfils the requirements of Section 5(8)(f), it wouldnot fall under the definition of the word ‘financial debt’. In other words,Section 5(8)(d) includes only finance or capital lease, which is deemed,as such, under the Indian Accounting Standards. Section 5(8)(f) is aresiduary and catch all provision. lease, which is not finance or acapital lease under Section 5(8)(d), may create financial debt withinthe meaning of Section 5(8)(f), if, on its terms, the Court concludes thatit is transaction, under which, any amount is raised, having thecommercial effect of the borrowing. All that we are finding, in the factsof this case, is that the lease in question does not fall within the ambit ofSection 5(8)(f). This is for the reason that the lessee has not raised anyamount from the appellant under the lease, which is transaction. Theraising of the amount, which, according to the appellant, constitutes thefinancial debt, has not taken place in the form of any flow of funds fromthe appellant/lessor, in any manner, to the lessee. The mere permissionor facility of moratorium, followed by staggered payment in easyinstallments, cannot lead us to the conclusion that any amount has been

[2022] 5 S.C.R.

Araised, under the lease, from the appellant, which is the most importantconsideration.

WHETHER THE APPELLANT IS AN OPERATIONALCREDITOR?

142. As far as the case of the respondents that the appellant is aBLocal Authority goes, the case of the respondent was largely premisedon the Judgment of this Court in Union of India and Others v. R.C.Jain and Others[14]. In short, the case of the respondent was that theappellant is Local Authority and the rental and premium in question,claimed by the appellant, constitutes amount due to the appellant under aClaw, viz., the UPIAD, read with Section 40 of the UP Act of 1973, madeapplicable to the UPIAD. Upon this Court pointing out the decision ofthis Court reported in New Okhla Industrial Development Authorityv. Chief Commissioner of Income Tax and others[15], wherein this Courthas taken the view in the case of the appellant itself, that it is not LocalAuthority. The parties would point out that the said Judgment, may notDapply, as it was rendered in the context of the Income Tax Act. It is alsopointed out that Judgments, which have been rendered after R.C. Jain(supra), which includes HousingBoard of Haryana v. HaryanaHousing Board Employees’ Union and Others[16 ]and Commissionerof Income Tax, Lucknow v. U.P. Forest Corporation[17], are alsoEdistinguishable. 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 of2010, cognate law, the appellant is treated as Local Authority. It isalso pointed out that the appellant does provide civic amenities to theFlocal inhabitants and, for the purpose of the IBC, it is, indeed, LocalAuthority. It is also pointed out that the appellant is treated as LocalAuthority under the Goods and Services Act. Prima facie the decision inNoida (supra) may not detract from the appellant being found to be alocal authority for the purpose at hand. No doubt, we do notice that inthe context of the proviso to Article 131 of the Constitution of India, thisGCourt did notice the distinction between the words ‘arising out of’ andthe words ‘arising under’ and held that the words ‘arising under’ bears

14 (1981) 2 SCC 30815 (2018) 9 SCC 35116 (1996) 1 SC 95H17 (1998) 3 SCC 530

narrower meaning (See also the discussion of the meaning of the word‘arises’ as meaning ‘coming into existence’, in Judgment of this Courtby Justice Mukherji in Re: Rogers Pyatt Shellac Co. v. The Secretaryof State for India in Council[18], which stands approved in TheCommissioner of Income Tax, Bombay v. Ahmedbhai Umarbhai andCo., Bombay[19].

144. The appellant would, in fact, point out that it is not necessaryto probe the matter further, in view of the concurrent findings that theappellant is an operational creditor. No doubt, Smt. Madhavi Divan doespoint out that the words ‘arising under any law’, may not be the same asamounts being made recoverable under law. Of course, she wouldpoint out that as far as the rental part of the claim, it may be relatable tothe first limb of an operational debt. When questioned further, as to whather position is, if this Court found that the appellant is not financialcreditor,the appellant may be entitled, at least, to be treated as anoperational creditor. We would think that, having regard to the fact thatboth the NCLT and NCLAT have proceeded on the basis that the appellantis an operational creditor, we need not stretch the exploration furtherand pronounce on the questions, which may otherwise arise. We mustnot be oblivious to the following prospect, should we find that the appellantis not an operational creditor, even under the IBC Regulations apartfromclaims by financial creditors and operational creditors, claims canbe made by other creditors. However, there are, undoubtedly, certainadvantages, which an operational creditor enjoys over the other creditors.We would proceed on the basis that, while the appellant is not financialcreditor, it would constitute an operational creditor.

145. The upshot of the above discussion is that the appeals mustfail. The appeals are, accordingly, dismissed. Parties to bear their owncosts.

Devika Gujral(Assisted by : Mahendra Yadav, LCRA)

Appeals dismissed.

18 AIR 1925 Calcutta 34

19 AIR 1950 SC 134