TaxTMI 
TaxTMI 
2004 (10) TMI 325
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....s a Corporation constituted under the Industrial Finance Corporation of India Act, 1948 and carries on the business of financing moneys to various borrowers. Vide agreement dated 4-12-1990, the appellant entered into a Lease Finance Agreement with M/s. Fairgrowth Financial Services Limited (hereinafter Fairgrowth, for short), the respondent No. 3. Pursuant to the letter of offer dated 26-7-1990 under this lease finance agreement, the appellant had taken lease finance of total 57 cars out of which one car was foreclosed in or about January, 1992, leaving 56 cars under lease finance with the appellant. The case of the appellant as regards these 56 cars and the relationship of the appellant and respondent No. 3 insofar as these cars are concerned is stated as follows. The Appellant Company deposited total security amount on the 56 cars of Rs. 20,97,447.25 paise. The total rental payable by the Appellant Company for 5-year period amounted to Rs. 85,35,379. The total purchase price of 56 cars is Rs. 84,80,664. As per the terms of the lease finance agreement mutually agreed into by the parties, the Appellant Company was required to pay 25 per cent of the purchase price of the cars as ....
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....t the time of buyback or purchase of lease assets by the appellant. On 9-4-1997, the appellant forwarded a cheque of Rs. 17,800 in full and final settlement of dues under lease finance agreement dated 4-12-1990. According to the appellant, the payment of this amount squared up fully and finally its liability for payment subject to adjustment of security deposit and interest agreed thereon and all that remained to be done thereafter was to transfer the said 56 cars in favour of the appellant company after cancellation of the hypothecation which obligation was to be discharged by the custodian which had taken over the properties of Fairgrowth. 5. A perusal of the detailed order passed by the Special Court shows that the Special Court refused to treat the transaction between the appellant and Fairgrowth as one of lease finance and instead treated it to be a transaction of lease only i.e., the appellant holding 56 cars as lessee of Fairgrowth. The principal reason which prevailed according to the Special Court is that in its application, the appellant had stated the transaction to be of lease and not of lease finance. Thus the Special Court has rigidly applied the rules of pleadings....
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....gth, the learned counsel for the parties. We also requested Shri Uday U. Lalit, Senior Advocate, to assist the Court by pointing out the correct position of law centering around lease finance transactions. We place on record our appreciation of the assistance rendered by the learned senior counsel, Shri Uday U. Lalit. What is a lease finance? According to Dictionary of Accounting & Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996 at page 136) : "A Finance Lease is one where the Lessee uses the asset for substantially the whole of its useful life and the lease payments are calculated to cover the full cost together with interest charges. It is thus a disguised way of purchasing the asset with the help of a loan. SSAP 23 required that assets held under a finance lease be treated on the balance sheet in the same way, as if they had been purchased and a loan had been taken out to enable this." [Emphasis supplied] In Lease Financing & Hire Purchase by Dr. J.C. Verma (4th Edition, 1999 at p. 33), Financial Lease has been so defined : "Financial lease is a long-term lease on fixed assets, it may not be cancelled by either party. It is a source of long....
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....e by either party. 5.The lease period usually coincides with the economic life of the asset and may be broken into primary and secondary period. 6.The lessor enters into the transaction only as a financier. He does not bear the costs of repairs, maintenance or operation. 7.The lessor is typically a financial institution and cannot render specialized service in connection with the asset. 8.The lease is usually full-pay-out, that is, the single lease repays the cost of the asset together with the interest. 10. In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipments or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment, undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. He remains liable for payment of ta....
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....ist in the attachment of the notified persons property and to manage the same thereof. The properties of the notified persons, whether attached or not, do not, at any point of time, vest in him. He is merely a custodian and not a receiver nor is he a final liquidator so as to enjoy control over the properties. In other words, the position of the custodian is the same as that of the notified person himself. We are, therefore, of the opinion that the custodian remains bound by the obligations incurred by the notified party itself, if not incurred fraudulently or to defeat the provisions of the Act. 12. For the purpose of deciding the controversy before us, it is not necessary for us to examine whether the transaction entered into between the appellant and Fairgrowth, the respondent No. 3, would at all attract the applicability of the provisions of the Act in view of sub-section (2) of section 3 thereof. The learned counsel for the appellant has taken a very fair stand submitting that the appellant is prepared to pay if anything is still found to be due and payable by it but in any case the 56 cars could not have been held liable and directed to be delivered to the custodian. It wa....