Case: Asea Brown Boveri Ltd Vs. S Industrial Finance Corporation Of India And Others

2. The Industrial Finance Corporation of India (hereinafter IFCI, for short) is a Corporation constituted under the Industrial Finance Corporation of India Act, 1948 and carries on the business of financing moneys to various borrowers. Vide agreement dated 4.12.1990, the appellant entered into a Lease Finance Agreement with M/s. Fairgrowth Financial Services Limited (hereinafter Fairgrowth, for short), the respondent No. 3. Pursuant to the letter of offer dated 26.7.1990 under this lease finance agreement, the appellant had taken lease finance of total 57 cars but of which one car was foreclosed in or about January, 1992, leaving 56 cars under lease finance with the appellant.3. The case of the appellant as regards these 56 cars and the relationship of the appellant and respondent No.3 in so far as these cars are concerned is stated as follows. The Appellant Company deposited total security amount on the 56 cars of Rs. 20,97,447.25 paise. The total rental payable by the Appellant Company forperiod amounted to Rs.The total purchase price of 56 cars is Rs.As per the terms of the lease finance agreement mutually agreed into by the parties, the Appellant Company was required to pay 25% of the purchase price of the cars as security deposit carrying interest @ 5% per annum compounded half yearly, a lease management fee of 1% and lease rental of Rs. 15/per thousand Rupees per month of the cash price of the assets which was later revised to Rs. 16/per thousand Rupees per month by a subsequent letter."4. It is further alleged that it was the tacit understanding between the parties that the cars were to be transferred to the Appellant Company at the end of initial lease period of 5 years for which the parties agreed in their agreement by stating that the terminal fee will be 20%, meaning thereby that on payment of 20% of the cost price of the cars the said cars would be transferred by the Lessee Company to the Appellant Company or their nominee. The term terminal fee is a well known term in Lease Finance Transaction and has no other connotation than the amount payable for transfer of the leased asset. This lease finance agreement was entered into on 4th December, 1990."5. Fairgrowth became a notified party under(2) of Section 3 of the Act due to certain illegal transactions covering the period between 1.4.1991 and 6.6.1992. The transaction entered into on 4.12.1990 pursuant to letter of offer dated 26.11.1990 is not referable to the period during which the alleged illegal transactions were entered into by Fairgrowth.6. The Central Government appointed IFCI as the custodian, under(1) of Section 3 of the Act, over the properties belonging to Fairgrowth. The Appellant Company continued to make payment to IFCI in place of Fairgrowth as per lease finance agreement. An amount of Rs. 30,96,948.30 paise was paid by the appellant to Fairgrowth till December, 1992. An amount of Rs. 44,61,273/was paid by the appellant to the custodian IFCI. Thus the total lease rentals actually paid by the appellant company are Rs. 75,31,842/only.7. According to the appellant company under lease finance agreement, it had made a security deposit with Fairgrowth on which an interest of 5% per annum compounded half yearly was to be paid. The appellant made a communication to the custodian clarifying that the appellant would be entitled under the agreement to the amounts on account of security deposit and interest accrued thereon at the time of buyback or purchase of lease assets by the appellants. 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.

Court's reasoning:
8. A perusal of the detailed order passed by the Special Court shows that the Special Court shows that the Special Court refused to treat the transaction between the appellant and Fairgrowth as one of lease finance and instead treated it to be a transaction of lease only i.e. the appellant holding 56 cars as lessee of Fairgrowth. The principal reason which prevailed according to the Special Court is that in its application, the appellant had stated the transaction to be of lease and not of lease finance. Thus the Special Court has rigidly applied the rules of pleadings but a perusal of the order shows that there has been no effort to scrutinize and interpret the documents evidencing the transaction so as to determine the real nature thereof.A perusal of the detailed order passed by the Special Court shows that the Special Court shows that the Special Court refused to treat the transaction between the appellant and Fairgrowth as one of lease finance and instead treated it to be a transaction of lease only i.e. the appellant holding 56 cars as lessee of Fairgrowth. The principal reason which prevailed according to the Special Court is that in its application, the appellant had stated the transaction to be of lease and not of lease finance. Thus the Special Court has rigidly applied the rules of pleadings but a perusal of the order shows that there has been no effort to scrutinize and interpret the documents evidencing the transaction so as to determine the real nature thereof.All the abovesaid features are available in the transaction entered into by the appellant. In addition, we find that the registration of the 56 cars stood in the name of the appellant from the very beginning and on payment of full amount including termination fee, as agreed upon, nothing more was needed to be done to vest the appellant with ownership and only loan documents were needed to be discharged and cancelled.19. There are certain tax benefits which by styling the transaction like a financial lease become available to the lessor (financer) and the lessee (borrower) both. Accounting standards have been devised consistently with which the entries are made in the accounts so as to satisfy the requirements of tax laws and to avail the best benefits by way of tax planning to both the parties.l the abovesaid features are available in the transaction entered into by the appellant. In addition, we find that the registration of the 56 cars stood in the name of the appellant from the very beginning and on payment of full amount including termination fee, as agreed upon, nothing more was needed to be done to vest the appellant with ownership and only loan documents were needed to be discharged and cancelled.19. There are certain tax benefits which by styling the transaction like a financial lease become available to the lessor (financer) and the lessee (borrower) both. Accounting standards have been devised consistently with which the entries are made in the accounts so as to satisfy the requirements of tax laws and to avail the best benefits by way of tax planning to both the parties.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(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 in still found to be due and payable by it but in any case the 56 cars could not have been held liable and directed to be delivered to the custodian. It was a simple case of accounting. If the appellants have cleared all their payments in accordance with the agreement dated 4.12.1990, initially to Fairgrowth and thereafter to the custodian including payment of terminal fee subject to adjustment for security deposit and the interest accrued thereon, then all that had remained to be done was the transfer of ownership on paper which the custodian should have been directed to do, submitted the learned counsel. But, as we have already noticed, the registration of the cars already stands in the name of the appellant. On a scrutiny of the accounts, if in the opinion of the Special Court, nothing had been remained to be paid by the appellant, then it was only a matter of calculation, the difference between the appellants statement of account and the one prepared by the Chartered Accountant at the instance of the custodian being bonafide, the appellant could, at best, have been directed to pay the deficit. But in no case submitted the learned counsel for the appellant, the 56 cars could have been directed to be delivered to the custodian. In spite of having made full payment (bonafide error or dispute as to calculation excepted), direction of delivery of cars to the custodian has caused failure of justice. We find ourselves in agreement with the submission so made.