INTRODUCTION

We are only tenants, and shortly the great Landlord will give us notice that our
lease has expired.
- Joseph Jefferson

Lease is a word which everyone is aware of, and hears it day in and day out while
dealing the transactions related to immovable property. Oxford Dictionary of Law
defines it as a contract under which an owner of property grants another person
exclusive possession of the property for an agreed period, in return for rent and
sometimes for a capital sum known as a premium.

DEFINATION
Section 105 of the Transfer of Property Act, 1882 defines a lease as follows:
A lease of immoveable property is a transfer of a right to enjoy such property, made
for a certain time, express or implied, or in perpetuity, in consideration of a price paid
or promised, or of money, a share of crops, service or any other thing of value, to be
rendered periodically or on specified occasions to the transferor by the transferee,
who accepts the transfer on such terms.
Lease (Section 105)
A lease of immovable property is a transfer of a right to enjoy such property made for
a certain time, express or implied, or in perpetuity, in consideration of a:
(a) price paid or promised, or
(b) money,
(c) a share of crops,
(d) service, or
(e) any other thing of value
(2) To be rendered periodically or on specified occasions to the transferor by the
transferee, who accepts the transfer on such terms.
As per Section 105 Transfer Of Property Act, a lease of immovable property is a
transfer of a right to enjoy such property made for a certain time or in perpetuity. The
expression transfer of a right to enjoy stands in contrast with the words transfer of
ownership occurring in Section 54 in the definition of sale. In a sale all the rights of
ownership , which the transferor has, passes on the transferee. In a lease transaction ,
the transferor is called the lessor, the transferee is called the lessee, the price paid or
promised is called the premium and the money , share , service or other thing to be so
rendered is called the rent
For instance, A gives his house on rent to B by executing a lease in his favour for 10
years. B is entitled to live here and if he complies with the terms and conditions, and
doesnt commit the breach of any condition, A cant terminate the agreement as his
will or throw B out of his pleasure. If an option is given to the lessor by the lesse
himself to resume the leasehold, it is a personal covenant and doesnt create an
interest in the land.1

1 R. Kemparaj v. Barton Son AIR 1970 SC 1872.

2

ESSENTIAL ELEMENTS
Essentials ingredients of a lease agreement are2:
a) Parties to the agreement;
b) The identification of the property subject matter of the arrangement;
c) There must be transfer of right,
d) Lease must be made in the mode under section 107,
e) Term of lease,
f) Rent,
g) Date of commencement and expiry.
a) Parties to Lease
There must be two parties in a lease i.e. lesser (Transferor) and the lessee (transferee).
A lease arises in agreement between the owner of a property and the person who
proposes to take that property for a term on payment of consideration. A man could
not grant a lease to himself3.
The tenancy must stand or fall with the agreement on which it is founded and with the
covenants contained in it and as they fall so does the tenancy.
Every person who is competent to contract and entitled to transferable property is
competent to grant a lease. Only an absolute owner of the property can grant a lease
for any period he likes. A limited owner can grant a lease only to the extent permitted
by law. A person holding a property for life cannot grant a lease beyond his life unless
he is especially empowered under the terms of the deed of settlement.
A lessee may himself grant a lease further and such a lease is commonly known as
sub-lease or under-lease. A tenant protected under statutory provisions with regard to
occupation of premises having no right to sublet or transfer the premises , cannot
confer any better title.
The lease must also be competent to contract. A lease may be granted to one or more
than one person jointly. In the case of joint tenancy, in the absence of a clear provision
to the contrary, the entire body of tenants constitute single tenant.
Where a lease is granted by joint tenants and one of them dies, the lessee holds under
the survivors

2 Arvind Kumar v. Govt of India, (2007) 5 SCC 745

3 Rye v. Rye , 1962 AC 496
3

b) Subject matter of lease

There may be composite leases also like lease of a building along with equipment and
lease of a factory along with machinery etc. A lease of a house or of a shop is a lease
not only of the superstructure but also of its site4. Lease premises is not only a
building or part of building but also the land and other things appertaining to it and
also furniture and other fixtures provided by the landlord.
In a case involving contravention of terms of lease, the lease of the land was granted
for the construction of house and the only restriction placed on lessee was not to use
the land for purpose other than construction of a house. The lessee constructed the
house and let it for non-residential use. It was held that the act of letting it out for nonresidential use could not be said to contravene the restriction in the deed on the
ground that the term house implies only residential user5.
Where the tenancy was in respect of the building alone and that building was
destroyed , the tenancy became terminated and the tenant could not put any structure
upon the land where buildings stood without the consent of the landlord. However ,
the landlord could claim recovery of possession of land only through a Civil Court of
competent jurisdiction. He could not trespass upon land on the ground that the lease
stood terminated.
c) Transfer of right
In lease there is a transfer of right of enjoyment of property. Right of enjoyment is
transferred only when there is transfer of possession. In mortgage and lease only
partial interest is transferred, therefore it is transfer of a limited estate. This limited
estate i.e., right of enjoyment is known as demise. lease hold estate is transferred
after being separated from ownership. This is right in rem.
A lease contemplates a demise or a transfer of a right to enjoy land for a term or in
perpetuity in consideration of price paid or promised or services or other things of
value to be rendered periodically or on specified occasions to the transferor. The
words transfer of a right to enjoy the land indicate that all the rights of ownership
are not transferred. In the words of Lord Shaw, The essential characteristic of a lease
is that the subject is one which is occupied and enjoyed and the corpus of which, does
not in nature of things and by reason of the user , disappear.
A lease creates a right in rem. It is only a contract. The estate transferred to the lessee
is called the leasehold whereas the estate remaining in the lessor is called the
reversion. The interest of the lessor and lessee in the leasehold property are heritable
and vests in their heirs after their death.
4 T. Lakshmipathi v. P. Nithyananda Reddy, 2003 (3) RCR (Civil) 306 SC
5 Union Of India v. Shivdayal Soin and Sons , AIR 2003 SC 1877
4

d) Duration of lease
The essential of a lease is that the right to enjoy the property must be transferred for a
certain time, express or implied or in perpetuity. The document of lease must show the
time period of operation of lease and when it is going to commence. The
commencement of the lease must be certain in the first instance or capable of being
made certain afterwards. It may commence either in the present or in the future or on
the happening of a certain contingency which is bound to happen.
Three types of lease are recognized by this section:(i)
(ii)
(iii)

Lease for a certain time;

Periodic leases; and
Leases in perpetuity

It is a principle of general application that it is not within the power of a person to

create whatever interests he may please in land; he is limited to such interests as are
recognized by the system of jurisprudence governing his disposition6.
A lease for life is leases for a certain time, for it terminate with the death of the lessee.
It is necessary for lease for a certain time that the lease deed should be capable of
being made certain on a future date.
The periodic leases are tenancies from month to month or year to year. A tenancy
from year to year differs from the tenancy at will in that it can only be death of either
party. A lease from year to year is a periodic lease which continues from period to
period.
In India, perpetual leases are created by an express or a presumed grant. In a case, a
question arose whether a lease for 999 years is legal especially in view of the fact that
substantial stamp duty can be saved by executing such a lease. The Calcutta High
court held that there was nothing illegal in executing a lease for 999 years and just
because stamp duty is saved thereby, the transaction does not become unlawful7.
e) Consideration
A lease is a transaction which has always to be supported by consideration.
Consideration may be either premium or rent. Where the whole amount payable as
consideration is paid in lump sum it is called premium the consideration which is paid
periodically is called rent. The rent fixed must be certain and where it is varying
nature it must be reasonably ascertainable. Rent need not to be necessarily in the form
of money. It may be paid in the form of share of crops, services or any other thing of
6 Municipal Corporation OF Bombay v. Security Of State , (1905) 29 Bom 580 (602)
7 M Haque v.G. Mullick AIR 1993 Cal 58
5

value. In Commissioner of Income Tax v. Panbari Tea Co 8., the Supreme court made
a distinction between premium and rent and observed: when the interest of the
lessor is parted with for the price, the price paid is premium or salami. But the
periodic payments for continuous enjoyment of the benefits under the lease are in the
nature of rent. The former is the capital income and the latter is a revenue receipt.
Therefore, the premium is the price paid for obtaining the lease, rent, on the other
hand, is applied to all other payments made for the use and occupation of land or
building.

8 (1965) 3 SCR 811

6

DURATION
Section 106 of the Transfer of Property Act, 1882 explains duration of certain
leases in absence of written contract or local usage as
(1) In the absence of a contract or local law or usage to the contrary, a lease of
immovable property for agricultural or manufacturing purposes shall be deemed to be
a lease from year to year, terminable, on the part of either lessor or lessee, by six
months' notice expiring with the end of a year of the tenancy; and a lease of
immovable property for any other purpose shall be deemed to be a lease from month
to month, terminable, on the part of either lessor or lessee, by fifteen days' notice.
(2) Notwithstanding anything contained in any other law for the time being in force ,
the period mentioned in sub-section (1) shall commence from the date of receipt of
notice.
(3) A notice under sub-section (1) shall not be deemed to be invalid merely because
the period mentioned therein falls short of the period specified under that sub-section,
where a suit or proceeding is filed after the expiry of the period mentioned in that subsection.
(4) Every notice under sub-section (1) must be in writing, signed by or on behalf of
the person giving it, and either be sent by post to the party who is intended to be
bound by it or be tendered or delivered personally to such party, or to one of his
family or servants at his residence, or (if such tender or delivery is not practicable)
affixed to a conspicuous part of the property.
Duration of leases (Section 106)
However such leases are subject to contrary contract or local law or usage. Under
section 106 , lease of immovable property for agricultural or manufacturing purposes
where there is no contract to t e contrary, shall be deemed to be a lease from year to
year and lease of immovable property for any other purpose shall be deemed to be a
lease month to month. Where the lease has other purpose shall be deemed to be lease
month to month. Where the lease has come to an end by efflux of time, no notice is
required under section 1069.
Lease for agricultural purposes
Although this chapter refers to agricultural leases but this does not apply to such
purposes unless there is a notification by the state government under section 117 of
this act. where there is no agreement between the parties or local usage to the
contrary, the duration of lease will be as under:9 Narayan Reddy v. Balasore Municipal Council, AIR 2001 Ori 1
7

(1)

a monthly lease or tenency can be determined by the lessoror lessee by

(a)
(b)
(c)
(d)

a notice in writing,
notice must be of 15 days,
the 15 days, notice must expire with the end of a month of tenancy, and
the notice must be served in the manner provided in this section.

(2) A lease from year to year can be determined by the lessor or lessee by:
(a)
(b)
(c)
(d)

a notice in writing,
the notice should be of six months,
the notice must expire with the end of a year of the tenancy, and
the notice must be served in the manner provided in the section itself.

Notice to quit
The above stated provisions are operative only when there is no agreement between
the parties as to the determination of the lease. If any person claims to the contrary
that the lease was for a fixed term or to be an yearly lease instead of lease from month
to month, he has to prove it by legal, valid and reliable evidence. The burden lays
upon defendant to prove his contrary claim that the term of lease was fixed for 5 years
and the lease would be entered into at the option and wish of the lessee 10. Where
petition for eviction of tenant by the landlord under rent control act was withdrawn
with the leave of the court and a civil suit for eviction of tenant was filed thereafter
without notice under section 106 terminating the tenancy, it was held that the suit was
liable to be dismissed. No notice is required if a lease of immovable property is
determined under clause (a) of section 111 of the Transfer of property Act by efflux of
time limited thereby.
No notice to quit is necessary where the tenant is holding over or lease is of
permanent nature or is determined by forfeiture of if the tenant denies the title of the
landlord.
Form and construction of notice
Every notice under this section must be in writing and signed by or on behalf of the
person giving it. The notice must be either(a) sent by post to the party who is intened to be bound by it, or
(b) tendered or delivered personally to such party, or to one of his family or
servats at his residence, or
(c) affixed to a conspicuous part of the property where such tender or delivery is
not practicable.
10 Punjab National Bank v. Ganga Narain Kapur, AIR 1994 All 221
8

After the service of the notice to quit a question generally arises whether the notice is
sufficient to bind the person concerned? The privy council considered this question
and held in Harihar Banerjee v. Ram Sashi Roy11 that the test of sufficiency is not
what the notice would mean to a stranger ignorant of all the facts and circumstances
touching the holding to which it purports to refer but what it would mean to the tenant
presumably conversant with all these facts and circumstances and further it has to be
construed, not with a desire to find fault in it, but to be construed that it may rather
become operative than null.
Where no objection was raised in the written statement as to the form and contents of
notice by the tenant, the tenant would be deemed to have waived any objection as to
non compliance of section 106.
The notice to quit must have the effect of terminating the lease at a certain time. A
notice to quit should be liberally interpreted but it must not prejudice the interests of
the lessee. The notice to quit must be unambiguous and unconditional.
Validity of notice to quit
Only 15 days notice to quit is required under the act but the notice for more than 15
days is not invalid. Where the notice to quit stated that tenancy is hereby terminated
but tenant was allowed to occupy till end of the tenancy month, that was held to be a
valid notice.
Any objection as to invalidity or infirmity of notice under section 106 should be
raised specifically and at the earliest, else it will be deemed to have been waived even
if there existed a valid objection12.
A notice given shall not be deemed to be invalid merely because the period mentioned
in it falls short of the period specified under sub-section (1) where a suit or
proceeding is filled after the expiry of the period mentioned in sub section (1).
Persons entitled to terminate
Notice of termination may be given either by lessor or by lessee. Notice may also be
given by their heir, trustee, executor or administrator or even an agent authorized in
this behalf. Where the interest of a lessee developed upon several persons as tenants in
common , notice to quit may be given to all of them. If it is given only to some of
them, the notice is sufficient to put an end to the tenancy13.

11 45 IA 225
12 Parwati Bai v. Radhika , 2003 (1) RCR (Rent) 607 (SC)
13 Ishwar Lal v. Labh Shankar , AIR 1982 Guj 152
9

Where certain tenants in the capacity of general power of attorney holders on behalf
of all the tenants received the notice of eviction from landlord, it was held that there
was service of notice of eviction on all the tenants.
Defective notice
Every notice to quit must fulfil the requirements of sub-sections (3) and (4). The
Supreme Court considered this in Calcutta Credit Corporation v. Happy Homes Pvt
Ltd14., and held that a notice not in compliance with section 106 because it did not
expire at the end of the period of lease or was of a shorter duration than that
prescribed may be accepted by the other party and if it is so accepted and acted upon,
the party receiving the notice will be estopped from denying its validity.
Presumption as to duration
Where there is absence of a contract or local law to the contrary, a lease of immovable
property for agricultural or manufacturing purpose is deemed to be a lease from year
to year. In case, the lease is for any other purpose, it is presumed to be month to
month tenancy. There is no scope for this presumption where the leave is in writing
and specifies its period.
A lease for manufacturing purpose is deemed to be lease from year to year but the
same is subject to the contract to the contrary between the parties. The landlord and
tenant can mutually agree to create a tenancy for manufacturing purpose for a period
less than a year. Only in the absence of this type of contract the lease for
manufacturing purposes would be deemed to be a lease from year to year. Only in the
absence of this kind of contract the lease for manufacturing purposes would be
deemed to be a lease from year to year. The same can be created by a registered
document in view of the provisions of section 105 of the act. Manufacturing lease
which is not from year to year does not require six months notice for termination. It
will require only fifteen days notice of termination.

14 AIR 1968 SC 471

10

MODE OF EXECUTON
Section 107 of the Transfer of Property Act, 1882 explains Leases how madeA lease of immovable property from year to year, or for any term exceeding one year
or reserving a yearly rent, can be made only by a registered instrument.
All other leases of immovable property may be made either by a registered instrument
or by oral agreement accompanied by delivery of possession.
Where a lease of immovable property is made by a registered instrument, such
instrument or, where there are more instruments than one, each such instrument shall
be executed by both the lessor and the lessee:
PROVIDED that the State Government from time to time, by notification in the
Official Gazette, direct that leases of immovable property, other than leases from year
to year, or for any term exceeding one year, or reserving a yearly rent, or any class of
such leases, may be made by unregistered instrument or by oral agreement without
delivery of possession.
Mode of creation of lease (Section 107)
According to section 107(1) a lease of immovable property from year to year or for
any term exceeding one year or reserving a yearly rent can be made only be a
registered instrument.
Lease from year to year
Such a lease is a continuous lease. Here the lessee cannot terminate the lease without
giving a notice at the end of the year.
Leases for a term exceeding one year
Where the term of lease exceeds one year it must be registered. The Supreme court
held in Rajendra Pratap Singh v. Rameshwar Prasad15, that a lease for a term
exceeding one year must be through a registered instrument. But for the validity of the
instrument the signing of the instrument both by lessor and lessee is not of the
instrument the signing of thed instrument both by lessor and lessee is not sine qua
non. Joint execution of the instrument is sufficient for the purpose
Lease reserving yearly rent
Where the rent is reserved for the whole year, there is a presumption that it a year to
year and it is register able.
15 AIR 1999 SC 37
11

Perpetual lease and covenant for renewal

In India, neither the Transfer of property Act not the general law abhors a lease in
perpetuity. When a covenant for renewal exists in a lease its exercise is a unilateral
act of the lessee and the consent of the lessor is not necessary here. Where the
principal lease executed between the parties containing a covenant for renewal is
renewed in accordance with the said covenant, whether the renewed lease should also
contain similar clause for renewal depends upon the facts and the circumstances of
each case regard being had to the intention of the parties as displayed in the original
covenant for renewal and the surrounding circumstances. The following prepositions
are important in this regard :(i)

(ii)

(iii)

In India, the law does not prohibit a prepetuat lease. However, clear and
unambiguous language is required for inference of such a lease. Where the
language is ambiguous, the court would opt for an interpretation negating
the plea of perpetuity.
To find an answer to the question whether a covenant for renewal
contained in the lease deed construed properly and in its real context,
entitles the tenant to continue as long as he chooses by exercising the
option of renewal at the end of each successive period subject to the same
terms and conditions depends upon the deed of lease being read as whole
and an effort made to ascertain the intention of the parties. No single
clause or term should be read in isolation so as to defeat other clauses. The
interpretation must be reasonable, harmonious and be deducted from the
language of the deed.
The court always leans against a perpetual renewal and therefore, where
there is a clause for renewal subject to the same terms and conditions, it
would be construed as giving a right to renewal for the same period as the
period of the original lease, but not a right to second or third renewal and
so on, unless the language is clear and unambiguous16.

The observations made by the division bench of the Calcutta High Court are worth
noting here. In the case of Secretary of State for India in Council v. A.H.
Forbes17, the Division Bench held that,
(i)
(ii)

a lease, which creates a tenancy for a term of years, may yet confer on the
lease an option of renewal.
If the lease does not state by whom the option is exercisable, it is
exercisable by the lessee only, that is to say, a covenant for renewal, if
informally expressed, is enforced only in the favour of the lessee.

16 State Of Uttar Pradesh v. Lalji Tondon (Dead) , AIR 2004 SC 32

17 (1912) 17 IC 180
12

(iii)

The option is exercisable not merely by the lessee personally but also by
his representative in interest.

DISTINCTION BETWEEN LEASE AND LICENCE

As stated above Section 105 of Transfer of Property Act provides Lease is a transfer
of right to enjoy immovable property made for certain term or duration in
consideration of rent. Lease and License are different. Term License as defined
under section 52 of Indian Easement Act is a right to do or continue to do in or upon
the immovable property of grantor , something which in the absence of such right, be
unlawful and such right would not amount to an easement or interest in property.
In Ajab Singh v. Shital Puri18 , it was observed that a lease of a property has a right to
possession and enjoyment of the devise to the exclusion of the lessor whereas a
licensee does not have such a right. Since appellant in instant case had the right to
exclusion possession and enjoyment of disputed property , he was a lessee and not the
licensee.
In Associated Hotel of India v. R.N. Kapoor19, had laid down following proportion in
this regard:(1) To ascertain whether a document creates a license or a lease, the substance of
the document must be preferred to the form.
(2) The real test is the intention of parties whether they intended to create a
license or lease.
(3) If the document creates an interest in the property it is a lease but if it only
permits other party to use the property of which legal possession continues
with the owner it is a license.
(4) In under a document a party gets exclusive possession of property , prima
facie he is considered to be tenant but circumstances may establish otherwise ,
negativing the intention to create it.
In the case of B.M. Lall v. Dunlop Rubber Co. Ltd20., the Supreme Court held that the
transaction is a lease if it grants an interest in the land and it is a license if it gives a
personal privilege with no interest in the land. The question is not of words but of
substance and the label which parties choose to put upon the transaction, though
relevant, is not decisive. The test of exclusive possession is not conclusive , though it
is a very important indication in favor of the tenancy. Persons merely in permissive
possession of licensee whose license had been terminated would be equally bound by
a decree for possession obtained by the licensor against licensee.

18 AIR 1993 All. 138

19 AIR 1956 SC 1262
20 AIR 1961 S.C. 175
13

In the case of Roop Kumar v. Mohan Thadani21, where the plaintiff permitted the
defendant to use the premises for conducting business, in consideration of which the
defendant agreed to pay commission to the plaintiff on earnings from business and it
was not specifically mentioned in the agreement that any monthly amount will be
payable by the defendant to the plaintiff, it was held that the agreement was one of
license and not of lease.
It was observed by the Supreme Court in M.N. Clubwala v. Fida Hussain Saheb22,
that
a) Whether an agreement creates between the parties the relationship of landlord
and tenant or merely that of licensor and licensee , the decisive consideration
is the intention of the parties.
This intention has to be ascertained of a consideration, of all the relevant provisions in
the agreement
b) Exclusive possession is not conclusive evidence of a lease. If, however
exclusive possession to which a person is entitled under an agreement with a
landlord is coupled with an interest in the property the agreement would be
construed not a mere license but as a lease.
So following are the points of distinction between two
(1) A lease creates an interest in the property while a license passes no interest
in the property and merely makes an action lawful which without it would
have been unlawful. The real test is intention of the parties.
(2) A lease gives the tenant a right to exclusive possession while a license
confers no such right on the licensee.
(3) A lease is assignable , but a license is generally non-transferable.
(4) A lease unlike a license is not revocable.
(5) A lease is not determined by the grantor making an assignment of its subjectmatter, but a license is determined in such a case. In the case of Shafiquddin
v. Pyarelal23, the Supreme Court observed that effect of the resolution and its
acceptance by A and B was not to create any lease but the transaction was
license.
(6) A lessee can bring an action for trespass , but a licensee cannot sue in his
own name.
(7) A lease in some cases requires registration but a license does not.

21 AIR 2003 SC 2418

22 AIR 1965 S.C. 610
23 AIR 1978 S.C. 298
14

(8) A lease-holder creates a heritable interest but a license does not survive to the
heirs and representatives of the licensee.
(9) A license is determined by the death of the grantor while a lease is not.

CASE STUDY
CIT vs. High Energy Batteries (India) Limited (Madras high Court)
The genuineness of sale and lease back transactions has been questioned most often.
Comes into picture a new case- wherein such transactions were held as genuine and
not sham. Here we try to throw some light on the case:
Core issues involved in the case:
Whether the hire purchase and sale and lease back transactions entered by the
assessee were genuine
Whether the assessee was entitled to depreciation on the leased asset
Facts and circumstances of the case
The case relates to M/s. High Energy Batteries (India) Ltd. (referred to as
assessee) and its sister concern M/s. Ponni Sugars Limited [sister concern]. The
assessee purchased igni-fluid boiler from its sister concern in the year 1995 for a total
consideration of Rs. 250 lakhs. However, the assessee contributed only Rs. 50 lakhs
and for the remaining amount, it entered into a hire purchase agreement [hire
purchase agreement (basically the same was a finance agreement)] with M/s.Wipro
Finance Limited [Wipro]. Thereafter, the assessee entered into an agreement of lease
[lease agreement] of the boilers with its sister concern. All these agreements were
executed on the same day.
The Assessing Authority under the Income Tax Act, 1961 held that the transaction is
merely a camouflage intended to get benefit of higher depreciation and thus avoid tax,
on the basis of following grounds:
The minutes of the meeting of the Board of Directors of sister concern noted that the
said company had gone for sale of the boilers to meet a portion of the cash loss and
other financial commitments of the said company. Therefore, the purchase made by
the assessee was only a financial accommodation to the sister concern.
The asset was an embedded one-it never came out from the possession of the seller,
i.e. the sister concern- to say, it remained with the lessee.

15

The hire purchase agreement established Wipro as the owner of the asset and the
assessee as the hirer.
The hire purchase agreement and the lease agreement were entered into only after
going through all the arrangements for finance. Precisely, the agreements were merely
a medium so as to colour the transaction as a genuine one.
The assessee filed an appeal before CIT (Appeals). The authority regarded the
transaction as a purchase of depreciation of Rs. 2.50 crore by paying Rs. 50.88
lakh. It viewed that the transaction was in essence a financing transaction between
the sister concern and Wipro - the job of the assessee was to give the touch of real
transaction to this transaction, which was neither a finance lease nor an operating
lease.
This decision was appealed against before the Income Tax Appellate Tribunal
(Tribunal). The Tribunal deviated from the opinion of above two authorities- it opined
that there was no direct or circumstantial material to show that the transaction was
sham. Further, the facts relating to the sale and subsequent financial agreement, hire
purchase agreement and leasing agreement was placed before financial institutions,
like ICICI, IDBI, UTI for their clearance- as the assessee had got clearance from
ICICI, it was difficult to contend that the transaction is a sham one. Therefore, the
Tribunal rejected the contention of the Revenue, since the Revenue was unable to
prove its point in the matter.
Ratio-Decidendi
Aggrieved by the decision of Tribunal, the Revenue then preferred an appeal to
Madras High Court. The High Court came up with the following observations:
True that the asset was in the possession of the lessee, i.e., the sister concern; but law
recognises constructive delivery as an acceptable mode of delivery and possession.
Therefore, the fact that the assessee was not in physical possession of the asset does
not go against the sale taking place between the assessee and its sister concern.
The Revenue contended on the basis of the minutes of the Board Meeting that the
monthly payment by the assessee to Wipro was to be met by the rental dues payable
by the sister concern to Wipro. On this, the Court referred to the agreements entered
into between the assessee and Wipro and between the assessee and the sister concern.
There was nothing in the agreements to indicate that the sister concern had
undertaken the responsibility to meet the liabilities of the assessee towards Wipro.
Instead, under the agreement, the lessee undertook to pay the lease rentals on the due
date and the last payment was to be made by the assessee. Even if it is assumed that
the lessee had undertaken responsibility to meet the liability of the assessee company
to pay the hire purchase amount to Wipro, it is a matter of pure commercial
16

understanding between two parties under the agreement to decide as to the

modalities of lease rental payment. The Court observed Given the freedom to enter
into agreements with parties and guided by commercial considerations, even to
invoke the theory of tax evasion, the Revenue must have sufficient material to draw an
inference of what had been shown as an understanding on an agreement between the
parties, is not, in fact, so.
The Court pointed towards the view put forward by the Apex Court in Vodafone
International Holdings B.V. Vs. Union of India [2012] 341 ITR 1 (SC) in which the
Supreme Court held that the task of the Revenue or the Court is to determine the legal
nature of the transaction and while doing so, it has to look at the entire transaction as a
whole and not to adopt a dissecting approach.
The Court also raised another relevant point relating to the capital gains claimed by
the assessee on the sale of the machinery in respect of the assessment year 1998-99.
The claim was allowed by CIT (Appeals), which was not appealed against by the
Revenue. Therefore, in the matter of granting relief to the assessee, while for one year,
the Department had accepted the transaction as genuine one (for 1998-99), in respect
of assessment year 1995-96 and 1997-98, it took a different stand that the transaction
is a colourable transaction.
The judgement
Finally, on the basis of the documents produced before the Court, the appeal of the
Revenue was rejected and the order of Tribunal was confirmed. The transaction was
held not to be a sham one and the assessee was granted the benefit of depreciation.
Take on the decision
The decision taken by the High Court seems to give more weight to the agreements
entered into by the parties. The view of the Court it is a matter of pure commercial
understanding between two parties under the agreement to decide as to the modalities
of lease rental payment, will give vent to cleverly-worded agreements that aim to
hide the substance of the transaction under the veil of clauses. The decision is a
departure from that taken in CIT vs. The Instalment Supply Ltd in which the Delhi
High Court looked into the substance of the sale and lease back transaction to
deliberate whether the transaction was a financial lease in the garb of operating lease.
Structuring deals in a manner that take advantage of the law is not uncommon- as
such it becomes the responsibility of the Courts/relevant Departments to look into the
substance of the transactions, rather than just peruse the documents.

17

BIBLIOGRAPHY
1. Dr. Avtar Singh, Textbook on The Transfer of Property Act, Universal
Law Publishing Co. Pvt. Ltd., 2006
2. Prof. G. P. Tripathi, The Transfer of Property Act, 1882, Central Law
Publications, 2005
3. Dr. Poonam Pradhan Saxena, Property Law, 2nd, LexisNexis, New Delhi
2011
4. Sanjiva Row's Transfer of Property Act, 7th, Universal, New Delhi 2011
5. G.C. Bharuka, Mulla, The Transfer of Property Act 1882, 10th, Lexis
Nexis, New Delhi 2006
6. Soli J. Sorabjee, Darashaw J Vakil's, The Transfer of Property Act: (4 of
1882), 3rd, Wadhwa and Company, New Delhi 2009
7. Dr. Hari Singh Gour, The Transfer of Property Act, Delhi Law House,
2004

18