1983 (9) TMI 1 - SC - Income Tax

s.72A relief denial quashed; authority's positive viability finding held perverse; matter remitted for fresh decision within three months

Commissioner of Income-Tax, Bombay, And Others Versus Mahindra And Mahindra Limited And Others

SC affirmed the HC: the specified authority's recommendation and the Central Government's order denying relief under s.72A were quashed as unreasonable. ... Application u/s 72A for the grant of relief of requisite declaration - Financial Viability of ITCI - scheme of amalgamation - whether recommendation of a statutory body and Central Government's decision based on it a matter of subjective satisfaction were open to judicial review & whether HC was justified in interfering - HELD THAT:- It is pertinent to mention that the reports presented by ITCI to its shareholders for the years 1975 and 1976 attributed the poor performance of the company to the mechanics of price control which did not take into account the cost increase and also sluggishness in the demand for tractors, principally because of the stringent credit restrictions imposed by the Government from time to time. Thus, admittedly, the poor performance of ITCI for the years of losses are due to short-term difficulties existing in the relevant years. Once the short-term difficulties were got over, the company was expected to make profits. The expression ' financial non-viability ' has not been defined in the Act but the Finance Minister's speech, the Notes on Clauses of the Bill and the Memorandum explaining the provisions thereof make it clear that the financial non-viability of an undertaking has been equated with the 'sickness' of such undertaking and obviously in the context of its revival by a sound undertaking the sickness must be of a temporary character and not any basic or permanent sickness. An undertaking which is basically or potentially non-viable will ordinarily be incapable of revival and would face a closure; in other words, the financial non-viability spoken of by the section must refer to sickness brought about by temporary adverse financial circumstances that disables the unit to stand and work on its own. This is also made clear by the provision contained in cl. (a) of sub-s. (1) which states that the financial non-viability of the amalgamating company has to be judged by reference to ' its liabilities, losses and other relevant factors '. Admittedly, during the two years 1974-75 and 1976-77 it had made huge losses to the tune of Rs. 253 lakhs and Rs. 433 lakhs respectively and the nominal profits of Rs. 70 lakhs (or for that matter even Rs. 208 lakhs) earned by it in 1975-76 did not convert it into a profitable concern as on 31st of October, 1977. As regards the liquidity, even the specified authority and the Central Govt. have observed that the large losses incurred in the year 1976-1977 had made ITCI face the problem of temporary liquidity. As regards the solvency, admittedly, cheques and bills issued by ITCI had bounced, suppliers had stopped supply of raw materials, financial institutions had stopped further monetary help and legal actions including winding-up proceedings had been threatened, Further, as stated earlier, the excess of liabilities (including loans) over the assets (share capital plus free reserves) was to the tune of Rs. 63 lakhs odd as on 31st October, 1977, and, as such, the entire share capital plus free reserves had been eroded (and not merely 50% as per the test of the Govt. of India); and the ' current ratio ' was extremely strained at 40: 60 (being less than 1: I as required by the test adopted by commercial banks). In other words, according to the tests or criteria adopted by men of business or commerce and financial institutions, ITCI, immediately before its amalgamation with M & M, was clearly and blatantly financially non-viable. In spite of such situation that obtained and which was brought to the notice of the specified authority and the Central Govt. it is surprising how the impugned conclusion was reached by them and the same appears to us to be almost perverse ; at any rate it was a conclusion which no reasonable body of persons, properly informed, could come to. The High Court, in our view, was right in holding that the impugned conclusion of the specified authority and the Central Govt. on the aspect of non-fulfilment of the condition specified in cl. (a) of sub-s. (1) of s. 72A being vitiated was liable to be set aside and that consequently the recommendation of the specified authority and the order of the Central Govt. based thereon deserved to be quashed. Further, the proceedings of the specified authority, particularly the minutes of the third meeting held on July 19, 1978, clearly show that it was in the light of the aforesaid factors that the specified authority expressed a clear opinion that it would be difficult to take the view that the test of public interest was not met and the said opinion was substantially reiterated in its thirteenth meeting held on July 11, 1979. Therefore, the specified authority made a negative recommendation in its order dated May/June 2, 1980, that the condition specified in cl. (a) of sub-s. (1) of s. 72A had not been fulfilled. It is also clear that it was on the basis of such recommendation that the Central Govt. passed its order where the relief was refused to M & M on the ground that the condition specified in cl. (a) of sub-s. (1) had not been fulfilled and no other ground was given. In this view of the matter it is difficult to accept the contention that the High Court was wrong in presuming that the condition in cl. (b) had been fulfilled in the instant case. In our view, from the aforesaid material on record an irresistible inference arises that relief under s. 72A was refused by the Central Govt. to M & M only on the ground that the condition specified in cl. (a) of sub-s. (1) had not been fulfilled. It is also clear from the record that M & M had taken adequate steps for the revival of ITCI and had carried on the same business without any modification or reorganisation during the relevant previous year. In the result we confirm the High Court's decision as also the several directions issued by it in the operative part of its order subject to one modification that the specified authority and the Central Govt. should dispose of M & M's application within three months from the date hereof (instead of six months as directed by the High Court) in the light of our judgment. Issues Involved:1. Judicial review of the Central Government's decision based on the recommendation of a statutory body under Section 72A of the Income Tax Act, 1961.2. Financial viability of the amalgamating company (ITCI) immediately before its amalgamation with M & M.3. Whether the amalgamation was in the public interest.4. Adequacy of steps taken by the amalgamated company (M & M) for the revival of the amalgamating company (ITCI).Detailed Analysis:1. Judicial Review of the Central Government's Decision:The primary issue was whether the Central Government's decision, based on the recommendation of the specified authority under Section 72A of the Income Tax Act, 1961, was subject to judicial review. The court held that if the action or decision is perverse, or such that no reasonable body of persons, properly informed, could come to, or has been arrived at by the authority misdirecting itself by adopting a wrong approach, or has been influenced by irrelevant or extraneous matters, the court would be justified in interfering with the same. The court cited principles from Prof. de Smith's treatise on Judicial Review of Administrative Action, emphasizing that discretion must be exercised genuinely and not be influenced by irrelevant considerations.2. Financial Viability of ITCI:The court scrutinized the Central Government's conclusion that ITCI was financially viable immediately before its amalgamation with M & M. The specified authority and the Central Government had concluded that ITCI's financial difficulties were temporary liquidity problems and not indicative of non-viability. However, the court found that this conclusion was based on a wrong approach and irrelevant considerations, such as the potential for financial assistance from M & M, which was legally and factually incorrect due to the limitations imposed by Sections 370 and 371 of the Companies Act, 1956. The court noted that ITCI was commercially insolvent, with significant losses, negative net worth, and strained liquidity ratios, indicating financial non-viability according to established business and financial criteria.3. Public Interest:The court affirmed that the amalgamation was in the public interest. The amalgamation prevented the closure of ITCI, which would have resulted in social costs such as loss of production of essential commodities (tractors) and unemployment of over 2,000 workers. The specified authority had expressed that the test of public interest was met, and the Central Government's refusal of relief was solely based on the non-fulfillment of the financial non-viability condition. The court found that the amalgamation forestalled the necessity for the State Government to take over ITCI, thereby avoiding a heavy burden on the public exchequer.4. Adequacy of Revival Steps by M & M:The court observed that M & M had taken adequate steps for the revival of ITCI, such as repaying liabilities and investing in maintenance and replacement of machinery, which enabled ITCI to earn a cash profit post-amalgamation. These steps demonstrated M & M's commitment to reviving ITCI's business, fulfilling the conditions under Section 72A(2)(ii) of the Act.Conclusion:The court upheld the High Court's decision to quash the impugned recommendation of the specified authority and the Central Government's order refusing relief under Section 72A. The Central Government and the specified authority were directed to reconsider M & M's application within three months in light of the court's judgment. The appeal was dismissed with costs in favor of M & M.