TaxTMI 
TaxTMI 
1983 (9) TMI 1
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....nancial institutions to the extent of about 40 per cent. of its equity share capital; it is engaged in the manufacture, inter alia, of jeeps and other motor vehicles on a large scale. M/s. International Tractor Company of India Limited (for short "ITCI "), was incorporated on April 15, 1963, under the Companies Act, 1956, as a public company and was carrying on the business of manufacture and sale of agricultural tractors and implements which are an essential commodity under the Essential Commodities Act, 1955. Though it commenced production within three years of its incorporation, ITCI incurred a loss-of Rs. 253 lakhs in the year 1974-75 ; with the financial assistance received from M & M, ITCI was able to improve its operating picture and its working results for the year 1975-76 showed a profit of Rs. 70 lakhs (Rs. 208 lakhs according to the Central Government but that was without providing for depreciation to the extent of Rs. 138 lakhs); but again in the financial year 1976-77 (ending October 31, 1977), for various reasons its working was not satisfactory and it made a huge loss to the tune of Rs. 433 lakhs. Cheques issued by ITCI bounced, suppliers had stopped the supplies ....
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....ares proposed in the scheme was approved by 3/4ths majority of the equity shareholders of both the companies. It was, however, specifically stated that this order was not to be construed as conveying any approval of the Central Govt. that may be required under any other law. Thereafter, ITCI and M & M preferred Company Petitions (No. 789 of 1977 by ITCI and No. 2 of 1978 by M & M) in the Bombay High Court under ss. 391 and 394 of the Companies Act, 1956, seeking the court's sanction to the scheme of amalgamation; and during the pendency of the petitions, pursuant to the interim directions given by the learned company judge, meetings of the shareholders of both the companies were held at which the scheme of amalgamation was approved by them and ultimately by its order dated March 9, 1978, the Bombay High Court sanctioned the scheme of amalgamation effective from November 1, 1977. It needs to be stated that at the hearing before the company judge the Regional Director, Company Law Board (representing the Central Govt. to whom notice is statutorily required to be issued and was issued) appearing through counsel raised a specific contention that the exchange ratio of the shares fixe....
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....company. In other words, sub-s. (1) of s. 72A provides that if the Central Govt., on the recommendation of the specified authority, is satisfied that the aforesaid conditions are fulfilled in a given case of amalgamation then the Central Govt has to make a declaration to that effect and the consequence of such declaration is that notwithstanding anything contained in any other provision of the Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company is deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected. An additional statutory function of the specified authority under sub-s. (2)(ii) of s. 72A is to issue a certificate to the effect that adequate steps have been taken by the amalgamated company for the rehabilitation or revival of the business of the amalgamating company, which certificate is required to be furnished, along with its return of the income for the said assessment year, by the amalgamated company for claiming the benefit of the section. On April 27, 1978, M & M made an application in the approved form under s. 72A of the Act for t....
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....ntention that the Central Govt. had refused the relief to M & M on the basis of its subjective decision about the non-fulfilment of the condition specified in cl. (a) of s. 72A(1) and for relevant and cogent reasons and hence the decision could not be reviewed or interfered with by the court and with a view to show that both the specified authority and the Central Govt. had considered all the relevant factors and that M & M had been fairly treated in the matter great reliance was placed on the minutes of the several meetings held by the specified authority which were produced before the court. On a consideration of the entire material placed before it as well as the rival submissions made by counsel for the parties the High Court came to the conclusion that the view taken by the specified authority and the Central Govt. in the impugned orders was just not possible to be formed and that no reasonable authority, much less the specified authority or an expert body of the Central Govt., could have reasonably come to the conclusion that the ITCI was, immediately before its amalgamation with M & M, financially viable and, therefore, the orders were liable to be struck down. The High Cour....
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....ty as well as the Central Govt. had, inter alia, relied upon two conspicuous factors that emerged from the materials on record, (a) the exchange ratio of shares fixed under the scheme of amalgamation (two shares of M & M in exchange for three shares of ITCI), and (b) the admission on the part of ITCI about its sound financial position contained in para. 14 of its Company Petition No. 789 of 1977, for coming to the conclusion that the amalgamating company (ITCI) was financially viable immediately before its amalgamation with M & M and since the opinion of the statutory body as well as the decision of the Central Govt. were based on the aforesaid relevant and cogent materials, the High Court was in error in interfering with the same. Secondly, counsel contended that neither the specified authority in its order of recommendation dated May/June 2, 1980, nor the Central Govt. in its order dated December 1, 1980, had indicated that the second condition mentioned in cl. (b) of sub-s. (1) about the amalgamation being in public interests had been fulfilled nor was it clear on the record that the relief sought by M & M was denied only on the ground of non-fulfilment of the condition specifie....
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....ed and if that conclusion was vitiated on any of the aforesaid grounds the High Court was right in striking down the impugned orders and remanding the matter to the Central Govt. for doing the needful in the light of its judgment; and the High Court was also right in issuing the directions which it did. By now, the parameters of the court's power of judicial review of administrative or executive action or decision and the grounds on which the court can interfere with the same are well settled and it would be redundant to recapitulate the whole catena of decisions of this court commencing from Barium Chemicals case [1966] Suppl. SCR 311 ; [1966] 36 Comp Cas 639, on the point. Indisputably, it is a settled position that if the action or decision is perverse or is 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. This court in one of its later decisions in Smt. Shalini Soni v. Union of India [1981] 1 SCR 962, 966; AIR 1981 SC 431, 434, has observed thus :....
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....ally viable, and (b) that the amalgamation was in the public interest. Both the specified authority as well as the Central Govt., on the materials before them, came to the conclusion that ITCI was, immediately before its amalgamation with M & M, financially viable and as such the first condition mentioned in cl. (a) of sub-s. (1) had not been fulfilled. In its order of negative recommendation dated May/June 2, 1980, the specified authority has set out six reasons that led it to form the aforesaid conclusion and it is undisputed that substantially the same six reasons have been given by the Central Govt., though couched in better language and compressed in four paragraphs of its order dated December 1, 1980, while upholding the recommendation of the specified authority and declining the relief to M & M. These reasons for the impugned conclusion as appearing in the four paragraphs (paras. 3 to 6) of the Central Govt.'s order are : " 3. It has been claimed by Messrs. M & M that having regard to the losses incurred by ITCI, the company was financially non-viable immediately before the amalgamation. The amalgamation with M & M took place with effect from 1-11-1977. ITCI suffered loss....
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....ive, if the market value of the assets is taken into account, the assets exceeded the liabilities by 790 lakhs. This shows that the company was a viable unit. (same as reason (iii) of the specified authority)." Before undertaking a scrutiny of these reasons for ultimately deciding whether the impugned conclusion of the specified authority and the Central Govt. is liable to be interfered with or not it will be useful to indicate briefly the object with which this new provision of s. 72A was introduced in the Act as it will throw light on what was the mischief or situation that was intended to be remedied by its introduction as also the true concept of financial non-viability. From the Budget speech of the Finance Minister, the Notes on Clauses of the Finance (No. 2) Bill of 1977 and the Memorandum explaining the provisions of the said Bill it will appear clear that sickness among industrial undertakings was regarded as a matter of grave national concern inasmuch as closure of any sizable manufacturing unit in any industry entailed social costs in terms of loss of production and unemployment as also waste of valuable capital assets, and experience had shown that taking over of suc....
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....algamation of companies it will have to be understood in its popular sense, that is to say, the sense or meaning that is attributed to it by men of business, trade or commerce and by persons or institutions interested in or dealing with companies. In this behalf counsel for the contesting respondent invited our attention to the several criteria adopted by various bodies like the Govt. of India, financial institutions and commercial banks on what could be regarded as a sick unit. For instance, while announcing its scheme of merging sick units with healthy ones (Finance Act, 1977), the Govt. of India had classified " those units where losses, past and present, have eroded 50% of capital and reserves, as sick According to the RBI, commercial banks consider a unit to be sick if it has incurred cash loss for one year and in their judgment is likely to continue to incur cash losses for the current year as well as the following year and which has an imbalance in its financial structure, such as current ratio of less than I : I and worsening debt-equity ratio (total outside liabilities to net worth) ". Counsel pointed out that while the commercial banks follow these criteria for banking pu....
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.... simple reason that those did not exist when the specified authority as well as the Central Govt. arrived at its impugned conclusion. Suffice it to say that the factors which these guidelines lay down as being required to be taken into account for deciding the question of non-viability of the amalgamating company are more or less similar to and in accord with the aforesaid tests or criteria adopted by men of business, trade or commerce and financial institutions and counsel for the contesting respondent claimed that those guidelines had been more than fulfilled in the instant amalgamation. However, for the purpose of this appeal we would rather ignore the said guidelines contained in the Press Note dated 23rd February, 1981, and decide the question whether the impugned conclusion of the specified authority as well as the Central Govt. is liable to be interfered with or not by having regard to the true concept of financial non-viability, as discussed above, and applying the several tests or criteria mentioned in that behalf earlier. Turning now to the reasons that prompted the specified authority and the Central Govt. to come to the impugned conclusion, a careful and close scruti....
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....ther, the fact that during the year 1977-78, following the amalgamation, M & M took adequate steps for the revival of ITCI's undertaking by making repayments to its creditors to the tune of Rs. 4 crores and by making investment of Rs. 0.7 crore on maintenance, replacement of machinery, etc., thereby enabling the undertaking to earn a cash profit of Rs. 3.9 crores, could not be regarded as a factor showing the financial viability of ITCI, prior to 1-11-1977, as was wrongly done by the specified authority and the Central Govt. All this shows that the impugned conclusion was the result of an entirely wrong approach being adopted as regards the true concept of financial non-viability. On the other hand, while stating the facts in the earlier part of our judgment, we have pointed out that at the material time, namely, immediately before its amalgamation with M & M, which took place on 1-11-1977, ITCI, having regard to its financial position, was commercially insolvent and that all the three parameter of profitability, liquidity and solvency, by reference to which its sickness (financial non-viability) is required to be judged, showed negative figures. Admittedly, during the two years 19....
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....in the same paragraph and, as such, it referred to the company's position as on 30th September, 1976, and not as on 31st October, 1977 (i.e., immediately prior to the amalgamation). Admittedly, the balance-sheet as at 31st October, 1977, was ready only in May, 1978, and was furnished to the specified authority in July, 1978. Obviously, therefore, the so-called admission was referable to the position as on 30th September, 1976, and it cannot be forgotten that at the close of that year the working results of ITCI had shown a profit of Rs. 70 lakhs, though in the following year it again made a huge loss. Further, all these facts were clearly stated in para. 6 of M & M's petition seeking court's sanction for amalgamation and averments in both the petitions, (which were heard together by the High Court) will have to be read together. So read, the so called admission on the part of the ITCI could not be given any significance as has been done by the specified authority and the Central Govt. Paragraph 5 of the Central Govt.'s order merely refers to the poor performance of the ITCI during the relevant years and points out that the same was due to factors such as the mechanics of price c....
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....e books of account was negative on the date of amalgamation and, therefore, when the specified authority and the Central Govt. took into consideration the market value of the assets of the ITCI as on the date of amalgamation for coming to the conclusion that the company was a viable unit, they were clearly influenced by irrelevant and extraneous material vitiating the impugned conclusion. Having regard to the above discussion 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. The second contention of counsel for the appellants need not detain us very long, for, having regard to the materials that are available on record, it will be difficult to accept it. In the first place, in the writ petition, respondent No. 1, after referring to several facts which tended to show that the amalgamation was in the public interest, had specific....