TaxTMI 
TaxTMI 
1982 (5) TMI 21
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....osses and other relevant factors and that the amalgamation was in the public interest. The satisfaction of the Central Govt. is to be arrived at after considering the recommendations of the specified authority being such authority that the Central Govt. may, by notification in the official Gazette, specify for the purposes of s. 72A. The effect 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 was deemed to be the loss, or, as the case may be, an 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 s. 72A(2)(ii) 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. The filing of such a certificate by the amalgamated company is one of the requisites for grant of relief under s. 72A. There was an amalgamation of M/s. International Tractor Company of India Ltd. (hereinafter referred to as the ITCI) with ....
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.... and from then onwards was carrying on the business of manufacture and sale of tractors and allied equipments. The licensed and installed capacity in 1977 of ITCI was 10,000 tractors units per annum. ITCI was then producing tractors less than its capacity. For various reasons, ITCI incurred a loss in 1975. ITCI was able to change its operating picture in the next financial year of 18 months ended September 30, 1976, by making reasonable profit. For the financial year 1976-77, the working of ITCI was again not satisfactory for various reasons. In October, 1976, the board of directors of M & M and ITCI considered a proposal for the merger and/or amalgamation of ITCI with M & M as the board of the two companies felt that it would be advantageous for both ITCI and M & M that their operations be rationalised for better and more efficient utilization of their existing facilities; that the products of M & M and ITCI were of such a nature as to make it possible for the utilization of the capacity of one company for the products of the other with marginal investments in tooling; that the proximity of the major manufacturing facilities of M & M and ITCI in adjoining locations at Kandivili wa....
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.... could extend the said period The scheme of amalgamation Was approved by the shareholders of both the companies and was pending sanction by the High Court as on December 31, 1977. At a meeting of the directors of M & M held on December 22, 1977, a question of extending the time-limit beyond December 31, 1977, was discussed at length. The board of directors of M & M resolved to extend under cl. 9 of the scheme, the period of completion of formalities from December 31, 1977, to June 30, 1978. The scheme of amalgamation was ultimately sanctioned by the High Court of Bombay on March 9, 1978, by passing orders on the petitions filed by ITCI and M & M. At the hearing before the company judge for sanctioning the scheme of amalgamation, 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, specifically contended that the ratio fixed under the scheme, of two shares of M & M in exchange for three shares of ITCI, was not fair to the shareholders of M & M considering ITCI's very bad financial position. The company judge took this contention into account and after considering ....
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....A of the Act. The application was made in the form approved by the Central Govt. As the amalgamation had been effected as from November 1, 1977, M & M filed the said application so as to enable the authorities to investigate the requisite factual pre-conditions for grant of relief under s. 72A and to arrive at a decision in order to enable M & M to file its return of income for the assessment year 1979-80 before the due date, June 30, 1979, along with the requisite certificate under s. 72A(2)(ii). M & M's assessment year 1979-80 is in respect of the relevant previous year ended on October 31, 1978. This is the previous year in which the amalgamation was effected. During the pendency of the original application, the latest audited financial position of ITCI was also communicated by M & M with its letter dated July 14, 1978, together with all its enclosures. 9. The specified authority under s. 72A of the Act, as notified by the Central Govt. by notification S.O. No. 710(E) dated October 11, 1977, consisted of a Committee of four Secretaries to the Government, namely, Secretary, Dept. of Industrial Development; Secretary, Department of Company Affairs; Secretary, Ministry of La....
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....y High Court as late as December, 1977, that even though the company sustained loss, it was in a sound financial position and its assets were more than sufficient to meet its liabilities. (v) The revival scheme submitted by the amalgamated company along with its application consisted mainly of repayment to creditors to the extent of Rs. 4.0 crores, besides a small investment of Rs. 0.7 crore on maintenance, replacement of machineries. It was expected that the undertaking of the amalgamating company would be revived as a result of such repayments. In fact, after the liabilities to the extent of Rs. 5.2 crores were repaid in 1977-78, the undertaking was revived and earned a cash profit of Rs. 3.9 crores in the subsequent year. This suggests that the undertaking is not basically non-viable but required a temporary dose of liquidity to bring it back to health. (vi) A relevant factor to be taken into consideration to determine whether the amalgamating company is non-viable is its close link with the amalgamated company, and the financial assistance which it got and would have continued to get from the amalgamated company. If this factor is taken into consideration it c....
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....o 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. On and from April 1, 1978, the amalgamated company was thus entitled to carry forward and set off accumulated loss and unabsorbed depreciation of the amalgamating company wherever the amalgamating company was not, immediately before such amalgamation financially viable, and where the amalgamation was in public interest. Thus, there are two conditions which are to be fulfilled under s. 72A(1) for benefits prescribed therein to be available to the amalgamated company, namely: "(a) the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors; (b) the amalgamation was in the public interest; and (c) (with which we are not concerned in this case) there being no other conditions specified under clause (c)." 12. That the amalgamation of ITCI with M & M was in the public interest was brought out before the Screening Committee, the Specified Authority as well as the Central Govt. In the writ petition, it is averred th....
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....spondent (Exhibit D hereto) for determining whether the amalgamation was in public interest." 13. In the corresponding para. of the counter-affidavit, it is merely stated that reference is drawn to the record of the case. Mr. D. P. Wadhwa, the learned counsel for the Central Govt., also urged that the condition of s. 72A(1)(b) was not satisfied. This contention is ill-founded. In the minutes of the third meeting of the Specified Authority held on July 19, 1978, it is recorded that the proposal for amalgamation had been initiated before the tax concessions under s. 72A of the Act had been announced but this was not considered as a material condition. It was noticed that the tractor was one of the important requirements for the development of Indian agriculture and hence it would be difficult to take the view that the test of public interest was not met. In the minutes of the meeting of the Screening Committee held on January 16, 1979, it is recorded that the amalgamation did subserve public interest. The minutes of the 13th meeting of the Specified Authority held on July 11, 1979, records further discussions. The suggestion of the Secretary (Labour) that the public interest was i....
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....departments. It has been designated as an approved research association for the purposes of s. 35 of the Act. In that study, NCAER stated that the sickness of a unit is defined as the weakening (of) financial viability, leading to its loss and finally its extinction. Sickness is defined in terms of financial viability since this is the only known indicator of the health of a unit. Financial viability consists of three inter-dependent elements of equal emphasis and weight, viz., profitability, liquidity and solvency which are represented by cash profit and loss, net working capital and net worth respectively. In Chap. II of the report, NCAER mentioned what were the different criteria adopted by various bodies. It is apposite to reproduce them: " While there is widespread debate about industrial sickness, there is as yet no accepted definition of what is a sick unit. Government, industry, financial institutions and commercial banks have all adopted different criteria reflecting their needs and bias. For example: Government of India, in its recent announcement of the scheme of merging sick units with healthy ones (Finance Act, 1977), has classified 'those units w....
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....hat sickness is not an incident in the history of a unit ; rather it is an organic process which has an origin, a sickness path, stages and if there is no revival will become terminal, resulting in the company's collapse. Before describing the sickness process and its stages, we would like to elaborate on the concept of financial viability. Financial viability Sickness is defined in terms of financial viability since this is the only known indicator of the health of a unit. Financial viability consists of three interdependent elements, of equal emphasis and weight, viz., profitability, liquidity and solvency which are represented by cash profit or loss, net working capital and net worth, respectively. Viewed in another way, solvency and liquidity are the two vital organs of financial viability and profitability its life blood. The status of financial viability, at a point of time, is a result of the status of these elements, but in the absence of any precise index which combines the individual status of the three elements, the status of financial viability at any point of time is gauged by giving equal weight to its three elements. T....
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....er. The submission of Mr. F. S. Nariman is that none of those reasons are real or a valid one, apart from being patently erroneous in fact and based on a completely wrong interpretation of the provisions of s. 72A of the Act. He puts his factual and legal submissions as under : "ITCI's financial position. The application submitted under s. 72A of the Act discloses the following position with regard to the financial non-viability of ITCI as on 31st October, 1977 (i.e., the date immediately before the amalgamation of ITCI with M & M which took place on and from 1st November, 1977)--being the relevant date under s. 72A(1):- (A) ITCI's Debts : Rs. Aggregate amount of loans and liabilities & provisions 2,131 lakhs This consists of the following : (a) Loans due to Public Financial Institutions 135 lakhs (b) Loans due to banks (State Bank of India) 815 lakhs (Overdrawings beyond the sanctioned limits from the State Bank of India was of the order of Rs. 462 lakhs). (c) Other liabilities 1,181 lakhs (as appearing in the balance-sheet as at 31-10-1977 submitted to the Spec....
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....tate Bank of India stated that ITCI had no 'tangible securities' and that their drawings were not supported by 'adequate drawing power'. (3) In 1976-1977 (i.e., prior to 31st October, 1977) several notices (at least 24 notices) addressed by or on behalf of large creditors to ITCI calling for immediate repayment of their debt s; these included three statutory winding-up notices sent on behalf of Bharat Forge, Bank of Baroda for Bills of WG Forge and Union Bank for Bills of Choonilal Foundry under s. 434 of the Companies Act, 1956. (4) ICICI who were creditors of ITCI (also M & M) were requested for rescheduling instalments for repayment of loans, but ICICI refused this request. They specifically stated that since reliefs under s. 72A were available quite expeditiously, M & M were urged to take quick steps in the matter so that they could get the benefits in time. III. Inability of ITCI to Generate or Raise Additional Resources (1) Any loans by M & M to ITCI could not be in excess of Rs. 50 lakhs, since the maximum limit of 10% of the paid up capital and free reserves, in the case of M & M under section 370 of the Companies Act, 195....
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.... lakhs was not provided) the State Bank, in its letter dated 24th September, 1977, stated that ITCI had no tangible security and that their drawings were not supported by adequate drawing power. (3) Representatives of both ICICI and IDBI had reported to the Screening Committee that " the financial institutions as well as, the banks were not ready to give any financial assistance to ITCI. (4) The cumulative effect, therefore, was that all avenues for obtaining finance were closed to ITCI. IV. Opinion of experts in the field (1) ICICI-a leading public financial institution and so designated by s. 4A(1) of the Companies Act, was specifically asked by the Screening Committee to submit an expert note on ITCI's ' financial non-viability '. By their Note submitted to the Screening Committee, they opined that in the financial year 1976-77, ITCI was in serious difficulties, operating at highly uneconomical levels, and not in a position to increase production due to lack of finances. They also opined that on an analysis of M & M's cash flow and financial resources and its requirements to pay tax on its profits M & M would have a cash shortf....
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.... or controverted, by the Specified Authority or the Central Government in their orders." 18. We may now deal with the reasons in the light of the material. The first reason for refusing to issue the declaration is that ITCI suffered losses for only two years, i.e., 1974-1975 and 1976-77, and it earned profit of Rs. 208 lakhs in 1975-76. A conclusion from it is drawn that it created temporary financial difficulties for the company. The second reason is that the poor performance was due to short-term difficulties existing during the relevant years. The statement that ITCI earned a profit of Rs. 208 lakhs in 1975-76 is erroneous since the profit is taken before providing for depreciation. The profit for 1975-76 (eighteen months' period) was only Rs. 71 lakhs. The Central Govt. and the Specified Authority have failed to appreciate that for the entire period of 1974-75 (loss Rs. 253 lakhs), 1975-76 (profit Rs. 71 lakhs) and 1976-77 (loss Rs. 433 lakhs), there was a total loss of Rs. 615 lakhs and the accumulated loss as on October 31, 1977, amounted to Rs. 555 lakhs. The accumulated loss amounting to Rs. 555 lakhs was as against the paid-up capital and reserves of Rs. 4,91,94,657....
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....e Central Govt. in the impugned orders is just not possible to form. 20. The third reason advanced is that the net worth of ITCI on the date of amalgamation is as high as Rs. 790 lakhs if the market value of the assets is taken into account. A part of the same reason is that the share exchange ratio fixed for sanctioning the amalgamation does not indicate any sickness. Section 72A(1)(a) lays down the condition that the amalgamating company was not immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors. Market value of assets does not play any part in the liquidity of the business of the ITCI or in determining whether it is capable of being run at an economical level. The Specified Authority as well as the Central Govt. have addressed themselves to a wrong question. It may be possible to consider the net worth at Rs. 790 lakhs on the basis of the market value for determining whether the creditors of ITCI could be fully paid off in the event of the sale of its assets on the liquidation of the business of ITCI. The sale of the assets or the winding up of the ITCI is totally extraneous to the object and scheme of s. 7....
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....ncy of the unit is discussed : net worth has been re-worked excluding the effect of revaluation of fixed assets and restoring the original book value of the fixed assets. The Dept. of Company Affairs, with its letter dated 2nd February, 1977, to M & M in dealing with the application dated 30th October, 1976, under s. 23(2) of the MRTP Act for approval of the Central Govt. to the scheme of amalgamation of ITCI with M & M (which was later approved by the Central Govt.) had enclosed a work sheet for showing the department's working of the exchange ratio of shares for the purposes of the amalgamation of ITCI with M & M. In computing the " Assets backing value " (which is another term for " net worth ") the assets were taken at the book value (and not at market value); after deducting the liabilities shown in the company's balance-sheet from the assets so valued at book value, the assets backing value was arrived at. In the Guidelines for issue of Bonus Shares issued by the Finance Ministry, it is stated as follows : " (5) Reserves created by revaluation of fixed assets are not permitted to be capitalised." 22. Similarly, per r. 2(a) of the Companies (Acceptance of D....
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....he exchange ratio is a neutral factor and could not form any relevant material for basing the impugned recommendations and orders of the Central Govt. 24. The fourth reason is the statement in the petition before the Bombay High Court for sanctioning the scheme of amalgamation. The statement made by ITCI is that " although the company has sustained a loss, it is in a sound financial position and its assets are more than sufficient to meet its liabilities ". It may be mentioned here that this statement by ITCI was based on the latest audited accounts for the year ended 30th September, 1976, referred to in the same paragraph. The statement is thus torn out of context for the purpose of considering the financial non-viability immediately before the date of amalgamation, i. e., as on 31st October, 1977. It is also stated in that petition that for the financial year 1976-77, the working of ITCI was not satisfactory again. The audited accounts of ITCI were not ready till then. The statement in relation to the assets is made before the company judge to enable it to appreciate the position of the creditors of ITCI and other parties. The Bombay High Court in sanctioning the scheme of ama....
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....levant time or in the foreseeable future could not have advanced loans more than Rs. 50 lakhs to any party, taking into account loans and advances already made by M & M to various parties aggregating to Rs. 70 lakhs. The excess borrowings, i.e., in excess of the Tandon Committee norms, of M & M from the banks were of the order of Rs. 127 lakhs as shown in the record of memorandum of discussions at the relevant time. A consortium meeting was held on October 28, 1977, by the four bankers, namely, Grindlays Bank Ltd., Bank of Baroda, Union Bank of India and Central Bank of India, to review the financial arrangements with M & M. At the last meeting, M & M's borrowings worked out to Rs. 127 lakhs which was agreed to be repaid within 5 years. The consortium noticed that excess borrowings had come down by about Rs. 42 lakhs. M & M was asked to give revised projection for the year 1977-78. Reference was also made to the Tandon Committee's Report for the excess borrowings and the account being monitored on a quarterly basis. The financial position of M & M immediately before the date of amalgamation did not reveal that M & M would have continued to give financial assistance to ITCI.....
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....itors of ITCI. All avenues for obtaining further finances were closed to ITCI as noticed above. From which source the " required temporary dose of liquidity to bring it back to health " could have been obtained is a mystery on the record. None has been revealed by the Specified Authority or the Central Govt. in the impugned orders. No attempt has been made to spell it out in the counter-affidavit in this Court. 27. The very purpose of s. 72A is to revive the business of an undertaking which is financially non-viable and to bring it back to health. This has been achieved by M & M and there is no reason for denying the relief under s. 72A of the Act. That adequate steps have been taken by M & M for the rehabilitation or revival of ITCI is amply demonstrated on the records before the Specified Authority as well as the Central Govt. The first vital step for the revival of the business of ITCI was the repayment of old outstandings to suppliers amounting to over Rs. 500 lakhs. As a result of amalgamation M & M was able to raise additional fixed deposits from the public which additional finance, together with its own internal generations, were utilised to reduce ITCI's old outstand....
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....justified when the Executive have taken into consideration wholly irrelevant or extraneous considerations. It was ruled (p. 2234): "'The Executive have to reach their decisions by taking into account relevant considerations. They should not refuse to consider relevant matter nor they should take into account wholly irrelevant or extraneous considerations. They should not misdirect themselves on a point of law. Only such a decision will be lawful. The courts have power to see that the Executive act lawfully. It is no answer to the exercise of that power to say that the Executive acted bona fide nor that they have bestowed painstaking consideration. They cannot avoid scrutiny by Courts by failing to give reasons. If they give reasons and they are not good reasons, the court can direct them to reconsider the matter in the light of relevant matters, though the propriety, adequacy or satisfactory character of those reasons may not be open to judicial scrutiny. Even if the Executive considers it inexpedient to exercise their powers they should state their reasons and there must be material to show that they have considered all the relevant facts. " 29. In Shalini Soni v. ....