TMI Blog2007 (10) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... e Industries by deduction of ₹ 8.68 lakhs net of tax from the differential and, therefore, Forgings are not entitled to receive anything more. Therefore, Appeal No. 662 of 2001 filed by the Forgings is liable to be dismissed while the Appeal No. 532 of 2001 filed by the Industries deserves to be allowed. - APPEAL NOS. 532 AND 662 OF 2001 COMPANY APPLICATION NO. 332 OF 1988 COMPANY PETITION NO. 271 OF 1985 - - - Dated:- 16-10-2007 - D.K. DESHMUKH AND J.H. BHATIA, JJ. R.A. Dada and V.R. Dhond for the Appellant. N.G. Thakkar and A.S. Doctor for the Respondent. JUDGMENT J.H. Bhatia, J. - Both these appeals seek to challenge the judgment and order passed by learned Single Judge of this Court in Company Application No. 332 of 1988 in Company Petition No. 271 of 1985. Both these appeals may be disposed off by this common judgment. 2. To state in brief, one Harilal Doshi had five sons Mansukhlal, Maganlal, Vinodchandra, Manharlal and Hasmukhlal. Echjay Industries Private Limited was commenced and controlled by this Doshi family. This company had its factory at Kanjurmarg, which may be referred to as Kanjur Division . The said company also had anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this reserve was specifically created for meeting liability towards the workmen, who were terminated from the Kanjur Division and that this fact was specifically stated in the meetings of the Board of Directors. It was contended that when the Kanjur Division was spun off from the Industries, these reserves should have been transferred to the forgings but the Industries had failed to transfer the General Reserve No. II to the forgings. It was contended that the Forgings had from its funds paid an amount of Rs. 23,47,000 towards the claims of workmen and, therefore, Industries had no right to retain the General Reserve No. II. It was also contended by the Forgings that certain die-blocks and machines, which were transferred from Kanjur Division to Rajkot Division but they were never returned to Kanjur Division. Therefore, the forgings claimed by the said application, a direction to the Industries to transfer the amount of General Reserve No. II to the forgings as well as to hand over die-blocks and machinery, which were transferred to Rajkot Division. 4. The Industries contested this claim denying that any die-blocks or machinery were taken away from the Kanjur Division to Rajkot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Industries were liable to pay that amount to the Forgings. The learned Single Judge also came to conclusion that the Industries had failed to prove that the said amount was actually adjusted by paying amount of Rs. 8.68 lakhs net of tax as Forgings had taken tax rebate to the extent of remaining amount. In the result, the learned Single Judge directed the Industries to pay the said amount of Rs. 23,47,000 to Forgings while rejecting remaining claims of the Forgings. Being not satisfied with the rejection of the claim to the General Reserve No. II and the die-blocks and machinery, the Forgings preferred Appeal No. 662 of 2001. The Industries also preferred Appeal No. 532 of 2001 challenging the direction to pay an amount of Rs. 23.47 lakhs to the Forgings. 6. It is contended on behalf of Forgings that the learned Single Judge has committed error in coming to conclusion that the General Reserve No. II was not expected to be transferred to the Forgings though this General Reserve was specifically created as a provision to meet the liability towards the workmen, who were terminated. It is contended that the General Reserve No. II was a charge over the accumulated profits to me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Mehta had prepared a blue print of the proposed spin off of the Kanjur Division from the Industries. As per that note, it was proposed that an inventory of all the property of Kanjur Division be prepared and this property should be given on lease to the proposed new company comprising of Kanjur Division, which would be subsidiary of the Industries, after working of the same for some years. It was also proposed that the scheme should be drawn under section 391 of the Companies Act whereby leased assets would vest in newly formed subsidiary. However, on 27-5-1983, a family agreement was entered into and that agreement was signed by all the concerned members of the family. A supplemental deed of family agreement was executed on 6-6-1984. As per the said family settlement, Mansukhlal group was to take over individual control and management of Kanjurmarg factory (Kanjur Division), Echjay Electronics Private Limited and Kanjur Bleaching Private Limited excluding its plot. It was also provided that Mansukhlal group would transfer their interest in the remaining units belonging to the family. As there were five brothers, Mansukhlal group was entitled to 20 per cent of the total value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 shares of Rs. 100 each could be required to be issued in Forgings. Total value of such shares would be Rs. 1,53,60,000. Thus, allotment of 8 shares per 10 shares in the Industries was the nearest possible figure, taking into consideration the value of assets of Kanjur Division being nearest Rs. 1,51,00,000. The report of H.P. Korhani and Co-shows that General Reserve No. II of Industries were not taken into consideration for the purpose of making valuation of the assets of Kanjur Division. It is also material to note that the Balance-sheet prepared for Kanjur Division for the years ending 1983 and even in 1984 do not take any reference to General Reserve No. II amounting to Rs. 3,25,00,000. On the contrary, the balance sheet of the Kanjur Division for the year ending with 31-12-1983 shows reserve transferred from Profit and Loss Account of Rs. 8,14,725 only. The balance sheet as on 31-12-1984 shows that Reserves and Surplus column contains opening balance of Rs. 8,14,725 and additional appropriation was made during the year to the extent of Rs. 6,51,598. Thus, as on 31-12-1984 the total reserves in the balance sheet of Kanjur Division were Rs. 14,66,323. There is nothing on reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not profits of the purchasing company but are represented by assets which the company purchases and pays for. The purchasing company cannot distribute them as dividend. 9.6 The Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 4 SCC 435, has considered the concept of a reserve and a provision. Mr. Justice V.D. Tulzapurkar delivering the Judgment of a Bench consisting of three Learned Judges of the Supreme Court, referred to the Judgment in Metal Box Company of India Ltd. v. Workmen AIR 1969 SC 612, in which the Supreme Court had held that whereas provisions are made against anticipated losses, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. In Vazir Sultan s case the Supreme Court held that the broad distinction between the two is that whereas a provision is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a reserve is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. Industries was a party before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that letter or debit note, there is no reference to the claim on the entire amount of General Reserve being Rs. 3.25 crores. 14. Appeal No. 784 of 1987 in Notice of Motion No. 713 of 1987 in Suit No. 767 of 1987 was filed by Maganlal Doshi and others against Echjay Electronics Private Limited, a company which was allotted to Mansukhlal Group under the family arrangement. In that appeal, a consent order was passed on 14-10-1987 by the Division Bench of this Court whereby the directors of the Forgings agreed to pay an amount of Rs. 45.58 lakhs under Clause 2 of Part I of the scheme to the Industries. This consent order was significant because if the Forgings were really entitled to claim amount of Rs. 3.25 crores under the General Reserve No. II, they would not have agreed to pay amount of Rs. 45.58 lakhs to the Industries. 15. The learned Single Judge noted that a letter dated 1-9-1987 was addressed by M/s. Bachubhai Munim Co. about computation of differential, which was payable by the Mansukhlal group. M/s. Bachubhai Munim Co. were acting as Advocates for Echjay Electronics (P.) Ltd. in Appeal No. 784 of 1987 referred above. As per that computation, total net worth of D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in other properties of Doshi family. However, as painted out earlier after making all the calculations, it was found that Mansukhlal was found liable to pay differential of Rs. 62.39 lakhs to other group. 17. The learned Single Judge has considered all these aspects and several other aspects minutely before coming to conclusion that the Forgings have no right or claim over the General Reserve No. II of Rs. 3.25 crores shown in the balance sheet of Industries. We find no valid reason to disagree with these findings. 18. Next important question is about liability to pay amount of Rs. 23.47 lakhs in respect of payments made to the workers, whose services were terminated in 1973. The learned Single Judge noted that both the parties have taken shifting stand in this respect. In paragraph 14.1, the learned Single Judge noted that Mr. Thakkar the learned Senior Counsel for the Forgings had submitted that liability to pay workmen was that of Forgings and not of the Industries and Mr. Dada, the learned counsel for the Industries had submitted that the liability in respect of compensation paid to the workmen as one part of the Industrial settlement had to be borne by the Industrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the settlement and under the sanction scheme, who is to meet that liability because Mr. Dastur as well as the learned Single Judge though for different reasons, found that the Industries was to compensate the Forgings. However, in view of difference of opinion, we find it appropriate to scrutinise the record as to what was the settlement in this respect. Mr. Dastur as well as the learned Single Judge rightly observed that the parties have not taken consistent stand about taking over the responsibility of liability to pay compensation to the erstwhile workers of the Kanjur Division. Therefore, it will be useful to find out what was the sanction scheme in this respect. Clause 3( b )( i ) and ( ii ) read as follows : "3. ( b )( i ) All the employees of Kanjur Division in service on the date immediately preceding the effective date shall become the employees of Echjay Forgings Private Limited without interruption in service and/or terms no less favourable to them than those applicable to them on the day immediately preceding the effective date. 3. ( b )( ii ) The gratuity and all terminal liabilities up to the effective date and thereafter will be of Echjay Forgings Private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their claims amounting to Rs. 23.47 lakhs was already paid by August, 1983. Therefore, when the scheme was sanctioned, there was no reason to cover those employees. If those employees would have been covered under the scheme, the valuation of Kanjur Division would have certainly taken note of that liability but admittedly there is no reference of that liability in the valuation made by H.P. Kumbhani Co., Chartered Accountants in 1984. Taking into consideration the terms of the scheme, we have no doubt that the Forgings had not taken the responsibility of paying any compensation to the workmen, whose services were terminated in the year 1973 though they were the workers at Kanjur Division. Therefore, we find that it was responsibility of the Industries. 20. The question whether the responsibility of the liability towards those workmen was taken over by the Industries or by the Forgings, in fact becomes immaterial because admittedly the payment of that liability was made from the account of the Forgings during the year 1983 and admittedly, no provision was made for that payment in the scheme nor it was provided for in the evaluation report of the Kanjur Division. Therefore, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also noted that the copies of the said minutes and the company papers were produced by the experts namely, Manharlal Shah and Hiralal Ajmera. These two experts were named in the family arrangement as experts as they were highly respected businessmen. It is true that original minutes were not produced because according to them the minutes were with Bansi Mehta and admittedly, Bansi Mehta was not examined before Mr. Dastur and he was not called upon to produce the original. Taking into consideration the overall documentary and other evidence, Mr. Dastur opined that even though the minutes dated 6-8-1984 were not signed and though originals were not produced before the Court still this fact could be believed and this explained as to how the amount of Rs. 23.47 lakhs was adjusted. Mr. Dastur also observed that even if the minutes dated 6-8-1984 are not taken into consideration, still on the basis of other evidence, he would come to same conclusion. 22. The learned Single Judge noted following Clause from the disputed minutes of the meeting dated 6-8-1984 : "5. Old Workers Liability. Regarding this liabilities amounting to Rs. 23.43 lakhs it was agreed that it will be claimed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay an amount of Rs. 45,58,661 lakhs to the Industries. In the same matter M/s. Bachubhai Munim Company attorneys for Mansukhlal group also found the differential payable by Mansukhlal group to the remaining brothers. If this amount of Rs. 23.47 lakhs would not have been already satisfied M/s. Bachubhai Munim Company would have certainly taken note of that while finding out the differential to be paid by Mansukhlal group. However, Bachubhai Munim did not make any mention of Rs. 23.47 lakhs while calculating the differential payable by Mansukhlal group. This aspect also goes against the Forgings. Taking into consideration these aspects, we find that payment of Rs. 23.47 lakhs towards the liability of erstwhile workers was in fact adjusted by deduction of Rs. 8.68 lakhs net of tax from the differentials and the remaining amount was settled as the Forgings got rebate in the income-tax for the payment of Rs. 23.47 lakhs towards the workers liability. Taking into consideration overall view of the facts and circumstances, we find ourselves unable to agree with the learned Single Judge on this count. In our opinion, this claim of the Forgings was already satisfied in the differential ..... 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