1982 (5) TMI 21 - HC - Income Tax

Interpretation of section 72A of the Income-tax Act 1961 - amalgamated company to carry forward and set off the accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation of companies - fulfilment of the conditions mentioned in sub-s. (1) of s. 72A - Legality and validity of the Central Government s refusal to issue a declaration under Section 72A(1)(a) - Concept of financial non-viability - Scheme of Amalgamation - definition of net worth - Accumulated loss - Unabsorbed depreciation - Business undertaking - Market value of the assets - Merger of sick industrial units - amalgamation in public interest - determine whether an amalgamating company is non-viable. HELD THAT - 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 outstanding liabilities. M M has taken further steps for the replacement and modernisation of ITCI s building plant and machinery. The business of the erstwhile ITCI has in fact been revived in the production of tractors which was 2, 004 in 13 months ended October 31 1977 increased to 5, 750 in the year ended October 31 1978 and to 9, 325 in the year ended October 31 1979 as against a total installed capacity of 10, 000 tractors per annum. This is noticed by the Specified Authority as well as by the Central Govt. The revival scheme received by them consisted inter alia of repayment to creditors to the extent of Rs. 4 crores besides an investment of Rs. 0.7 crores on maintenance replacement of machineries. It is also recorded in the impugned recommendations that the liabilities of ITCI to the extent of Rs. 5.2 crores were repaid in 1977-78 and the undertaking was revived. It is also appreciated that the undertaking earned a profit of Rs. 3.9 crores in the subsequent year. We are of the view that no reasonable body of persons could ever come to a conclusion other than that M M has taken adequate steps for rehabilitation and revival of the business of ITCI. One of the two conditions under s. 72A of the Act was clearly fulfilled namely that the amalgamation was in the public interest. In fact its absence is not mentioned in the impugned recommendations of the Specified Authority or the impugned decision of the Central Govt. as ground for refusing to make the declaration. The other condition regarding financial non-viability of the amalgamating company was established by the facts before the Specified Authority and the Central Govt. as discussed above. The view taken by the Specified Authority and the Central Govt. in the impugned orders is just not possible to form. We are convinced that no reasonable authority much less the Specified Authority or an expert body like the Central Govt. could have reasonably come to the conclusion that ITCI before its amalgamation with M M was financially viable. In Shalini Soni v. Union of India 1980 (10) TMI 199 - SUPREME COURT it was held it is an unwritten rule of the law constitutional and administrative that whenever a decision making function is entrusted to the subjective satisfaction of a statutory functionary there is an implicit obligation to apply his mind to pertinent and proximate matters only eschewing the irrelevant and the remote . We have dealt with each of the six reasons of the Specified Authority and Central Government for their coming to the conclusion about the financial viability of ITCI. There were no adequate funds that ITCI could obtain from any source whatsoever in order to overcome its financial difficulty (wrongly termed as temporary) ITCI having exhausted all possibilities of raising additional finance in the foreseeable future. By applying the three parameters enunciated by NCAER to ITCI immediately before its amalgamation with M M ITCI had to be classified as sick-all three parameters showing a negative figure and since NCAER defined sickness in terms of financial viability it was clear that ITCI was not on October 31 1977 financially viable. The market value of the assets of ITCI could not be considered as a relevant material to the determination of the question of the financial non-viability of ITCI within the meaning of s. 72A of the Act. The share exchange ratio in the scheme of amalgamation is a neutral factor and could not form any relevant material for basing the impugned recommendations by the Specified Authority or the impugned orders of the Central Govt. Viewed from the point of liquidity the statutory authorities could not draw any inference that ITCI was financially viable merely on the basis of the statement made by ITCI in the application for sanctioning the scheme of amalgamation that its assets are more than sufficient to meet its liabilities. It had been established on the record that the immediate requirement of ITCI was of the order of 5 or 6 crores and this could not have been provided by M M because of the financial constraints on M M under s. 370 of the Companies Act 1956 and because of the excess borrowing of M M from banks in excess of the Tandon Committee norms. There was no material before the statutory authorities that ITCI would have continued to get financial assistance from M M to nurse ITCI back to health. There is no positive material either in the impugned orders or in the counter-affidavit from which a conclusion in law could be drawn that ITCI was financially viable on October 31 1977. It had been established on the record that the immediate requirement of ITCI was of the order of 5 or 6 crores and this could not have been provided by M M because of the financial constraints on M M under s. 370 of the Companies Act 1956 and because of the excess borrowing of M M from banks in excess of the Tandon Committee norms. There was no material before the statutory authorities that ITCI would have continued to get financial assistance from M M to nurse ITCI back to health. There is no positive material either in the impugned orders or in the counter-affidavit from which a conclusion in law could be drawn that ITCI was financially viable on October 31 1977. With the result that the impugned recommendations dated May 1980/June 2 1980 of the Specified Authority (annex. X to the writ petition) and the decision dated December 1 1980 of the Central Govt. (annex. 5B to the writ petition) are hereby quashed and are set aside. The Specified Authority and the Central Govt. are hereby directed to deal with the application of M M in accordance with the provisions of s. 72A(1) of the Act in the light of this judgment. We further direct the Specified Authority to consider and issue the requisite statutory certificate under s. 72A(2)(ii) of the Act within one month of the declaration made by the Central Govt. under s. 72A(1) of the Act. The petitioners cannot be denied the relief by the authorities under the Act merely for the reason that the certificate under s. 72A(2)(ii) of the Act was not furnished to the ITO together with the returns of income of M M for the assessment years 1979-80 and 1980-81. The certificate when furnished shall be deemed to have been filed with the return of income. The stay of proceedings granted by this court on January 20 1981 shall continue to be operative till the decisions as directed above of the statutory authorities under s. 72A of the Act. The writ petition succeeds to this extent and is allowed with costs.

Summary

The judgment revolves around the interpretation and application of Section 72A of the Income-tax Act, 1961, concerning the amalgamation of companies and the conditions under which an amalgamated company can carry forward and set off accumulated losses and unabsorbed depreciation allowances. The case specifically addresses the refusal of the Central Government to grant such relief to Mahindra & Mahindra Ltd. (M & M) following its amalgamation with International Tractor Company of India Ltd. (ITCI).

1. Issues Presented and Considered

The core legal issue in this case is whether the Central Government's refusal to issue a declaration under Section 72A of the Income-tax Act, 1961, was valid. This involves examining whether ITCI was financially non-viable immediately before its amalgamation with M & M and whether the amalgamation was in the public interest.

2. Issue-wise Detailed Analysis

Financial Non-viability of ITCI

Relevant Legal Framework and Precedents: Section 72A of the Income-tax Act allows an amalgamated company to carry forward losses and depreciation of the amalgamating company if the latter was financially non-viable immediately before amalgamation and the amalgamation was in public interest.

Court's Interpretation and Reasoning: The Court analyzed the concept of financial non-viability, referencing the National Council of Applied Economic Research (NCAER) study, which defines sickness in terms of financial viability, including profitability, liquidity, and solvency. The Court emphasized that financial viability should be assessed immediately before amalgamation, not over a period.

Key Evidence and Findings: ITCI's financial records showed accumulated losses exceeding its paid-up capital and reserves. The company faced pressing demands from creditors, and all avenues for obtaining finance were closed. Expert opinions from financial institutions like ICICI and IDBI confirmed ITCI's financial difficulties.

Application of Law to Facts: The Court found that the Central Government and the Specified Authority erred in their assessment of ITCI's financial viability. The evidence demonstrated that ITCI was financially non-viable immediately before amalgamation.

Treatment of Competing Arguments: The Central Government's argument that ITCI's financial difficulties were temporary was rejected. The Court noted that ITCI's inability to generate or raise additional resources indicated a lack of financial viability.

Conclusions: The Court concluded that ITCI was financially non-viable immediately before its amalgamation with M & M, fulfilling one of the conditions under Section 72A.

Public Interest in Amalgamation

Relevant Legal Framework and Precedents: Section 72A requires that the amalgamation be in the public interest for the tax relief to apply.

Court's Interpretation and Reasoning: The Court considered various factors indicating that the amalgamation was in the public interest, including the essential nature of ITCI's products for agricultural development and the prevention of job losses.

Key Evidence and Findings: The amalgamation prevented the closure of ITCI, which would have resulted in significant job losses and a negative impact on agricultural production. The Central Government had previously acknowledged the public interest in the amalgamation under the MRTP Act.

Application of Law to Facts: The Court found that the amalgamation served the public interest by maintaining production of essential goods and preserving employment.

Treatment of Competing Arguments: The Central Government's contention that the public interest condition was not met was dismissed as unfounded. The Court noted that the Specified Authority and the Central Government had previously accepted the public interest aspect.

Conclusions: The Court concluded that the amalgamation was in the public interest, satisfying the second condition under Section 72A.

3. Significant Holdings

The Court held that the Central Government's refusal to issue the declaration under Section 72A was unjustified. The judgment emphasized that the financial non-viability of ITCI and the public interest in the amalgamation were clearly established. The Court quashed the recommendations of the Specified Authority and the decision of the Central Government, directing them to reconsider the application of M & M under Section 72A in light of the judgment.

Verbatim Quotes of Crucial Legal Reasoning: "The purpose of s. 72A is to revive the business of such undertakings and to bring it back to health by amalgamation with sound companies."

Core Principles Established: The judgment clarified the interpretation of financial non-viability under Section 72A, emphasizing the need to assess financial viability immediately before amalgamation. It also reinforced the importance of considering public interest in granting tax relief for amalgamations.

Final Determinations on Each Issue: The Court determined that both conditions under Section 72A were met, and the Central Government's refusal to grant relief was based on erroneous assessments. The Court directed the authorities to reconsider the application and issue the necessary declarations and certificates.