TMI Blog1986 (4) TMI 349X X X X Extracts X X X X X X X X Extracts X X X X ..... for the taking over by the Central Government of the management in the public interest of Messrs Shree Sitaram Mills a textile undertaking owned by it and specified in the First Schedule to the Act, held that the surplus land appurtenant to the Mill was not an 'asset in relation to the textile undertaking' within the meaning of sub-s.(2) of s.3 of the Act, on the ground that the business of real estate carried on by the Company was separate and distinct from the textile business, and accordingly directed the Central Government to restore possession of the said land to the Company. The issue involved must necessarily turn on the meaning of the words 'assets in relation to the textile undertaking' appearing in sub-s.(2) of s.3 of the Act. In order to appreciate the nature of the controversy, it is necessary to state a few facts. The mill now known as Shree Sitaram Mills was established in 1875 under the management of Messrs Shapurji Broacha Mills Limited on a very large tract of land located in the heart of the metropolitan city of Greater Bombay. The only real estate that it acquired in the late 19th Century comprised of 1,05,008 square yards which undoubtedly wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l support to the mill but it was not fruitful. The strained liquidity position had a vicious effect affecting the quality of raw material and stores purchases resulting in distress sales mainly because the company was not able to attract competent talent for managing its affairs. As a cumulative effect of all these factors, the Company continued to slide down steeply and the capacity utilisation became the first victim leading to a fall in the volume of production. As mentioned in the IDBI report : Even if large funds were pumped at a concessional rate, the Company would take 20 years to wipe out its liabilities. As is revealed from Company's balance-sheets, since last more than seven years before the taking over, the net- worth of the Company had been in the negative. In the year 1978-79 the networth was minus ₹ 2.80 crores, in 1979-80 minus ₹ 3.54 crores, in 1980-81 minus ₹ 3.91 crores, in 1981-82 minus ₹ 6.56 crores and in 1982-83 minus ₹ 8.67 crores. It would therefore appear that the networth had not only been negative but the negative factor had been increasing at a rapid rate over the years. There was also loss in the Profit Loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial institutions, and debentures in an increasing manner. During the year 1981 the Company received fresh financial assistance from IDBI, Maharashtra State Financial Corporation and other financial institutions aggregating to over ₹ 47 lakhs. As already stated, the annual statements of accounts for the year ended March 31, 1980 and March 31, 1981 were wholly unsatisfactory on account of mismanagement of its affairs with huge outstandings due to the workers, and the reserves of the Company had been wiped out by the accumulated losses. The mill could not be revamped into production and rehabilitation to subserve the interest of the general public to achieve national growth and particularly to prevent unemployment of thousands of workers without investment of large sums of money by public financial institutions for such reorganisation and rehabilitation. It is needless to stress that the textile industry in India has played an important role in the growth of national economy and at one time the Indian Textiles were in great demand in the world market. It occupies an important position in the industrial field in India both because it produces an essential commodity the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o recommence work due to financial constraints. Faced with the problem of rendering financial assistance and rehabilitation to the textile industry the Reserve Bank of India carried out a survey of the sick textile mills which had a disasterous effect on the financial viability which could only be attributed to mismanagement and a situation further worsened by the general strike. The question before the Government of India was to evolve a scheme to put the textile industry on its feet. On December 3, 1981 the Central Government appointed an Investigation Committee under s.15(a)(i) of the Industries (Development Regulation) Act, 1951 to find out the causes for the fall in the volume of production of the Company's textile undertaking. The Investigation Committee submitted its report dated February 11, 1983 a copy of which was also forwarded to the respondents. It recommended that the IDBI and the nationalized banks should finance and put through expeditiously the rehabilitation programme proposed by the Company by keeping full control over the management. In the meantime the State Government of Maharashtra by its order dated May 25, 1982 declared the Company's textile un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company had lost confidence in them' and 'indicated that no loans could be advanced unless Tantias were agreeable to dissociating themselves from the mismanagement. It also referred to the Inquiry Committee appointed by the Government of India to look into the affairs of the Company which had attributed the continuous losses incurred by the Company to gross mismanagement. After setting out a long term scheme of financing of the textile mill by public financial institutions, the report observed : Even assuming that the Company will be able to utilize 75% of its cash accruals to liquidate its term liabilities, it will take over 20 years for it to repay its term commitments (including the funded loan) aggregating to ₹ 7.59 lakhs . It accordingly observed that the mill could not be considered viable, but added : However, the Company has surplus lands admeasuring 6625 square metres within the factory area which is proposed to be disposed off and for which it had already obtained the approval of Government of Maharashtra under Urban Land Ceiling Act. The Company expects to realize about ₹ 2.05 crores from the sale of the land. The Company also has plans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch undertakings and manage them itself as a step towards nationalisation. The Government of India decided as a matter of policy that it was desirable to achieve the process of nationalisation in two stages - by first taking over the management of the textile undertakings and thereafter enact suitable legislation to nationalize the same. As the taking over of the management was with a view to implement the decision to nationalize the said textile mills, there was no question of holding an inquiry either under the Industries (Development and Regulation) Act, 1951 or under the Sick Textile Undertakings (Taking Over of Management) Act, 1972. Prior to November 1982, there were several viability surveys made by different authorities, namely, (1) Ahmedabad Textile Industries Research Association (2) Textile Commissioner's Office (3) S.R. Batlibhoy Company and an independent survey by the IDBI itself. In 1976-77, at the instance of the IDBI the Ahmedabad Textile Industries Research Association carried on a technoeconomic viability survey and made its report in 1978 which at the request of the United Commercial Bank was again updated in March 1979. In its reports, the said Researc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g also vests in the Central Government. The Ordinance was replaced by an Act of Parliament being Textile Undertakings (Taking over of Management) Act, 1983 which by sub-s. (2) of s.1 was brought into force with retrospective effect from October 18, 1983, the date of promulgation of the Ordinance. The purpose and object of the Act, as reflected in the long title, was to provide for the taking over in the public interest of the management of the textile undertakings of the Companies specified in the First Schedule pending nationalisation of such undertakings and for matters connected therewith or incidental thereto. The preamble to the Act brings out the necessity for such legislation : WHEREAS by reason of mismanagement of the affairs of the textile undertakings specified in the First Schedule, their financial condition became wholly unsatisfactory even before the commencement in January 1982 of the textile strike in Bombay and their financial condition has thereafter further deteriorated; AND WHEREAS certain public financial institutions have advanced large sums of money to the companies owning the said undertakings with a view to making the said undertakings viable; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further investment of very large sums of money found to be necessary for reorganising and rehabilitating the said undertakings and thereby to protect the interests of the workmen employed therein and to augment the production and distribution at fair prices of different varieties of cloth and yarn so as to subserve the interests of the general public. Government considered the nationalisation of the said undertakings to be necessary to enable it to invest such large sums of money and safeguard other interests. Once the basic decision of nationalisation was taken, a genuine apprehension arose in the Government's mind that unless the management of the concerned undertakings was taken over on immediate basis there might be large scale frittering away of assets which would be detrimental to the public interest. It thus became urgently necessary for Government to take over Management of the undertakings in the public interest. As Parliament was not in Session at that time and every day's delay could have had serious repercussions the aforementioned Ordinance was promulgated. On November 11, 1983 the respondents filed a petition under Art. 226 of the Constitution challengin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 square yards to the Bombay Municipal Corporation for construction of school and playground against nominal advance, the balance value to be fixed by the Special Land Acquisition Officer. (2) Plots Nos. 2 and 6 admeasuring about 4,000 square yards were to be reserved for recreational amenities and open space, free of cost. (3) Plot No. 3, a triangular plot at the top admeasuring 103 square yards was to be set apart by the Company for construction of B.E.S.T. sub- station. (4) The Company had to construct and hand over an approach road 1500 to 1600 feet long and 45 feet wide admeasuring about 7,600 square yards free of cost as per the requirement of the development plan finalized by the Bombay Municipal Corporation. In consideration of the aforesaid, the Bombay Municipal Corporation agreed to grant Floor Space Index i.e. Floor Area Ratio, otherwise known as FAR, and building rights on the appurtenant plots. As a result of the aforesaid sub-division, the following plots became available to the Company for development : 1. Plot No. 5 admeasuring 8740 square yards. 2. Plot No. 7 admeasuring 7122 square yards. (being Industrial Estate already constructed and sold) 3. Plo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial estate on plot No. 5. On January 19, 1974 a special resolution was passed at an extraordinary general meeting of the Company in terms of s. 149(2A) of the Companies Act, 1956 to the effect : Resolved that pursuant to s. 149(2A) of the Companies Act, consent be and is hereby accorded to and authority conferred upon the Board of Directors of the Company to carry out the provisions of cl.12 of the Memorandum of Association. The resolution then reproduced sub-cl.(12) of cl.3 of the Memorandum of Association. To resume the narrative, the construction of an industrial estate on plot No. 7 admeasuring 7122 square yards consisting of 166 galas was commenced by the respondents sometime in the year 1974 and the same was completed in later years. Incidentally, they constructed 90 galas in Building A and 12 galas in Building B and secured the help of the developers for the rest. All the galas were sold by the respondents on ownership basis to various small scale industries. Similarly, the respondents commenced construction of an industrial estate on plot No. 12 admeasuring 3443 square yards in the year 1973 but due to the imposing of certain restrictions placed by the Sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment under sub-s.(1) of s.3 of the Act was concerned but held that the Real Estate Division was not an asset in relation to the textile undertaking within the meaning of sub-s.(2) of s.3 of the Act. The crucial question that falls for determination is whether the surplus land appurtenant to the mill was not an 'asset in relation to the textile undertaking' within the meaning of sub-s.(2) of s.3 of the Textile Undertakings (Taking over of Management) Act, 1983. That depends on whether the so-called business of real estate carried on by the Company was separate and distinct from the textile business. The High Court has held that along with the vesting of the management of the mill in the Central Government under sub-s.(1) of s.3 of the Act, all the assets and properties etc. of the Company only relating to the mill vested in them and that the Company having by a resolution passed at the Extraordinary General Meeting of shareholders on January 19, 1974 authorized the Directors to carry on business of developing Company's surplus lands and the Company's balancesheets from 1974 onwards having shown the said Industrial Estate as current assets of the Company and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing in sub-s.(2) of s.3 of the Act. Sub-ss.(1) and (2) of s.3 of the Act which have a material bearing on these appeals provide as follows : (1) On and from the appointed day the management of all the textile undertakings shall vest in the Central Government. (2) The textile undertaking shall be deemed to include all assets, rights, leaseholds, powers, authorities and privileges of the textile company in relation to the said textile undertaking and all property, movable and immovable, including lands, buildings, workshops, projects, stores, spares, instruments, machinery, equipment automobiles and other vehicles, and goods under production or in transit, cash balances, reserve fund, investments and booklets and all other rights and interests in or arising out of such property as were, immediately before the appointed day, in the ownership, possession, power of control of the textile company whether within or outside India and all books of account, registers and all other documents of what ever nature relating thereof. In the Act, textile undertaking as defined in s.2(d) reads : 2(d): textile undertaking or the textile undertaking means an undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ragraphs, embody the main object of the Company, all other paragraphs are treated as merely ancillary to the main object and as limited or controlled thereby. We were referred to the various survey reports of the IDBI, Ahmedabad Textile Industries Research Association, Investigation Committee, Textile Commissioner's Office and Task Force with a view to impress upon us that the viability of the Company depended largely on the proper utilization of the surplus lands. It was contended that the Legislature in enacting the law clearly had the intention of taking over the surplus lands of the Company and the High Court should have interpreted sub-s. (2) of s. 3 of the Act in consonance with the legislative intent. The contention to the contrary put forth by Shri Nariman, appearing for the respondents' Company is that the words assets in relation to the textile undertaking in sub-s. (2) of s.3 of the Act must be read in conjuction with sub-s. (1) thereof and the other provisions of the Act and therefore must be interpreted to mean forming part of i.e. as belonging to the textile undertaking. It is submitted that what vests in the Central Government under sub-s. (1) of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substance, the submission is that the business of development of property and the sale of plots withindustrial galas was an adventure in the nature of trade which was wholly independent of the textile business and merely because the Company was raising finance by selling industrial galas constructed on the lands, did not necessarily imply that the lands formed part of the textile undertaking. We find it difficult to sustain the judgment of the High Court that the so-called Real Estate Division of the Company was a separate or distinct business or that the surplus lands did not form part of the assets 'in relation to the textile undertaking' within the meaning of sub-s. (2) of s. 3 of the Act. There was in reality no such business much less any real estate business. The respondents Company was borrowing money all the time and the proceeds of the sale of surplus lands and industrial galas were utilised to improve the liquidity to pay off the creditors. When the mill was established way back in 1875 it was located over an area of about 21 acres admeasuring 1,05,008 square yards, most of which was free-hold and of this the manufacturing and storage areas pertaining to texti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly segregated from the textile undertaking and is a separate and independent business of Petitioner No.1 and it has nothing to do with the Textile Undertaking. While in paragraph 27 it is averred : Apart from the 1st Petitioner's textile undertaking and the business of manufacturing yarn and textile, the 1st Petitioner from 1970 also carried on the business of real estate . The balance-sheets of the Company throughout furnish data for the textile undertaking as a whole and the fact shows that the so called real estate business was not separate from the textile undertaking. Even the schedule of fixed assets does not indicate that the alleged Real Estate Division comprising of the surplus lands apart from 40,456 square yards which now form part of the mill precincts had been separated. There is nothing to show that the said lands were not appurtenant to the textile undertaking or their integrality was broken. me balance-sheets do not disclose that the Company had shown Real Estate Division or the industrial galas separately in the schedule of fixed assets. This falsifies the respondents plea that the real estate business was separate and distinct from the textile un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... square yards lying vacant : There was no development of this plot. The respondents-Company created an equitable mortgage in favour of the United Commercial Bank to raise finance for the textile business. Plot no. 6 admeasuring 2761 square yards was released by the Corporation and transferred from the Industrial Zone to the Residential Zone with permission to construct multi-storeyed buildings containing residential flats. Plot no. 7 admeasuring 7122 square yards : in 1974 the Company built some industrial galas on a portion and sold them on ownership basis. In 1980, building rights were sold to builders as the Company did not have finances to build on its own. Sale proceeds thereof were used for improving financial liquidity of the Company and to reduce the liabilities relating to the textile business. We have already referred to plot no. 8 which was lying vacant till 1981 when the Municipal Corporation reserved it in exchange for plot no.6. Equitable Corporation was also created by the Company in favour of the united Commercial Bank with respect to this plot. Then comes plot no.9 admeasuring 50,749 square yards. The textile mill and its buildings are now located over a portion the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-s. (2) of s.3 of the Act is clearly borne out from the balance-sheets of the company. Before dealing with the balance sheets we think it proper to set out the relevant portion of the Note on Real Estate Division submitted by the petitioners, which reads : The textile unit was one of the businesses of Petitioner No.1, Real Estate being another business. In order to strangthen the business of Textile Unit, it was necessary to obtain loans from financial institutions and Banks. The Petitioner No.1 created security on Plot Nos. 5, 8 and 12 (assets of the Company not related to the working of the textile unit) in favour of the Company's bankers. Merely because the Petitioner No. 1 created or agreed to create security on some of its assets not pertaining to Textile Undertaking for strengthening the textile undertaking, it does not follow that these assets are the assets of the Company in relation to the textile undertaking of which charge can be taken by the Central Government or the Custodian. Shri M.L. Tantia and his family members had pledged their shares to the extent of 13,000 shares in favour of the Company's bankers, as a collateral security. It very often hap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not follow that the surplus lands were the assets of the Company in relation to the textile undertaking. We have already dealt with different transactions entered into by the Company with respect to the surplus lands in the preceding paragraph and it is clear enough they are not separable from but were integrally connected with the running of the textile undertaking. It is undisputed that the predominant object with which the Company was formed was to carry on business in textiles alone and the surplus lands were undoubtedly an asset of the Company held in relation to the textile business. Furthermor e, the respondents case that the textile business of Real Estate Division was separate and distinct from the textile business stands belied by the balance-sheets of the Company. The respondents case is that the Real Estate Division was started during the year 1973-74 when monies were received from various buyers of industrial galas against advance sales of such galas built on plot No.7. In the relevant accounting year the Company made profits of ₹ 39.25 lakhs which were solely attributable to the textile undertaking. The prior mortgage in favour of the National Industrial D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s situate by deposit of title-deeds by way of collateral security and this fact was intimated to the Registrar of Companies along with a plan demarcating the boundaries of the textile undertaking. Similar entries appear in the subsequent years. It goes on like this from year to year. Nothing really turns on the aforesaid entries in the balance-sheets. Such entries in the books of account of a business concern following the mercantile system are usually made for accounting purposes. The balance-sheets and the Profit and Loss Accounts instead of substantiating the respondents claim that the business in real estate was separate and distinct from the textile business, are rather destructive of it. The opening of a separate account under the heading Industrial Galas under Construction Account is of little significance. None of the balance-sheets of the Company nor the Profit and Loss Accounts make any mention of the so-called Real Estate Division. Even the schedules relating to the fixed assets in the balance-sheets of the Company make no distinction between land belonging to the textile undertaking and land belonging to the Real Estate Division. They clearly demonstrate that the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n textile business and admittedly no new assets had been acquired by it thereafter. This is borne out by the fact that the disposal of surplus lands was with the sole and avowed intention of ploughing back the money to improve the financial liquidity of the Company and to reduce the liabilities relating to the textile business. In the absence of the surplus lands no loans could have been raised for the purpose of running the textile undertaking and as such they were and are an integral part of the textile undertaking. We regret to find that the High Court in coming to the conclusion that it did, has also overlooked the reports of the several high-powered committees constituted by the Central Government from time to time which stressed that the potential viability of the textile undertaking depended to a large extent on the proper utilization of the lands belonging to the textile undertaking, and also the fact that the Company had in the past been misutilising its real estate. In particular, the Investigation Committee's report highlighted that the disposal of the surplus lands had been misused by the Company and that it was to the detriment of the Company's textile under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides for the consequences that ensue upon the taking over in public interest of the management of a textile undertaking under sub-s.(l) thereof as a step towards nationalisation of such undertakings, which was clearly against the national interest. In dealing with similar legislation, this Court has always adopted a broad and liberal approach. In New Satgram Engineering Works Anr. v. Union of India Ors., [1981] 1 S.C.R. 406 in repelling the contention that the Engineering Unit together with the Shethia Bhawan and all its assets built on a plot adjacent to the New Satgram Coal Mines in 1964, the technical Director's Bungalow built on a plot outside the A mining area somewhere in 1957-58 and another building on the same plot of land, namely, the Guest House used for the residence of the officers and staff of the mines were not assets falling within the definition of mine defined in s.2(h)(vi), (vii) and (xi) of the Coal Mines (Nationalisation) Act, 1973, the Court had occasion to observe : It will be seen that there is a difference in the language used in s.2(h)(vii) and (xi). Sub-clause (vii) uses the words in, or adjacent to, a mine and used substantially for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coal but also that part of it which consisted in the sale of coal and its supply to customers both of which are a part of an integrated activity. mis is manifested by sub-clauses (i) to (xii) of clause (h) of s.2, i.e., all the assets belonging to a mine vest in the Central Government. (Emphasis supplied) Again, in Union of India v. United Colliories Ltd. Ors., [1985] 1 S.C.C. 305 a similar question arose. me question was whether or not a staff car belonging to the United Colliery Ltd., the owners in relation to a mine and being the staff car of the Technical Advisor of the North Chirimiri Collieries, was an asset belonging to the mine within the meaning of s.2(h)(xii) of the Nationalisation Act. me High Court held that the question as to whether the staff car should be treated as belonging to the owners of a mine as part of the mine itself raised disputed questions of fact relating to its user which would have to be determined on the basis of evidence, purporting to rely upon the aforesaid decision of this Court in New satgram Engineering Works' case and therefore relegated the parties to have the matter settled by a civil suit. Allowing the appeal, this Court held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments, machinery, equipment, automobiles and other vehicles, goods under production and in transit, cash balances, reserve funds, investments and booklets and all other rights and interests in and arising out of such property as were before the appointed day, in the ownership, possession, power or control of the textile company whether within or outside India. It further includes all books of accounts, registers and all other documents of whatever nature relating thereto. The conclusion is therefore inescapable that all the assets of the Company held in relation to the textile undertaking including the surplus lands appurtenant thereto, vest in the Central Government by reason of sub-s.(2) of s.3 of the Act. Upon that view it is not necessary for us to deal with the other contentions, namely, the applicability of the 'main objects' rule of construction or as to the purport and effect of the special resolution passed by the Company as contemplated by s. 149(2A) of the Companies Act, 1956 or the tests laid down under the Income Tax Acts of 1922 and 1961 for determining whether a certain receipt realized by an assessee was merely a realization or change of capital assets or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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