TMI Blog1992 (1) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... . Both the companies, namely, the petitioner and ACCI decided to amalgamate. Accordingly, on September 30, 1982, the petitioner and ACCI passed resolutions in their respective board meetings approving the scheme of amalgamation subject to the obtaining of necessary permission from various authorities. The scheme of amalgamation, inter alia, postulated that the transfer of ACCI will be with effect from October 1, 1982. This scheme was conditional upon certain approvals being obtained from different authorities, namely, under the Monopolies and Restrictive Trade Practices Act and the Foreign Exchange Regulation Act, and it was further provided that the scheme shall be deemed to be effective on the date on which the last of such approvals was obtained. The scheme also postulated issuance of shares of the petitioner-company to the erstwhile shareholders of ACCI. On December 27, 1982, an application for approval of amalgamation was filed under section 23(2) of the Monopolies and Restrictive Trade Practices Act. This approval was received by the Central Government passing an order on January 18, 1984. As both the companies, namely, the petitioner as well as ACCI were registered in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction is restricted to amalgamations which would facilitate the rehabilitation or revival of the business of the amalgamating company, then, the Central Government may make a declaration to that effect, and, thereupon, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be 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, and the other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly." It is common ground that no condition has been notified by the Central Government under sub-clause (c) of sub-section (1) of section 72A of the Act. In order to get the benefit of this provision, the petitioner company had, therefore, to satisfy that ACCI was not, immediately preceding the, amalgamation, financially viable and, secondly, that the amalgamation was in public interest. With this end in view, a lot of correspondence was exchanged between the parties and hearings took place to which we will presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant factors'." After referring to a study conducted by the National Council of Applied Economic Research on financial viability, it was observed by the Supreme Court as follows (p. 241) : "National Council of Applied Economic Research has further observed that where all the three parameters-profitability, liquidity and solvency-show positive figures, the unit's financial viability will be sound; where one of the three parameters shows a negative figure, the unit could be regarded as 'tending towards sickness' ; when two of the three parameters show negative figures, it would be a case of 'incipient sickness' and when all the three parameters show negative figures, the unit is 'sick'. This being the true concept of financial non-viability as understood by men of business and commerce and by financial institutions, it is by reference to these several tests or criteria adopted by them that the question has to be decided whether a particular undertaking is financially nonviable at a given point of time." After receipt of the application, some additional information was sought for by the Specified Authority on June 20, 1984, vide letter dated July 9, 1984. This information was su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I with the petitioner for the purpose of section 72A of the Act. It was stated in the said letter as follows : ".....The Specified Authority is not satisfied that the conditions as referred to in sub-section (1) of section 72A of the Income-tax Act, 1961, are fulfilled in view of the following : The requirement that the amalgamating company, viz., Messrs. Alkali and Chemicals Corporation of India Ltd., was not, immediately before amalgamation, financially viable by reason of its liabilities, losses and other relevant factors is not fulfilled. It was noted that the solvency of the amalgamating company was on the positive side, to the extent of Rs. 3.65 crores as per books of account on the date of amalgamation approved by the High Court, i.e., October 1, 1982." The present writ petition has been filed challenging the aforesaid letter of April 7, 1986. We are informed that the Central Government has not so far passed any formal order pursuant to the aforesaid decision of the Specified Authority. As we read section 72A of the Act, it is quite evident that, under sub-clauses (a) and (b) of section 72A(1), two conditions have to be fulfilled, namely, that the amalgamating compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating depreciation was Rs. 1,238 lakhs. This figure, due to the losses, came down to Rs. 740 lakhs in the year 1980-81 and, as on September 30, 1982, this figure has further come down to Rs, 365 lakhs. According to learned counsel, the financial condition of the company was such that the substratum of the company was going down and the company which was solvent was steadily progressing towards insolvency. It was submitted by learned counsel that the impugned order does not indicate that the Specified Authority had considered the aforesaid and other circumstances. Another factor in this connection which has been highlighted by learned counsel is that, in the year 1980, the profit of the ACCI was Rs. 153 lakhs which was soon converted to loss of Rs. 533 lakhs in the year 1981 and to a further loss of Rs. 376 lakhs in the year 1981-82. According to the petitioner, as per the ratio of the decision of the Supreme Court in the case of Mahindra and Mahindra Ltd. [1983] 144 ITR 225, the only conclusion possible in the present case was that the ACCI was financially not viable. He also contended that the respondents were not right in ignoring the written down value of the assets and in apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in making such a recommendation. Similarly, after the Specified Authority comes to the conclusion that the amalgamating company was financially viable or that the amalgamation was not in the public interest, then it would be incumbent upon the Specified Authority to give reasons for its Conclusion. Some reasons were given by the Specified Authority in the case of Mahindra and Mahindra Ltd. which were examined by this court and the Supreme Court. In the present case, however, the only reason given by the Specified Authority for not making the recommendation in favour of the petitioner is that, according to the Specified Authority, the ACCI was solvent to the extent of Rs. 3.65 crores as per the books of account on the date of amalgamation. As we have indicated, this is not the only criterion which is to be adopted. Solvency, no doubt, is a relevant factor but, when the solvency is repeatedly eroding, the Authority can legitimately come to the conclusion that the company is no longer financially viable. Dr. Pal has drawn our attention to the fact that, even by calculating the depreciation on the straight line method, the company continued to make cash losses and the solvency of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may here note that, where the provisions of section 72A are not misused, there is a further safeguard which is provided in section 72A of the Act. Once a declaration under section 72A has been accorded, then before getting the benefit under that provision, the amalgamated company has to fulfil the conditions specified in sub-section (2) of section 72A. One of the important conditions stipulated in subsection (2) of section 72A is the obtaining of a certificate from the Specified Authority to the effect that adequate steps had been taken by the amalgamated company for the rehabilitation or revival of the business of the amalgamating company. In other words, the benefit of section 72A will not be obtained if the sole idea of amalgamation was not the revival of the amalgamating company but was only to take the benefit of the carry forward losses and unabsorbed depreciation. The revival of a sick unit or positive efforts, in this behalf are the pre-conditions to the benefits under section 72A being availed of. We, therefore, feel that an application under section 72A should be considered most sympathetically from a businessman's point of view. If company has become commercially inso ..... X X X X Extracts X X X X X X X X Extracts X X X X
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