B.N. Kirpal, J.
1. The petitioner in this writ petition is challenging the decision of the specified authority constituted under s. 72A(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), who by its order dated 16th November, 1978, expressed its inability to recommend to the Central Govt. the acceptance of the scheme of amalgamation as proposed by the petitioner.
2. The petitioner is one of the leading manufacturers of bicycles in India. According to the averments made in the writ petition, the petitioner promoted a subsidiary company known as Atlas Auto-Cycles Ltd. The subsidiary company was incorporated in the year 1970, but it started manufacturing operations only in February, 1976. The said subsidiary company, however, did not make any profit. On the contrary, it has been suffering huge losses ever since it started manufacturing. Some time in the year 1977, the company sought expert advisers prepared a comprehensive report on the potentialities of the project of the subsidiary company and made its recommendations. The said recommendations postulated huge investment being made in order to make the said unit viable.
3. It was then decided that the two companies should be amalgamated. It was thought that this was the only way in which the subsidiary company could be saved from imminent and total collapse. Both the companies filed petitions in the High Court of Punjab and Haryana under ss. 391 and 394 of the Companies Act for the approval of the scheme of amalgamation of the companies. The requisite formalities under the Companies Act having been complied with, the said High Court, vide its order dated 27th February, 1978, accorded approval to the scheme of amalgamation.
4. In order to take the benefit of the provisions of s. 72A, the petitioner-company made an application on 7th June, 1978, to the Secretary, Dept. of Industrial Development, Govt. of India, for granting approval under the said section. The said s. 72A(1), which is relevant for the purpose of this petition, reads as under :
'(1) Where there has been an amalgamation of a company owing an industrial undertaking or a ship with another company and the Central Government, on the recommendation of the specified authority, is satisfied that the following conditions are fulfillled, 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 public interest; and
(c) such other conditions as the Central Government may, by notification in the Official Gazette, specify, to ensure that the benefit under this section is restricted to amalgamations which would facilitate the rehabilitation or revival of the business of the amalgamating company ....'
5. The Govt. of India in pursuance of the provisions of s. 72A have also laid down certain guidelines. These guidelines were issued on 2nd February, 1978. These guidelines were laid down so that if the conditions mentioned therein were fulfillled the Government would grant approval of the amalgamation of the units. The said guidelines, inter alia, provided that the declaration under s. 72A would be given if the following conditions were fulfillled :
'Size of sick industrial units : The amalgamating company should have employed at least 100 workmen during the accounting year in which the amalgamation is effected and in each of the two accounting years immediately preceding that year. Alternatively the fair market value of the fixed assets (excluding land) as on the date of amalgamation should not be less than Rs. 50 lakhs.
However, these general criteria can be relaxed if one of the following conditions is fulfillled :-
(a) if the sick industrial unit is engaged in the manufacture of mass consumption goods or goods which have a high priority or new industrial capacity is required for manufacture of such goods;
(b) special consideration will be given in cases where the sick industrial unit is located in any rural or backward area or in any city or town with a population not exceeding one million.'
6. The petitioner was asked to appear before the specified authority by letter dated 4th September, 1978. The representatives of the petitioners were heard and the petitioner was thereafter communicated the decision of the specified authority contained in the letters dated 16th November, 1978. It was stated in the said letter that the authority regretted its inability to recommend to the Central Govt. the scheme of amalgamation of the subsidiary company with the petitioner-company. On a request being made for giving detailed reasons as to why the said decision had been taken, the specified authority communicated the said reasons along with its letter, dated nil, No. 3(34)/78-CUS. In the said letter it was stated that the specified authority was of the opinion that the conditions laid down in s. 72A had not been fulfillled in view of the following :
'(i) The amalgamating company commenced production only in September, 1976. It has not yet been able to stabilise production because the product faces some technical problems and requires adaptation to the local conditions. Any new unit is likely to face such problems which should be solved without benefits of section 72A of the Income-tax Act.
(ii) The amalgamation does not fully satisfy the guidelines as evolved by the specified authority as the number of employees is less than 100 persons and the written down value of fixed assets (excluding land) is less than Rs. 50 lakhs.
(iii) The amalgamation scheme provides for issue of shares by the amalgamated company to the shareholders of the amalgamating company in the ratio of 1 : 1. This is not suggestive of financial non-viability of the amalgamating company.
(iv) As the amalgamating company is a subsidiary of the amalgamated company, the amalgamation will not bring in any additional managerial expertise.'
7. The petitioner in the present writ petition is challenging this decision of the specified authority. It is contended, in our opinion rightly, that the reasons given in the aforesaid impugned letter, dated nil, for not recommending to the Central Govt. the application of the petitioner are contrary to s. 72A and in fact are not in accordance with the guidelines laid down by the Government itself. It will be seen that s. 72A requires two conditions to be fulfillled. The first condition is that the amalgamating company was not immediately before the amalgamation financially viable. The financial viability had to be by reason of its liabilities, losses or other relevant factors. The other condition required to be fulfillled is that the amalgamation was in public interest. The Central Govt., we are informed, has not laid down any other conditions which are required to be satisfied. In the impugned decision it has not been stated that the provisions of s. 72A(1)(a) are not attracted. In other words, the contention of the petitioner that the amalgamating company was not financially viable has not in express words been controverter. It has no doubt been mentioned that the issuing of shares of the amalgamated company in the ratio of 1 : 1 is suggestive of the fact that the amalgamating company was financially viable. We are not able to agree with this contention. Merely because for every one share held by the member of the amalgamating company he is to get one share of the amalgamated company, it cannot possibly suggest that the amalgamating company was a viable unit. The financial viability of a company or an undertaking has to be judged having regard to its profitability, its profit and loss account, balance-sheet and other relevant factors. It has not been controverter that the amalgamating company has been incurring huge losses ever since it started operation. In any event, it does not appear that this aspect of the question has received much attention of the specified authority. The specified authority would, of course, be entitled to go into this aspect, as we are inclined to set aside the order and send the case back to it.
8. The first reason given in the aforesaid letter of rejection is not one which is contemplated by the guidelines at all, nor is it covered by s. 72A of the Act. It is quite clear that, as already stated hereinabove, the amalgamation company is facing acute problems. These problems cannot be solved in the present set up. It is not denied that the amalgamating company is a sick industry. The mere fact that in future it would be in a position to stabilise is not material because it is not denied that in order to stabilise the production huge investment is required plus some technical problems would have to be overcome.
9. It is correct that the number of employees which are employed by the amalgamating company is less than 100. The guidelines, however, postulate that in case the company employs less than 100 workmen, nevertheless permission can be granted if, in the alternative, the fair market value of the fixed assets excluding land on the date of amalgamation is not less than Rs. 50 lakhs. The specified authority has fallen into an error in referring to the written down value and not fair value of the assets is more than Rs. 50. If this be so, then the condition mentioned in the guidelines would be satisfied. Even otherwise, the guidelines provide that the general criteria of the amalgamating company employing at least 100 workers or having fixed assets of value of more than Rs. 50 lakhs can be relaxed if the conditions mentioned in the said circular are fulfillled. One of the conditions mentioned therein is if the sick industrial unit is engaged in the manufacture of mass-consumption goods. This aspect of the case has not been dealt with by the specified authority. Even if the specified authority comes to the conclusion that the fair market value of the assets are less than Rs. 50 lakhs, nevertheless the specified authority should apply its mind and take into consideration the fact that the goods which are being manufactured by the amalgamating company are such which may be regarded as mass-consumption goods.
10. The last reason stated in the said letter, namely, that the amalgamating company is a subsidiary of the amalgamated company and the amalgamation will not bring any additional managerial expertise can also not be a ground for not recommending the application of the petitioner. Neither s. 72A nor the guidelines empowered the specified authority not to grant approval for such a reason. In any event, this observation of the specified authority is a mere surmise which is not supported by any fact. It will be seen that the petitioner, namely, the amalgamated company, is being run efficiently and is making huge profits. With the amalgamation of the two units the managerial expertise as well as the financial resources of the amalgamated company would be utilised for making the unit viable.
11. We accordingly allow the writ petition, quash the decision contained in the letter No. 2(34) 78-CUS, dated 16th November, 1978, and direct the specified authority to deal with the application of the petitioner in accordance with law, keeping in view the observations made above. No order as to costs.