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Mahindra and Mahindra Ltd. and Others Vs. Union of India and Others - Court Judgment

LegalCrystal Citation
Subject Direct Taxation; Company
CourtDelhi High Court
Decided On
Case NumberCivil Writ Petition No. 99 of 1981
Judge
Reported in[1983]53CompCas409(Delhi); (1983)36CTR(Del)153; ILR1983Delhi856; [1983]141ITR174(Delhi)
ActsCompanies Act, 1956 - Sections 4A(1), 370, 372, 391, 392, 394, 394(1) and 434; Industries (Development and Regulation) Act, 1951 - Sections 18AA(1); Monopolies and Restrictive Trade Practices Act, 1969 - Sections 23, 23(2) and 54
AppellantMahindra and Mahindra Ltd. and Others
RespondentUnion of India and Others
Advocates: F.S. Nariman,; F.H.J. Talyar Khan,; B.K. Kulkari,;
Cases ReferredIn Shalini Soni v. Union of India
Excerpt:
income-tax act, 1961 - section 72-a--scope and interpretation of considered--meaning of financial viability in this context--relevant date is immediately before amalgamation.; m/s. international tractor co. of india limited was carrying on the business of manufacture and sale of agricultural tractors and allied agricultural implements. in 1975 and 1977 itci suffered a loss but in 1976 itci made some profit. in 1976 the board of directors of the petitioners and itci considered a proposal for various specified reasons for the merger and/or amalgamation of itci with the petitioner. the proposal for merger was approved by the board of directors of the two companies on october 4 1976. a scheme for amalgamation duly prepared and finalised. it was also approved by the share holders of the two.....chadha, j. 1. section 72a of the income-tax act, 1961 (hereinafter called 'the act'), was inserted by the finance (no. 2) act, 1977, with effect from april 1, 1978. by this section, a provision is made to enable an amalgamated company to carry forward and set off the accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation of companies on a fulfillment of the conditions mentioned in sub-s. (1) of s. 72a and the central govt.'s satisfaction in respect thereof, namely, that the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors and that the amalgamation was in the public interest. the satisfaction of the central govt. is to be arrived at after considering the.....
Judgment:

Chadha, J.

1. Section 72A of the Income-tax Act, 1961 (hereinafter called 'the Act'), was inserted by the Finance (No. 2) Act, 1977, with effect from April 1, 1978. By this section, a provision is made to enable an amalgamated company to carry forward and set off the accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation of companies on a fulfillment of the conditions mentioned in sub-s. (1) of s. 72A and the Central Govt.'s satisfaction in respect thereof, namely, that the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors and that the amalgamation was in the public interest. The satisfaction of the Central Govt. is to be arrived at after considering the recommendations of the specified authority being such authority that the Central Govt. may, by notification in the official Gazette, specify for the purposes of s. 72A. The effect of such declaration is, that notwithstanding anything contained in any other provision of the Act, the accumulated loss and the unabsorbed depreciation of the amalgamated company for the previous year, in which the amalgamation was effected. An additional statutory function of the specified authority under s. 72A(2)(ii) is to issue a certificate to the effect that adequate steps have been taken by the amalgamated company for the rehabilitation or revival of the business of the amalgamating company. The filing of such a certificate by the amalgamated company is one of the requisites for grant of relief under s. 72A. There was an amalgamation of M/s. International Tractor Company of India Ltd. (hereinafter referred to as the ITCI) with M/s. Mahindra & Mahindra Ltd. (hereinafter referred to as 'M & M') with effect from November 1, 1977. M & M made an application under s. 72A of the Act for grant of the relief of the declaration. By an order dated May, 1980/June 2, 1980, the specified authority, after considering the particulars furnished in the application under sub-s. (1) of s. 72A of the Act of M & M dated May 3, 1978, and further correspondence and evidence produced in this behalf and after hearing M & M, recommended that the amalgamation of ITCI with M & M did not satisfy the conditions enumerated in s. 72A(1)(a). The reasons that led the specified authority in making the foregoing recommendations are stated in the said letter. The Central Govt., thereby refused to issue the declaration under s. 72A(1)(a) of the Act to M & M. The legality and validity of the said order of the Central Govt. dated December 1, 1980, refusing to make a declaration under s. 72A of the Act, as also the recommendations of the specified authority to the Central Govt. dated May, 1980/June 2, 1980, under 72A of the Act are questioned in this petition under art. 226 of the Constitution.

2. The bare facts leading up to the scheme of amalgamation of ITCI with M & M are hardly in dispute (except the extent of its financial viability which we will consider in detail later) and may now be stated. M & M was duly incorporated under the Indian Companies Act, 1913, and is thus duly registered under the Companies Act, 1956. The share capital of M & M have been and is widely held; the principle shareholders of M & M have been and are public financial institutions to the extent of around 40% of the equity share capital of M & M. M & M is engaged in the manufacture, inter alia, of jeeps and other motor vehicles on a large scale. ITCI was incorporated on April 15, 1963, under the Companies Act, 1956, and was duly registered as a public company and was carrying on the business of manufacture and sale of agricultural tractors and agricultural implements. ITCI was manufacturing agricultural tractors and allied agricultural implements which were and are an essential commodity under the essential Commodities Act, 1955.

3. ITCI commenced production within three years of its incorporation and from then onwards was carrying on the business of manufacture and sale of tractors and allied equipments. The licensed and installed capacity in 1977 of ITCI was 10,000 tractors units per annum. ITCI was then producing tractors less than its capacity. For various reasons, ITCI incurred a loss in 1975. ITCI was able to change its operating picture in the next financial year of 18 months ended September 30, 1976, by making a reasonable profit. For the financial year 1976-77, the working of ITCI was again not satisfactory for various reasons. In October, 1976, the board of directors of M & M and ITCI considered a proposal for the merger and/or amalgamation of ITCI with M & M as the board of the two companies felt that it would be advantageous for both ITCI and M & M that their operations be rationalised for better and more efficient utilization of their existing facilities; that the products of M & M and ITCI were of such a nature as to make it possible for the utilization of the capacity of one company for the products of the other with marginal investments in tooling; that the proximity of the major manufacturing facilities of M & M and ITCI in adjoining locations at Kandivili was an added advantage which would promote the use of current capacities, avoid duplication and ensure economic future expansions at marginal costs and that with the amalgamation of ITCI with M & M it would be possible for M & M to utilise its surplus capacity to meet the expected increasing demand for tractors in the next few years in the domestic and foreign markets. The proposal for the merger between ITCI and M & M was approved by the board of directors of the two companies in the resolutions passed on October 4, 1976. A scheme of amalgamation was duly prepared and finalised.

4. M & M made an application on October 30, 1976, under s. 23(2) of the Monopolies & Restrictive Trade Practices Act, 1969 (hereinafter called the 'MRTP Act'), for an approval by the Central Govt. of merger/amalgamation, since both ITCI and M & M were undertakings to which Part A of Chap. III of the MRTP Act was applicable. At the oral hearing before the Central Govt. under the MRTP Act, it was brought to the Central Govt.'s notice and is so mentioned in the approval order that ITCI was not doing well for another two the three years it would lead to the closure of the entire undertaking of ITCI had declined, and that if that state of affairs continued for another two to three years it would lead to the closure of the entire undertaking of ITCI and subsequent unemployment of about 2,400 employees. By its order dated August 10, 1977, communicated to M & M and ITCI, the Central Govt. accorded approval to the amalgamation of ITCI and M & M. This approval was accorded by the Central Govt. in exercise of its power under sub-s. (2) of s. 23 read with s. 54 of the MRTP Act. It was, however, specifically stated that this order was not to be construed as conveying any approval of the Central Govt. that may be required under any provisions of law.

5. Clause 9 of the scheme of amalgamation also provided that the scheme was conditional and subject to the necessary sanction of the High Court of Bombay under ss. 391, 392 and 394 of the Companies Act, 1956, being obtained or orders passed before December 31, 1977. It was, however, provided that the directors of the two companies could extend the said period. The scheme of amalgamation was approved by the shareholders of both the companies and was pending sanction by the High Court as on December 31, 1977. At a meeting of the directors of M & M held on December 22, 1977, a question of extending the time-limit beyond December 31, 1977, was discussed at length. The board of directors of M & M resolved to extend under clause 9 of the scheme, the period of completion of formalities from December 31, 1977, to June 30, 1978. The scheme of amalgamation was ultimately sanctioned by the High Court of Bombay on March 9, 1978, by passing orders on the petitions filed by ITCI and M & M. At the hearing before the company judge for sanctioning the scheme of amalgamation, the Regional Director, Company Law Board (representing the Central Govt., to whom notice is statutorily required to be issued and was issued), appearing through counsel, specifically contended that the ratio fixed under the scheme, of two shares of M & M in exchange for three shares of ITCI, was not fair to the shareholders of M & M considering ITCI's very bad financial position. The company judge took this contention into account and after considering the fact that all parties concerned, namely, the shareholders, including the public financial institutions, had considered the ratio as fixed as fair and equitable, and decided not to disturb the said ratio.

6. Under the second proviso to s. 394(1) of the Companies Act, 1956, no order for the dissolution of ITCI can be made unless the official liquidator has, on a scrutiny of the books and papers of ITCI, made a report to the High Court that the affairs of the company have not been conducted in a manner prejudicial to the interest of the members or to the public interest. On the passing of the said order dated March 9, 1978, the official liquidator appointed M/s. Batliboi & Purohit, Chartered Accountants, to scrutinise the books and papers of the ITCI and to submit their report to the official liquidator to enable him to make his report to the court under the second proviso to s. 394(1). M/s. Batliboi & Purohit, Chartered Accountants, examined the unaudited accounts of ITCI for the financial year ended October 31, 1977, and the audited accounts for the four financial years ended September 30, 1976, for the purpose of their report to the official liquidator. The official liquidator to whom the report of M/s. Batliboi & Purohit was submitted, after applying his mind to the matter, made his report to the court. On the basis of the findings made by M/s. Batliboi & Purohit in their report to him, the official liquidator was of the view that the affairs of ITCI had not been conducted in a manner prejudicial to the interest of the members or to public interest, and reported accordingly to the High Court of Bombay. The report of the official liquidator was accepted by the High Court of Bombay on June 26, 1978. The company judge passed an order or the dissolution of ITCI without winding up.

7. Upon amalgamation, the undertaking of ITCI became a division of M & M known as the International Tractor Division which is being continued without modification or re-organisation, as a separate division of M & M and carries on the same business as ITCI carried on prior to the amalgamation, namely, the manufacture and sale of agricultural tractors and agricultural implements.

8. As already noticed, s. 72A of the Act came into operation with effect from April 1, 1978. M & M made an application dated April 27, 1978, received by the Central Govt. on May 3, 1978, under s. 72A of the Act. The application was made in the form approved by the Central Govt. As the amalgamation had been effected as from November 1, 1977, M & M filed the said application so as to enable the authorities to investigate the requisite factual pre-conditions for grant of relief under s. 72A and to arrive at a decision in order to enable M & M to file its return of income for the assessment year 1979-80 before the due date, June 30, 1979, along with the requisite certificate under s. 72A(2)(ii). M & M's assessment year 1979-80 is in respect of the relevant previous year ended on October 31, 1978. This is the previous year in which the amalgamation was effected. During the pendency of the original application,the latest audited financial position of ITCI was also communicated by M & M with its letter dated July 14, 1978, together with all its enclosures.

9. The specified authority under s. 72A of the Act, as notified by the Central Govt. by notification S.O. No. 710(E) dated October 11, 1977, consisted of a Committee of four Secretaries to the Government, namely, Secretary, Dept. of Industrial Development; Secretary, Department of Company Affairs; Secretary, Ministry of Labour; and Secretary, Dept. of Economic Affairs and the Chairman of the CBDT. The Central Govt., on the recommendations of the Specified Authority, also set up a separate Screening Committee of experts for a detailed investigation with regard to fulfillment or non-fulfilment of requisite statutory conditions, namely, conditions specified in cls. (a) and (b) of s. (1) of s. 72A of the conditions mentioned in sub-s. (2)(ii) of s. 72A. It is not necessary to refer here to the deliberations, the queries raised, the further information called from M & M and ITCI, the finding, the reports and recommendations of the Screening Committee or to the deliberations of the Specified Authority. The Specified Authority, after considering the particulars furnished in the application under sub-s. (1) of s. 72A of the Act to M & M dated May 3, 1978, and further correspondence and evidence produced in this behalf and after hearing M & M, recommended that the amalgamation of ITCI with M & M did not satisfy the conditions enumerated in s. 72A(1)(a). The reason that had led the Specified Authority in making the foregoing recommendations are as under :

'(i) The company has suffered losses for only two years, i.e., 1974-75 and 1976-77; it earned a profit of Rs. 208 lakhs in 1975-76. It is only the large losses incurred in one year, 1976-77, that created temporary financial difficulties for the company.

(ii) In the reports presented to the shareholders for the years 1975 and 1976, the directors have ascribed the poor performance to the mechanism of price control which does not take into account cost increases, and also sluggishness in demand for tractors principally because of the stringent credit restrictions brought into force by the Government from time to time. This also indicated that the poor performance of the company is admittedly due to short-term difficulties existing during the relevant years.

(iii) Even though the net worth of the company on the date of amalgamation is negative as per the account books, net worth is as high as Rs. 790 lakhs if the market value of assets is taken into account. The share exchange ratio of 2 : 3 for equity shares and 1 : 1 for preference as fixed by the High Court for sanctioning merger also does not indicate any sickness.

(iv) The amalgamating company has indicated in the petition filed before the Bombay High Court as late as December, 1977, that even though the company sustained loss, it was in a sound financial position and its assets were more than sufficient to meet its liabilities.

(v) The revival scheme submitted by the amalgamated company along with its application consisted mainly of repayment to creditors to the extent of Rs. 4.0 crores, besides small investment of Rs. 0.7 crore on maintenance, replacement of machineries. It was expected that the under-taking of the amalgamating company would be revived as a result of such repayments. In fact, after the liabilities to the extent of Rs. 5.2 crores were repaid in 1977-78, the undertaking was revived and earned a cash profit of Rs. 3.9 crores in the subsequent year. This suggests that the undertaking is not basically non-viable but required a temporary dose of liquidity to bring it back to health.

(vi) A relevant factor to be taken into consideration to determine whether the amalgamating company is non-viable is its close link with the amalgamated company, and the financial assistance which it got and would have continued to get from the amalgamated company. If this factor is taken into consideration it cannot be held that the amalgamating company is non-viable.'

10. On a consideration of the recommendations made by the Specified Authority, the Central Govt. came to the conclusion that it could not be denied that the large losses incurred in one year, viz., 1976-77, had created certain financial difficulties for ITCI, but it did not mean that the undertaking of ITCI was non-viable. It was opined that the problem was one of temporary liquidity; all that was needed was a dose of liquidity to nurse it back to health and this is borne out by the events subsequent to the amalgamation. The reasons recorded by the Specified Authority in its recommendations are adopted by the Central Govt. though in different words. The Central Govt. refused to issue the declaration under s. 72A(1)(a) of the Act to M & M.

11. We may briefly notice the object of introducing s. 72A of the Act as stated in the budget speech of the Finance Minister. It was said that sickness among industrial undertakings was a matter of grave national concern. Closure of any sizable manufacturing unit in any industry entails social costs in terms of loss of production and employment, and also waste of valuable capital assets. Experience has shown that taking over of such units by Government is not always the most satisfactory or the most economical solution. The more effective course suggested was to facilitate the amalgamation of sick industrial units with sound ones by providing incentives and removing impediments in the way of such amalgamation. That, to save the Government from social costs in terms of loss of production and employment and to relieve Government of the uneconomical burden of taking over and running sick industrial units was one of the motivating factors in introducing s. 72A, is also borne out from the notes on clauses to the Finance Bill, 1977, Memorandum explaining the provisions of the Finance Bill, 1977, and from the reply to the debate in Parliament on June 23, 1977, on the Finance Bill (No. 2) of 1977. In order to facilitate the merger of sick industrial units with sound ones, the general rule of carry forward and set-off accumulated losses and unabsorbed depreciation allowance of the amalgamating company by the amalgamated company was statutorily relaxed. By a deeming fiction, the accumulated loss or the unabsorbed depreciation of the amalgamating company is treated to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamating company was not, immediately before such amalgamation financially viable, and where the amalgamation was in public interest. Thus, there are two conditions which are to be fulfillled under s. 72A(1) for benefits prescribed therein to be available to the amalgamated company, 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 the public interest; and

(c) (with which we are not concerned in this case) there being no other conditions specified under clause (c).'

12. That the amalgamation of ITCI with M & M was in the public interest was brought out before the Screening Committee, the Specified Authority as well as the Central Govt. In the writ petition, it is averred that the amalgamation was in the public interest which fact is clearly indicated by the following :

'(i) ITCI was engaged in the manufacture of agricultural tractors which are an essential input for the development of agriculture in the country, which is so vital to the growth of the nation. Tractors have been declared an essential commodity under the Essential Commodities Act, 1955;

(ii) because of ITCI's parlous financial position as stated above, ITCI was facing the prospect of immediate closure. Such closure would have resulted not only in the direct loss of employment to over 2,000 workmen employed by ITCI, but would also have had repercussions in loss of employment in the establishments of suppliers of material to ITCI and associated and ancillary industries. In addition, there would have been the loss of production of agricultural tractors and the consequent deleterious effect on national agricultural production;

(iii) the closure of ITCI would also have rendered idle a large investment in productive capacity which would not have been in the national interest;

(iv) the amalgamation of the sick unit of ITCI with the first petitioner-company forestalled the necessity for the State Government to take that unit over and conduct it as a relief undertakings Special Provisions Act, 1958, or alternatively for the Central Government by notification under the Industries (Development and Regulation) Act, 1951, section 18AA(1)(b), to appoint as authorised person or body to take over the management of ITCI's undertaking, and thereby avoided a heavy burden falling on the public exchequer;

(v) at the meeting of the Screening Committee held on 7th October, 1978, the Chairman thereof had stated that agricultural tractors were an important input for agricultural operations and that the revival of ITCI would be in accordance with the socio-economic policy of the Government;

(iv) in its order dated 10th August, 1977, under section 23 of the MRTP Act, the Central Government itself had stated that there is nothing prejudicial to public interest if the amalgamation of ITCI with the first petitioner-company was allowed;

(vii) in any event the amalgamation of ITCI with the first petitioner-company also conformed to the guidelines issued by the second respondent (Exhibit D hereto ) for determining whether the amalgamation was in public interest.'

13. In the corresponding para. of the counter-affidavit, it is merely stated that reference is drawn to the record of the case. Mr. D. P. Wadhwa, the learned counsel for the Central Govt., also urged that the condition of s. 72A(1)(b) was not satisfied. This contention is ill-founded. In the minutes of the third meeting of the Specified Authority held on July 19, 1978, it is recorded that the proposal for amalgamation had been initiated before the tax concessions under s. 72A of the Act had been announced but this was not considered as a material condition. It was noticed that the tractor was one of the important requirements for the development of Indian agriculture and hence it would be difficult to take the view that the test of public interest was not met. In the minutes of the meeting of the Screening Committee held on January 16, 1979, records further discussions. The suggestion of the Secretary (Labour) that the public interest was incidental to the amalgamation was noticed and it was observed, 'though true, did not indicate that the concessions of section 72A should not be given. Companies would always amalgamate in their mutual interest and not to satisfy any public interest'. It was recorded that 'the conditions of section 72A would be satisfied so long as the amalgamation served public interest, irrespective of whether the amalgamation scheme was, or not, motivated by public interest'. In the subsequent meetings of the Specified Authority the discussion centered mainly on the issue whether the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors as required under s. 72A(1)(a) of the Act. The Specified Authority was satisfied that the condition of public interest was met, the amalgamation did not satisfy the conditions enumerated in s. 72A(1)(a). The Central Govt. also refused to issue the declaration under s. 72A(1)(a) of the Act of M & M. There is a complete absence of any indication in the recommendations of the Specified Authority and the order of the Central Govt. that the amalgamation did not subserve public interest. It is thus clear on the record that the amalgamation being in the public interest was accepted by the Specified Authority as well as by the Central Govt. The condition of the public interest of the amalgamation is clearly fulfillled.

14. The other essential condition to be satisfied for issuing a declaration under s. 72A(1) is that the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors. The phrase 'not financially viable' occurring in s. 72A has not been defined in the Act and we will not attempt to do so. During the hearing, Mr. F. S. Nariman, the learned counsel for the petitioners, addressed arguments at length on the concept of financial non-viability. A reference was made to a study of industrial sickness prepared in 1979 by the National Council of Applied Economic Research (for short called 'NCAER'). The NCAER is a body supported by the Central Govt. It has been designated as an approved research association for the purposes of s. 35 of the Act. In that study, NCAER stated that the sickness of a unit is defined as the weakening (of) financial viability, leading to its loss and finally its extinction. Sickness is defined in terms of financial viability since this is the only known indicator of the health of a unit. Financial viability consists of three inter-dependent elements of equal emphasis and weight, viz., profitability, liquidity and solvency which are represented by cash profit and loss, net working capital and net worth respectively. In Chap. II of the report, NCAER mentioned what were the different criteria adopted by various bodies. It is apposite to reproduce them :

'While there is widespread debate about industrial sickness, there is as yet no accepted definition of what is a sick unit. Government, industry, financial institutions and commercial banks have all adopted different criteria reflecting their needs and bias. For example :

Government of India, in its recent announcement of the scheme of merging sick units with healthy ones (Finance Act, 1977), has classified 'those units where the losses, past and present, have eroded 50 per cent of capital and reserves as sick'.

Industry : The Federation of Indian Chambers of Commerce and Industry uses the following guidelines for determining sickness : cash inflow during the last three years has been progressively going down in relation to revenue commitments; when cash inflow is less than operational commitments and debt servicing; when debt-service liability is equal to or less than one; when the company has negative working capital, and the unit continues to make losses; cumulative losses exceed capital and reserves.

The commercial banking system : According to the Reserve Bank of India, a unit may be considered sick if it has incurred cash loss for one year and (in the judgment of the commercial bank), is likely to continue to incur cash losses for the current year as well as the following year and which has an imbalance in its financial structure, such as current ratio of less than 1 : 1 and worsening debt-equity ratio (total outside liabilities to net worth). While the commercial banks follow this definition for banking purposes, a study by the State Bank of India, defines a sick unit as one which fails to generate internal surplus on a regular basis and depends for its survival on the constant infusion of funds from outside.

Term-lending institutions : They prefer to use the phrase 'problem project' rather than 'sick units'. According to ICICI 'a problem project is one whose financial viability, actually and potentially, is threatened by adverse factors, present and continuing. The adverse factors might relate to management, market, fiscal burdens, labour relations or any other. When the impact of these factors reaches a point where a company begins to incur cash losses leading to an erosion of its funds, there is a threat to its financial viability'. This definition is based on the criterion of the financial success or failure of a project. Broadly speaking, the other term-lending institutions also abide by this definition.'

15. After reviewing the different perceptions of industrial sickness they have stated :

'Definition of sickness adopted in the study

Sickness of a unit is defined as the weakening of financial viability, leading to its loss and finally its extinction. The underlying assumption is that sickness is not an incident in the history of a unit; rather it is an organic process which has an origin, a sickness path, stages and if there is no revival will become terminal, resulting in the company's collapse.

Before describing the sickness process and its stages, we would like to elaborate on the concept of financial viability.

Financial viability

Sickness is defined in terms of financial viability since this is the only known indicator of the health of a unit. Financial viability consists of three interdependent elements, of equal emphasis and weight, viz., profitability, liquidity and solvency which are represented by cash profit or loss, net working capital and net worth, respectively. Viewed in another way, solvency and liquidity are the two vital organs of financial viability and profitability its life blood.

The status of financial viability, at a point of time, is a result of the status of these elements, but in the absence of any precise index which combines the individual status of the three elements, the status of financial viability at any point of time is gauged by giving equal weight to its three elements.

The aforesaid note on 'the concept of financial non-viability' then mentioned that the NCAER identified four stages in the sickness process :

(i) 'Financial viability sound', i.e., where all the three parameters - profitability, liquidity and solvency showed positive figures;

(ii) 'Tending towards sickness' - When two of the three parameters show negative figures;

(iii) 'Incipient sickness' - When two of the three parameters show negative figures;

(iv) 'Sick' - When all the three identified parameters show negative figures. In their study NCAER have also termed this stage as 'Extinction of financial viability'.'

16. NCAER has thus come to its own conclusion regarding an acceptable definition on sickness, on which it ties up sickness with the question of financial viability. No other definition is attempted before us by the standing counsel for the Government. We will not go wrong in adopting this meaning given of the sickness and financial viability as brought out in the study. The record shows that the aforementioned note on the concept of financial non-viability was placed before the Specified Authority and the Central Govt. in support of the submission that by applying the said three parameters to ITCI immediately before its amalgamation with M & M, ITCI would be classified as sick - all three parameters showing negative figures, and since NCAER defined sickness in terms of financial viability, it was apparent that ITCI was not, on October 31, 1977, or immediately before, financially viable. We dare of the view that the financial viability of an amalgamating company is required by s. 72A(1) to be determined as at a particular point of time, viz., immediately before the amalgamation of the amalgamating company with another company. The condition specified does not require a consideration of the state of affairs for any particular period nor an estimation of whether it could become financially viable at any future period under different circumstances. The statutory requirement is that immediately before its amalgamation, it must not have been financially viable.

17. The Specified Authority has mentioned six reasons in its impugned recommendations reproduced in extenso in the earlier part of the judgment) and those have been adopted by the Central Govt. in the impugned order. The submission of Mr. F. S. Nariman is that none of those reasons are real or a valid one, apart from being patently erroneous in fact and based on a completely wrong interpretation of the provisions of s. 72A of the Act. He puts his factual and legal submissions as under :

'I. ITCI's financial position.

The application submitted under s. 72A of the Act discloses the following position with regard to the financial non-viability of ITCI as on 31st October, 1977 (i.e., the date immediately before the amalgamation of ITCI with M & M which took place on and from 1st November, 1977) -

being the relevant date under s. 72A(1) :-

(A) ITCI's Debts :Rs.Aggregate amount of loans and 2,131 lakhsliabilities & provisionsThis consists of the following :-(a) Loans due to Public FinancialInstitutions 135 lakhs(b) Loans due to banks (State Bankof India)(Overdrawing beyond the 815 lakhssanctioned limits from the StateBank of India was of the order ofthe order of Rs. 462 lakhs).(c) Other liabilities 1,181 lakhs(as appearing in thebalance-sheet as at31-10-1977 submittedto the SpecifiedAuthority on 4-7-1978).(i) International HarvestorChicago(Collaborators of ITCI who hadadvanced loan to ITCI & which wasoverdue for payment) 40 lakhs(ii) Miscellaneous loans includingfixed deposits 69 lakhs(iii) Other outside creditors(excluding M & M) 780 lakhs(iv) Due to M & M (for suppliesand components) 292 lakhs(B) ITCI's resources consisted of only Rs. 1,374 lakhs asfollows :-(1) Cash and bank balances 7 lakhs(2) Debts receivable by ITCIdue by the third parties 95 lakhs(3) Inventories and stocks 1,151 lakhs(4) Other receivables 121 lakhs-------------1,374 lakhs------------- [Inventories and stocks consisted of raw materials, components, work-in-progress and some finished goods (the value of finished goods was only Rs. 68 lakhs as per the audited accounts as at 31-10-1977). The current assets of inventories and stocks would become an available cash resource for payment to creditors only when the stocks were processed into finished goods and the finished goods were sold and the moneys realised for there finished goods].

II. Pressing demands of creditors.

(1) From July to November, 1976, 114 bills of exchange aggregating to Rs. 184.62 lakhs, accepted by ITCI, were returned unpaid as against bills amounting to Rs. 620.58 lakhs discounted by the State Bank of India during this period. Besides 371 cheques drawn by ITCI aggregating to Rs. 540.59 lakhs were returned unpaid for the reason 'exceeds the arrangement' during the period, January to November, 1976. The two factors were mentioned by the State Bank of India itself in its letter of the 26th December, 1976, stating that : 'This position is causing us great concern.'

(2) By ITCI's letter dated 7th September, 1977, the State Bank of India was approached for a two-year moratorium for repayment of working capital term loan, i.e., excess amount drawn over and above the sanctioned limit. ITCI also asked for a repayment schedule spread over an eight year period. By its letter dated 24th September 1977, the State Bank of India categorically stated that the eight years' repayment schedule was unacceptable and asked for a revision of the repayment schedule within three years and also refused to grant any moratorium on repayment of the borrowings over the sanctioned limits. The State Bank of India stated that ITCI has no 'tangible securities' and that their drawings were not supported by 'adequate drawing power'.

(3) In 1976-1977 (i.e., prior to 31st October, 1977) several notices (at least 24 notices) addressed by or on behalf of large creditors to ITCI calling for immediate repayment of their debts; these included three statutory winding-up notices sent on behalf of Bharat Forge, Bank of Baroda for Bills of WG Forge and Union Bank for Bills of Choonilal Foundry under s. 434 of the Companies Act, 1956.

(4) ICICI who were creditors of ITCI (also M & M) were requested for rescheduling Installments for repayment of loans, but ICICI refused this request. They specifically stated that since reliefs under s. 72A were available quite expeditiously, M & M were urged to take quick steps in the matter so that they could get the benefits in time.

III. Inability of ITCI to Generate or Raise Additional Resources :

(1) Any loans by M & M to ITCI could not be in excess of Rs. 50 lakhs - since the maximum limit of 10% of the paid up capital and free reserves, in the case of M & M under section 370 of the Companies Act, 1956, was Rs. 120 lakhs on that date and M & M had already lent and advanced to various third parties as on that date a sum of Rs. 70 lakhs. Hence only Rs. 50 lakhs could, in law, be advance by M & M to ITCI as against ITCI's requirements of over ten times that amount.

The guiding principles for considering applications under ss. 370 and 372 of the Companies Act, 1956, framed by the Dept. of Company Affairs, Govt. of India, at the relevant time state as follows :-

'In considering the applications received under these sections the following guiding principles have been formulated by the Department :-

(1) ......

(2) ......

(3) ......

(4) ......

(5) Whether, having regard to the considerations set out below, the proposed investment may be regarded as sound :

(i) The company in which the investment is proposed to be made should be in a sound financial position and, in particular, the depreciation provision made should be adequate;

(ii) The financial structure of the company in which the investment is proposed to be made, after taking into account the proposed investment, should be a balanced one as otherwise idle capital or heavy interest charges would act as an economic drag on the working of the company.'

At the relevant date ITCI was not in a 'sound financial position' : its own bankers, the State Bank of India refused to extend further credit and threatened to recall the existing loans - see letter dated 24th September, 1977. Besides, the balance-sheet and the profit and loss account for 30th September, 1976 (which was also forwarded to the Specified Authority with the application under section 72A showed that depreciation was not provided to the extent of Rs. 138 lakhs (page 20 of the printed audited accounts of ITCI for the 18 months ended 30th September, 1976). The financial structure of ITCI as the 30th September, 1976, was not a balanced one as its current liabilities exceeded its current assets on that date by Rs. 193 lakhs (page 12 of the printed audited accounts).

(2) ITCI's loss for the year ended 31st March, 1975, was of the order of Rs. 254 lakhs and for the 13 months' period ended 31st October, 1977, was of the order of Rs. 433 lakhs and, despite the profits reflected in ITCI's accounts for the year ended 30th September, 1976 (where depreciation of Rs. 138 lakhs was not provided) the State Bank, in its letter dated 24th September, 1977, stated that ITCI had no tangible security and that their drawings were not supported by adequate drawing power.

(3) Representatives of both ICICI and IDBI had reported to the Screening Committee that 'the financial institutions as well as the banks were not ready to give any financial assistance to ITCI.

(4) The cumulative effect, thereforee, was that all avenues for obtaining finance were closed to ITCI.

IV. Opinion of experts in the field :

(1) ICICI - a leading public financial institution and so designated by s. 4A(1) of the Companies Act, was specifically asked by the Screening Committee to submit an expert note on ITCI's financial non-viability'. By their Note submitted to the Screening Committee, they opined that in the their Note submitted to the Screening Committee, they opined that in the financial year 1976-77, ITCI was in serious difficulties, operating at highly uneconomical levels, and not in a position to increase production due to lack of finances. They also opined that on an analysis of M & M's cash flow and financial resources and its requirements to pay tax on its profits M & M would have a cash shortfall and would not be in a position to provide financial support to ITCI, which was vital for the revival of ITCI.

(2) The leading financial institution in the country - IDBI - whose representatives attended the meeting of the Screening Committee held on 7th October, 1978, was also of the opinion that the financial status of ITCI was such that 'their assets had negative value and their total capital had been eroded'

(3) On the basis of a scrutiny made by M/s. Batliboi and Purohit, Chartered Accountants, appointed by the official liquidator of the High Court of Bombay as auditors to report to him under the second proviso to s. 394(1) of the Companies Act, the official liquidator reported to the High Court of Bombay on the extent of the losses of ITCI from 1973 up to 31-10-1977, and the official liquidator opined that ITCI -

'has suffered heavy losses in the last five years and hence the financial position of the company is unsatisfactory.'

In this statutory report to the High Court under the second proviso to w. 394(1) of the Companies Act, the official liquidator further reported on investigation, that there were no objections or complaints against ITCI and that ITCI had at all times complied with the laws and regulations of the State and Central Govts., and had never been black-listed and or penalised on any occasion. On the basis of the findings recorded by the said M/s. Batliboi & Purohit, Chartered Accountants, the official liquidator submitted in his report dated 24th June, 1978, that -

'the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or the public interest.'

This report of the official liquidator was accepted by the High Court of Bombay as shown by its order dated 26th June, 1978, whereby the court ordered that ITCI should be dissolved without winding up.

(4) The Department of Heavy Industries of the Government of India (which department is administratively in charge of ITCI's undertaking) had also expressed the view -

'that the amalgamating company was financially non-viable immediately before the amalgamation',

and had given detailed reasons, in a note, for arriving at this conclusion.

None of these expert opinions by independent and knowledgeable authorities or agencies have been adverted to, much less dealt with or controverter, by the Specified Authority or the Central Government in their orders.'

18. We may now deal with the reasons in the light of the material. The first reason for refusing to issue the declaration is that ITCI suffered losses for only two years, i.e., 1974-1975 and 1976-77, and it earned a profit of Rs. 208 lakhs in 1975-76. A conclusion from it is drawn that it created temporary financial difficulties for the company. The second reason is that the poor performance was due to short-term difficulties existing during the relevant years. The statement that ITCI earned a profit of Rs. 208 lakhs in 1975-76 is erroneous since the profit is taken before providing for depreciation. The profit for 1975-76 (eighteen months' period) was only Rs. 71 lakhs. The Central Govt. and the Specified Authority have failed to appreciate that for the entire period of 1974-75 (loss Rs. 253 lakhs), 1975-76 (profit Rs. 71 lakhs) and 1976-77 (loss Rs. 433 lakhs), there was a total loss of Rs. 555 lakhs. The accumulated loss amounting to Rs. 555 lakhs was as against the paid-up capital and reserves of Rs. 4,91,94,657. The accumulated losses thus exceeded the paid-up capital and reserves by Rs. 63,43, 711. The capital and assets of ITCI had dwindled to such an extent that ITCI was not in a position to carry on business unless there was a dose of liquidity to nurse it back to health. The standard and criterion of financial non-viability as understood by the Central Govt. was later enunciated in the guidelines issued on February 23, 1981. It mentions the factors while taking a view of the financial non-vaibility, inter alia, namely :-

(i) losses incurred during each of the three years preceding amalgamation;

(ii) accumulated loss on the date of amalgamation as compared to the paid-up capital and reserves and surplus.

19. ITCI's financial position, pressing demands of the creditors and the inability of ITCI to generate or raise additional funds as noticed above clearly showed that the financial difficulty of ITCI immediately before its amalgamation with M & M was not a temporary one. ITCI has exhausted all possibilities of raising additional finances in order to enable it to continue to carry on its business economically. The inability of ITCI to overcome its financial difficulty was clearly established before the authorities. It is not even now shown how the 'liquidity problem' was temporary. It could be a temporary one if it could be overcome within a short period or even a reasonable time span or to stretch it further within the foreseeable future Mr. Nariman has been successful in demonstrating that there were no adequate funds that ITCI could obtain from any source whatsoever in order to overcome the financial difficulty, ITCI having exhausted all possibilities of raising additional finance in the foreseeable future. ITCI did not have, nor could it obtain, the financial wherewithal to produce the tractors at an economical level with the result that the financial difficulty was not temporary. The so-called short-term difficulties had in fact resulted in vast total losses in the preceding three years which losses had wiped out the entire share capital and reserves of ITCI. There was a permanent destruction of its ability to borrow further monies to undertake the manufacture of the tractors, thus rendering its business financially nonviable which in turn would necessarily lead to its ultimate closure. The view taken by the Specified Authority and the Central Govt. in the impugned orders is just not possible to form.

20. The third reason advanced is that the net worth of ITCI on the date of amalgamation is as high as Rs. 790 lakhs if the market value of the assets is taken into account. A part of the same reason is that the share exchange ration fixed for sanctioning the amalgamation does not indicate any sickness. Section 72A(1)(a) lays down the condition that the amalgamating company was not immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors. Market value of assets does not play any part in the liquidity of the business of the ITCI or in determining whether it is capable of being run at an economical level. The Specified Authority as well as the Central Govt. have addressed themselves to a wrong question. It may be possible to consider the net worth at Rs. 790 lakhs on the basis of the market vale for determining whether the creditors of ITCI could be fully paid off in the event of the sale of its assets on the liquidation of the business of ITCI. The sale of the assets or the winding up of the ITCI is totally extraneous to the object and scheme of s. 72A. The purpose of s. 72A is to revive and rehabilitate the business and not to shut it down. The statutory condition laid down is of 'financial viability'. The assumption that in determining the net worth for the purpose of considering financial viability, the market value of the assets should be taken into account is erroneous when considered in the light of the following definitions :

(i) The definition of net worth in the book, Cost and Management Accounting for Students by J. Batty, reads as follows :-

'Net worth :

A concept denoting excess of the book value of all assets over liabilities. In a company it represents the interest of the shareholders, i.e., the paid up share capital and reserves. If the assets are taken at current values instead of book values, the concept is known as current worth.'

(ii) In the Dictionary for Accountants by Eric L. Kohler, the definition of net worth reads as follows :

'Net worth :

The aggregate appearing on the accounting records of the equities representing proprietary interests; the excess of the going-concern value of assets over liabilities to outsiders; of a corporation the total of paid-in-capital, retained earnings, and appropriated surplus of a sole proprietorship, the proprietor's account, of a partnership, the sum of the partners' accounts. A British equivalent sometimes employed is total equity-stockholders' equity.'

(iii) In Black's Law Dictionary, 5th Edn. (1939), Net Worth is defined at p. 939 as :

'Net Worth :

Net worth of a corporation may be determined by subtracting liabilities from assets or by adding the capital account and surplus account as reflected in general ledger of corporation. Eastern Capital Corporation v. Freeman, 10 Misc. 2d. 412, 168, N.Y.S. 2d. 834 838.'

21. It would also be useful to refer to the study of NCAER. In the NCAER Study of Industrial Sickness, while examining the parameter for solvency which is represented by net worth, NCAER has made provision for unprovided depreciation on fixed assets to market value. On pp. 140 to 149 of the NCAER Study the financial viability of one of the sugar companies is being examined and, on p. 149, the solvency of the unit is discussed : net worth has been re-worked excluding the effect of revaluation of fixed assets and restoring the original book value of the fixed assest. The Dept. of Company Affairs, with its letter dated 2nd February, 1977, to M & M in dealing with the application dated 30th October, 1976, under s. 23(2) of the MRTP Act for approval of the Central Govt. to the scheme of amalgamation of ITCI with M & M (which was later approved by the Central Govt.) had enclosed a work sheet for showing the department's working of the exchange ratio of shares for the purposes of the amalgamation of ITCI with M & M. In computing the 'Assets backing value' (which is another term for 'net worth') the assets were taken at the book value (and not at market value); after deduction the liabilities shown in the company's balance-sheet from the assets so valued at book value, the assets backing value was arrived at. In the Guidelines for issue of Bonus Shares issued by the Finance Ministry, it is stated as follows :

'(5) Reserves created by revaluation of fixed assets are not permitted to be capitalised.'

22. Similarly, per r. 2(a) of the Companies (Acceptance of Deposits) Rules, 1975 - companies are permitted to borrow against a percentage of the free reserves - but this does not include the balance in any reserve created 'by the revaluation of any assets of the company'. Current value of the assets is a concept known as 'current worth' and is to be contrasted to the net worth. This has been ignored by the authorities under the Act. Market value of the assets of the amalgamating company, thereforee, cannot be considered as a relevant material to the determination of the question of financial non-viability of ITCI within the meaning of s. 72A of the Act.

23. Similarly, the share exchange ratio sanctioned by the High Court in the scheme of amalgamation can have no relevance to the determination of the question of financial viability of the ITCI. It is pertinent to note that the Regional Director, CLB (representing the Central Govt. to whom notice is statutorily required to be issued), appearing through counsel, contended that the ratio fixed under the scheme of amalgamation was not fair to the shareholders of M & M, considering the very bad financial position of ITCI. The Central Govt., in the counter-affidavit in this court, has not controverter this stand. The official liquidator, on the report of M/s. Batliboi & Purohit, had made a note that as per the terms of the scheme, for every 3 shares held by ITCI, M & M would issue 2 new shares. According to the official liquidator, the shareholders of ITCI have a chance to earn some returns. Different view may be held about the exchange ratio, but they cannot be suggestive of financial non-viability of the amalgamating company. A question arose in Atlas Cycle Industries Ltd. v. Union of India, C.W.P. 754 of 1979 decide on March 13, 1980, by a Division Bench of this court : [1983]141ITR168(Delhi) . There, the scheme of amalgamation provided for the issue of shares by the amalgamated company to the shareholders of the amalgamating company is the ratio of 1 : 1. It was held that 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 could not possibly be suggested that the amalgamating company was a financially viable unit. The financial viability has to be judged having regard to its profitability, its profits and loss account, balance-sheet and other relevant factors such as liquidity and solvency. The exchange ratio is a neutral factor and could not form any relevant material for basing the impugned recommendations and orders of the Central Govt.

24. The fourth reason is the statement in the petition before the Bombay High Court for sanctioning the scheme of amalgamation. The statement made by ITCI is that 'although the company has sustained a loss, it is in a sound financial position and its assets are more than sufficient to meet its liabilities'. It may be mentioned here that this statement by ITCI was based on the latest audited accounts for the year ended 30th September, 1976, referred to in the same paragraph. The statement is thus torn out of the context for the purpose of considering the financial non-viability immediately before the date of amalgamation, i.e., as on 31st October, 1977. It is also stated in that petition that for the financial year 1976-77, the working of ITCI was not satisfactory again. The audited accounts of ITCI were not ready till then. The statement in relation to the assets is made before the company judge to enable it to appreciate the position of the creditors of ITCI and other parties. The Bombay High Court in sanctioning the scheme of amalgamation is concerned to see that the assets of ITCI were more than sufficient to meet its liabilities so that when a winding-up order context that the position of assets was explained by ITCI. It was further stated that the scheme of amalgamation would not affect the creditors of ITCI as under the scheme M & M would take over all the liabilities of ITCI along with its assets. The assets of ITCI being more than sufficient to meet its liabilities may be factually correct as on September 30, 1976, but the inference drawn from it for judging the financial viability immediately before the amalgamation is patently incorrect. The Central Govt. as well as the Specified Authority was required to come to the conclusion that ITCI, immediately before its amalgamation with M & M, was not financially viable. The criteria of the financial viability is liquidity, i.e., net working capital. The record shows that as on 31st October, 1977, ITCI's current liabilities exceeded its current assets by Rs. 622 lakhs. Viewed from the point of liquidity, the statutory authorities could not draw the 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.

25. The sixth reason (we will deal with the fifth reason later) advanced is based on the close link of ITCI with M & M. It is stated that to determine whether an amalgamating company is non-viable, the close link with the amalgamated company and the financial assistance which it got and would have continued to get from the amalgamated company is a relevant factor. A conclusion is drawn that the amalgamating company is financially viable. The close link of the two (divorced from the financial assistance) by itself is not a material consideration. The close link between the two only brings out the possibility of the financial assistance from M & M flowing to ITCI without amalgamation. But on the record there is no basis for the assumption that because of close link ITCI would have in any event continued to get financial assistance from M & M flowing to ITCI without amalgamation. But on the record there is no basis for the assumption that because of close link ITCI would have in any event continued to get financial assistance from M & M. There are statutory constraints imposed by s. 370 of the Companies Act, 1956, restricting the financial assistance which one body corporate can give to another. Under the legal constraints of s. 370, M & M at the relevant time or in the foreseeable future could not have advance loans more than Rs. 50 lakhs to any party, taking into account loans and advances already made by M & M to various parties aggregating to Rs. 70 lakhs. The excess borrowings, i.e., in excess of the Tandon Committee norms, of M & M from the banks were of the order of Rs. 127 lakhs as shown in the record of memorandum of discussions at the relevant time. A consortium meeting was held on October 28, 1977, by the four bankers, namely, Grindlays Bank Ltd., Bank of Baroda, Union Bank of India and Central Bank of India, to review the financial arrangements with M & M. At the last meeting, M & M's borrowings worked out to Rs. 127 lakhs which was agreed to be repaid within 5 years. The consortium noticed that excess borrowings had come down by about Rs. 42 lakhs. M & M was asked to give a revised projection for the year 1977-78. Reference was also made to the Tandon Committee's Report for the excess borrowings and the account being monitored on a quarterly basis. The financial position of M & M would have continued to give financial assistance to ITCI. The immediate requirement of ITCI was of the order of Rs. 5 to 6 crores. 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 borrowings of M & M form the banks in excess of the Tandon Committee norms.

26. The rehabilitation programme submitted envisaged a repayment to the overdue creditors of ITCI to the extent of Rs. 5 crores, restricting the bank borrowing as per the Tandon Committee norms, which exceeded the guidelines prior to the amalgamation and the capital expenditure on fixed assets for replacement of machinery and buildings of the amalgamated company to the extent of Rs. 4 crores. The undertaking was revived and earned a cash profit of Rs. 3.9 crores in the subsequent years. From this the inference is drawn in the fifth reason of the Specified Authority as well as the Central Govt. that it suggested that the undertaking is not 'basically non-viable' but required a temporary dose of liquidity to bring it back to health. The Specified Authority as well as the Central Govt. have rightly come to the conclusion that ITCI is not 'basically non-viable'. 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. If an undertaking is 'basically non-viable', then such a sick unit has necessarily to face a closure. An undertaking amy be 'basically viable', but may not be 'financially viable'. The undertaking despite its basic viability may not be in a position to raise or generate additional resources, the financial wherewithal to continue the business at an economical level. It may not be in a position to increase production due to lack of finance. The Central Govt. and the Specified Authority were required by the mandate of s. 72A to see whether ITCI immediately before its amalgamation had its own resources to continue to carry on business or was it in a position to obtain financial resources from other avenues to continue the business. As noticed earlier, while dealing with the first reason, ITCI's financial position immediately before the amalgamation was shown by the counsel for the petitioner at an aggregate of an amount of loans and liabilities and provision of Rs. 2,131 lakhs as against the resources of Rs. 1,374 lakhs. There were pressing demands of creditors of ITCI. All avenues for obtaining further finances were closed to ITCI as noticed above. From which source the 'required temporary dose of liquidity to bring it back to health' could have been obtained is a mystery on the record. None has been revealed by the Specified Authority or the Central Govt. in the impugned orders. No attempt has been made to spell it out in the counter-affidavit in this court.

27. 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 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 and 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.

28. One of the two conditions under s. 72A of the Act was clearly fulfillled, 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 a 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. If the court comes to the conclusion that no reasonable authority would gave passed the impugned orders on the material before it, then the same is liable to be struck down (see Rohtas Industries Ltd. v. S. D. Agarwal : [1969]3SCR108 ). In Hochtief Gammon v. State of Orissa, : (1975)IILLJ418SC , the interference by courts is held justified when the Executive have taken into consideration wholly irrelevant or extraneous considerations. It was ruled (p. 2234) :

'The Executive have to reach their decisions by taking into account relevant considerations. They should not refuse to consider relevant matter nor they should take into account wholly irrelevant or extraneous considerations. They should not misdirect themselves on a point of law. Only such a decision will be lawful. The courts have power to see that the Executive act lawfully. It is no answer to the exercise of that power to say that the Executive acted bona fide nor that they have bestowed painstaking consideration. They cannot avoid scrutiny by courts by failing to give reasons. If they give reasons and they are not good reasons, the court can direct them to reconsider the matter in the light of relevant matters, though the propriety, adequacy or satisfactory character of those reasons may not be open to judicial scrutiny. Even if the Executive considers it inexpedient to exercise their powers they should state their reasons and there must be material to show that they have considered all the relevant facts.'

29. In Shalini Soni v. Union of India, : 1980CriLJ1487 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 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.

30. 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 and to dispose of the same within a period of six months from today 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. Counsel's fee Rs. 1,000.


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