INDIAN SHAVING PRODUCTS LTD.

BOARD OF INDUSTRIAL AND FINANCIAL

RECONSTRUCTIONS & ANOTHER

JANUARY 3, 1996

[S.P. BHARUCHA AND S. SAGHIR AHMED, JJ.j

Income Tax Acr 196I : Section 72A--Accumulated loss and the unabsorbed depre<.:iation of the a111alglunaling cn1npany shall be deenied to

be the loss or allo1'vance for depreciation nf the an1algan1ated con1pany.

Sick Industrial Companies (Special Provisions) Act I91i5-Sectimis 3(0), I7, iii and 32(2)-Reference to BIFR for declaration as a Sick Cnn1pany and sanction for a111algtunation--Sanctinn granted under Section I Ii-Refusal of benefits under Section 72A of the Income Tax Act--Held Requirenzentsfor Sanction under Section 1 Rare sirnilar to declaration under D Sel'tion 12A of the lncrnne Tt.1x Act-Hence, sanction of anralgamatinn also implies grant of benefits of Section 72A of the Income Tax Act.

According to the Appellants, Sharp Edge Ltd, was its subsidiary company which manufactured carbon steel blades. As on 31st March 1989, the accumulated loss of Sharp Edge amounted to Rs. 298 Iakhs against its paid up capital of Rs. 212 Iakhs. Sharp Edge having become a Sick Industrial Company, a reference was made to the Board of Industrial and Financial Reconstruction (BIFR) under section 15(8) of the Sick Industrial Companies (Special Provisions) Act 1985 (hereinafter referred to as the 'Said Act').

BIFR discussed the amalgamation of Sharp Edge with the appellant company and noted that it was not possible for sharp Edge to make its net worth positive on its own and appointed ICICI as he operating agency to examine the financial viability of Sharp Edge, and also to prepare a scheme for rehabilitation. Subsequently, amalgamation was allowed by BIFR but without granting any benefits of Section 72A of the Income Tax Act.

A request to reconsider its order was made to BIFR by the appellants and the same was rejected on the grounds that sharp Edge was H

A a closely held company and its liabilities were mainly in respect of the appellants which was a strong base company; and that sharp Edge had been showing a cash profit for the last three years and its net worth had since become positive.

On an appeal preferred by the appellants, the appellate authority B upheld the order of BIFR.

Hence, this appeal.

Allowing the appeal, this Court

HELD : 1.1. For the purposes of according sanction to a scheme of amalgamation of a Sick Industrial Undertaking with any other Company under Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985, BIFR has to be satisfied that the amalgamating company is not financially viable, which is the effect of Section 3 (0) of the said Act, and that the amalgamation is necessary or expedient in the public interest, which is the effect of Section 17 and 18 of the said Act read together. [40-E]

1.2. Sanction of a scheme of amalgamation under Section 18 of the said Act necessarily implies tlilat the requirements of section 72A Act of E the Income Tax Act have been met and BIFR must exercise the power conferred upon it by Section 32(2) of the said Act and make the declaration contemplated by section 72A of the Income Tax Act.

Commissioner of Income Tax, Bombay and Ors. v. Mahindra and Mahindra Ltd. and Ors., 144, ITR. 225, referred to. [40-F-G]

1.3. The conditions for !>anctioning a scheme under Section 18 of the said Act being the same as those required for a declaration under Section 72A of the Income Tm< Act, BIFR could not have sanctioned the scheme of amalgamation of Sharp Edge with the appellant but declined to make the declaration under Section 72A of the Income Tax Act with G regard to that amalgamation. [ 40-G-H]

CIVIL APPELLATE JURISDICTION Civil Appeal No. 5638 of 1994.

From the Judgment and Order dated 20.12.93 of the Appellate Author- H ity for Industrial and Financial Reconstruction, New Delhi in Appeal No. 51

-..;

INDIAN SHAVING PRODucrs LTD. 1: BO. OF JNDL. & FINANCIAL RECONSTRUCTIONS [BHARUCHA, J.] 33

of 1992.

R.K.P. Shankar Dass and Ashok Grover for the Appellant.

The Judgment of the Court was delivered by. :"

BHARUCHA, J. This appeal by special leave impugns an order of the Appellate Authority for Industrial & Financial Reconstruction. The impugned order upheld the order of the Board for Industrial and Financial Reconstruction, established under the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter called the said Act, by which the benefit of the provisions of section 72A of the Income Tax Act, 1961, was not extend to the appellant upon the amalgamation of Sharp Edge Limited with it.

Notice upon this appeal was issued to the Central Board of Direct Taxes and it was duly served. It has not entered appearance.

Section 72A of the Income Tax Act states "That whether there has been an amalgamation of a company owning an industrial undertaking with another company and the central Government, on the recommendation of the specified authority, is satisfied that the following conditions are fulfilled, namely :

"(a) the amalgamation company was not, immediately before such E amalgamation, financially viable by reason of its liabilities, losses and other relevant factors;

(b) the amalgamation was in the public interest; and

(c) such other conditions as the Central Government may, by F notification in the Official Gazette, specify, to ensure that the benefit under this section is restricted to amalgamation 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, G thereupon, notwithstanding anything contained in any other provisions 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 H

SUPREME COURT REPORTS

[1996] I S.C.R.

A .<\ct relating to set off and carry fonvard of Jos...; and a!kl\vance for depreciation shall apply accordingly .............. ".

"Specified authority" has been defined for the purposes of Section 72A to 111can such authority as the Central (iovcrnnent 1night, by notification in the Official Gazette. specify.

The said Act \Vas cnae-ted to nH1ke. in the public interest, special provisions \Vi th u vic\V to securing the tincly detection of sick and potentially :')ick con1panics o\vning industrial unde1takings, the speedy dete1n1inati'on by a board of experts of the preventive. ameliorative, ren1edial nnd other 1ncasures \vhich \Vere needed to be taki::n \Vi th respect to such co1npanies and the expeditious enforcement thereof. Section 4 constitutes the Board for Industrial and Financial Reconstruction (BIFR)

0 and Section 5 constitutes the Appellate Authority. Chapter III deals with references. inquiries and schemes. rhc provisions of Section 15(1) stat.:: that where an industrial co1npany has bcco1ne a sick industrial i.:on1pany, its Board of Directors shall \vithin sixty D days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has beco1nc a sick industrial co1npany, rnake a reference to the BIFR for detennination of the measures which should be adopted with respect to the company. A sick industrial company" was defined by Section 3(0) to mean

E an industrial co1npany \Vhich bad at the end of any financial year accumulated losses equal to or exceeding it:s enire net w011h and had also suffered cash losses in such financial year and the financial year immediately preceding such financial year. This definition was substituted in 1994 so that it no\v means an industrial compny (being a company registered for not less than five years) which has at the end of any financial year accumulated losses F equal to or exceeding its entire net worth. Section 16 requires the BIFR to n1akc such inquiry as it may deem fit for dctennining whether any industrial company has bcco1nc a sick industrial company, inter alia, upon receipt of a reference with respect to such company under Section 15. The BIFR may, for the disposal of such inquiry. require an operating agency to enquire into G and make a report with respect to such matters as the BIFR may specify. The inquiry is required to be completed \Vi thin sixty days from its commencement and an inquiry is deemed to have commenced upon receipt by the BIFR of a reference. Section 17 so far as is relevant reads thus :

"17. Powers of Board to make suitable order on the completion of inquiry -

I\()].\\. .... ,\I\(' rR1 ll1\ Cf" u Ll ' BD. ( lf i,;,[)I. ,!(:IT\,\ \.Cl-\L Rr; n l\STRl CTI! l;\..~ I B\I,.\!'{ '( ll \, I, I J ~

( j) 1 r :11 tcr inaking a;1 i:Hjl!iry L11ldcr Section 16, the Board is :-.atifi..:J J\ that a con1pany hJs beco1nc a sick industrial con1pany. the BllnrJ sha:I. after con'.idering all the relevant facts anJ circun1stance~ of the case. dc..:idc. as soo11 ;.1:-. n1ny be by order in V.Titing, \Vhether it is practicable for the con1pany to n1akc its net \\'Orth exceed the accu1nulatec! lo:-.S('S \vithin a rcason;,_ib\c tin1c.

(2) lf tile Board d..::cidcs u11dCr Sub-'scction (I) that it is practicable for a sick ir:du:-.trial conirany to n1akc its net \vorth e;..cccd the a'ccun1ul<.ned lo:..scs \\'ithin a rcason:tble tin1c. the Board. Shall, by order in \vriting anJ subject to such rcstrictinns or conditions as inay

be specified in the order. give such tin1c o the company sit 1nay C dcc1n fit to 1nakc its net worth cxccc:.i the accu1nulatcd loscs.

(3) If the Board decides under sub-section (I) that it is not

pn.ictiablc for a sick industrial company to n1akc its net \V01th exceed the accun1ulated losses \Vithin a reasonable time and that it is necessary or expedient in the public interest to adopt all or any D of the n1easurcs specified in Section 18 in relation to the said con1pany lt n1ay. as soon as 1nay be, by order in wiiting, direct any npcrating agency specified in the order to prepare, having regard to such guidelines as may be specified in the order, a scheme providing for such incasures in relation to such_ company.

Section 18 Slates that where an order has been made under Section 17(3) in , relation to any sick industrial company, the operating agency specified in the order shall prepare a scheme with respect to such company providing for the measures set out therein. The following measure is referredw in clause (c)(i), namely, "the amalgamation of the sick industrial company with any other company". The scheme prepared by the operating agency is required to be examined by the BIFR and its copies sent with such modifications, if any, as may have been made by the BIFR to the sick industrial company. the operating agency and to the other company concerned in the proposed amalgamation and, after consideration of objections, the BIFR is required to sanction the scheme, which would come into force on such dated as it might specify. Section 32(2) reads :

"Where there has been under any scheme under this Act an amalgamation of a sick industrial company with another company,

the provisions of Section 72-A of the Income Tax Act, 1961 (43 of H

1961), shall, subject to the modifications that the subject to the modifications that the power of the Central Government under that section may be exercised by the Board without any recommendation, by the specified authority referred to in that section, apply in relation to such amalgamation as they apply in relation to the amalgamation of a company owning an industrial undertaking with another company.

Sharp Edge Ltd. was incorporated in 1956 to manufacture carbon steel blades. Its controlling interest was held by different companies at different times. From August 1986 onwards the shareholding was taken over by the appellant. Subsequent to 1983 Sharp Edge was not doing well. As on 31st March, 1989, its accumulated loss amounted to Rs. 298 lakhs against its paid up capital of Rs. 212 lakhs. A reference was made to the BIFR under Section 15(8) of the said Act, Sharp Edge having become as a sick industrial company. On 9th July, 1991, the amalgamation of Sharp Edge with the appellant company was dismissed by the BIFR. After considering all the submissions made to it, the BIFR noted that it was not possible for Sharp Edge to make its net worth positive on its own and it was in the public interest to take such measures as might be feasible for its rehabilitation. Accordingly, in exercise of the powers under Section 17(3) of the said Act, ICICI was appointed as the operating agency with the task of examining the viability of Sharp Edge and for preparing a scheme to rehabilitate it. On 13th November, 1991, the BIFR observed that Sharp Edge's performance had significantly improved during the last two years mainly because of the management and financial support from the appellant and its net worth had become positive. The appellant was also doing quite well and had the necessary financial strength to rehabilitate its closely held subsidiary (Sharp Edge) without further financial reliefs and concessions. The BIFR then said : "In view of the consensus among the concerned parties for the long term benefits to the sick company flowing from its merger with the parent company, the Bench acceded to the request of the company to allow the amalgamation of the two companies but without granting any benefits G under section 72A of the Income Tax Act." The operating agency was, accordingly, directed to sul>mit a revised draft rehabilitation-cum-merger scheme.

On 2nd April, 1992, the appellant wrote to the BIFR and submitted that H it should reconsider the request for the benefit of the provisions of Section

INDIAN SHAVING PRODUCTS LTD. 1: BD. OF INDL. & FINANCIAL RECONSTRUCTIONS [BHARUCHA .. I.I 37

72A of the Income Tax Act favourably, for the reasons stated by it. On 23rd April, I 992, the BIFR considered the material on record and observed that no objection was received to the notified rehabilitation scheme and that the required consents and approvals of all the concerned parties to the said scheme had been obtained. It said : "The company's request for grant of benefit under Section 72A of the Income Tax Act, was not considered justified by the Bench as it was a closely held company. Its liabilities were mainly in respect of its parent company, namely, Indian Shavings Products Ltd. (ISPL)., it had been showing a cash profit for the last 3 years and its net worth had since become positive, as also ISPL was a strong base company. The BIFR sanctioned the scheme, to come into force with immediate effect. Under the terms of the scheme the amalgamation took effect on !st April, 1991.

Against the order of the BIFR declining to grant the benefit of a Section 72A of the Income Tax Act to the amalgamation, the appellant preferred an appeal. The appellate authority noted that the BIFR had given five reasons for declining the benefit under Section 72A, namely, (1) that Sharp Edge was a closely held company; (2) its liabilities were mainly in respei; t of the appellant; (3) Sharp Edge had been showing a cash profit for the last three years; (4) its net worth had since become positive; and (5) the appellant was a strong base company. In relation to these reasons, the appellate authority said:

"None of these factors can be consfdered totally irrelevant or extraneous except possibly the fact that both these companies are closely companies and also the fact that all the liabilities of the sick industrial company are in respect of its parent company namely, the amalgamating company, the ISPL. It may also be stated that, as on the date of amalgamation, that is, on April 1, 1991, the sick industrial c.ompany's net worth had not yet become positive."

The appellate authority concluded its order thus :

"Financial viability or non-viability is determined by the three G facturs of profitability, liquidity and solvency. It has been shown above that the sick company had generated cash profits in the preceding two years prior to the date of amalgamation, i.e., prior to I .4.9 I, and thus was in a stage of incipient sickness and potentially financially viable. This was thus the basis for the acceptance and H

~Ll'kl:.\!E Ull 'lff HEPORTS f.19%1 l S.C.R.

s ~. ndion n'.· tht:: n:habiiitauon sLhcm..:.

27. Public intl'rct has 1~1 be j11dgc<l !rom a t.liffcrent stand-point. It has to be examined whether. if this income-tax benefit were not to be granted, the rcbahilitation-n1111-mcrger scheme would succeed or fail and if. in the event of the latter, the economic and social costs to the community would be such as to warrant the gram of the benefit. On the facts of the case, with both the companies having generated cash profits immediately p1:eceding amalgamatinn, it can

be safely said that the rchabilitati0n scheme would ccnainly go through,_ even without the grant of this benefit and that such a grant, if made, would be at the cosr of the public exchequer and be thus altogether unwarranted and undeserved. It was not the intention of the legislature while confen'ing this discretionary power ori the BIFR/AAIFR, that it should be used so as to grant unintended benefits to profit making companies. Such a exercise of discretion would be unreasonable and would call for judicial inte1ferencc. This

i~ not the case here. The BIFR has wisely anJ properly exercised this discretion in not granting this benefit, as part of the rehabilitation exercise. Its order, in this regard, docs not, therefore call for any interference and has to be affinned, which we accordingly do.

28. The appeal, for all the above reasons, does not have any merit and is, therefore, dismissed as such.

Section 72A of the Income Tax Act was considere<l by this Court in Commissioner of Income-Tax, Bombay am/ Ors. v. Mal1indra u11d Mahi11dm Ltd. and Ors., 144 l.T.R. 225. This case arose prior to the coming into force F of che said Act, that is to say, it was a case when sanction under Section 72A

was required to be given by the Central Government upon the recommendation of the specified authority thereunder. Learned counsel for the appellant relied upon the following passage in the Judgment :

"Before undertaking a scrutiny of these reasons for ultimately deciding whether the impugned conclusion of the specified authority and the Central Government is liable to be interfered with or not it will be useful to indicate briefly the object with which this new provision of s.72A was introduced in the Act as it will throw light on what was the mischief or situation that was intended to be remedied by its introduction as also the true concept of financial

IND!AN SHAVING PRODUCTS LTD. 1: BD. Of' lNlJL. &. I l~:.\NCIAL RECONSTRUCT/fll\S IP.HARlXTIA, J.I 39

non-vi; ibiliiy. From the Budget speech of the Finance Minister. the ,\ Notes on Ciauses of the Finance (No. 2) Bill of 1977 and the 1ncn101audu1n cxplJining the provisions of the s~1id Bili it \vt-ll appear clear that sickness among industrial u1H .. 1Lrtakings \Vas rt:> gaiJcd as a n1atlcr of grnve national concern inas111uch as closurL' of any sizable 111anufacluring unit in any industry c?1tailc<l social costs in te1n1s of loss of produ:.-:tion an<l uncn1ploy1ncnt as al s() \Vastc of valuable capital assets, ::in<l experience had sho\vn tln1t taki.ng oVcr of such Sick units by Govcrn1nent \Vas .not _always ~· ..... 11 i-; factory or er:ono1nical solution: it \\/'.JS felt that a 111orc effective nicthod \Vouk.J be to facil iu1tc an1algan1ation of sick industrial units \Vi th sound.qncs by providing incentives anJ reJ11(•''iilg i1npedi111cnts in the WJ.)r of 'iuch an1algcunation \vlich \vould not 1nc, cly relieve the Govt. of

uncconon1ic~1l burrlcn of 1.aking ovc~· <:111J runiing sick units but save the G?vt. l"ro1T1 social ::osts in tcnns of loss ol productiorv and

U~1en1pJoyme11t. W; th <; UCh objc:.:t1 \'C in ViC\\I, in order to facilitate the 1nerger of sick indutri~:: uni ls 'Vllh sound lJnes and as and. by: way [) of offering an incCHlivc in lhat behalf. s. 72A \vas introduced in.thC Act, \vhcreunder, by a chcn1ing fiction. th~ accu1nulated loss or unabsorbed depreciation of the a1nalga111~1l!ng co1npany i_s treated to be a loss or, as the ca5"c n1ay be, allov. ance fo· dcpreciriiion of the

nnalga111ated co1npa11v in the previous year iay.:h!i.h the a1'nalgan1~1tion \Vas effected; but the :.n11algan1atcd co1npany although a Successor in interest, would be cntit!cJ to cany for\vard an<l set otJ the accumulated IOss and unabsorbd depreciation of the amagamating company on.ly where the a1na1gan1ating con1pnny \Vas not, immedi ately before such amalgamation, financially. viable ..tn<l the amaJg;1- 1nation \Vas in public interest. The expression "financial non

viability" has not been defined in the Act but the Finance Minister's speech, the Notes on Clauses of the Rill and the Memorandum explaining the prov; sions thereof :nakc it clear that the financial non-viability of an underta]<ing has been equated with the 'sickness' of such undertaking and obviously in the context of its revival by a sound undertaking the sickness must be of a tcniporary character ; ind not any basic or pcnnanent sickness.· .L\n 1indCrtakiµg which is basically or potc11tially non-viable wiH ordinarily be incapable of revival rind \vould face a closure; in other \\'Ctds. the financial !ll1ll viUbility spoken of by the section n1ust .refer t.o sickness brbught ;,:.bnut by te.mporary adverse financial circumstances tlat disables the

. [:

unit to stand and work on its own. This is also made clear by the provision contained in cl. (a) of sub-s. (!) which states that the financial non-viability of tile amalgamating company has to be judged by referepce to "its liabilities, losses and other relevant

facts".

Under Section 72 of the Income Tax Act, to give to the amalgamated company the benefit of tbe loss or, as the case may be, allowance for depreciation of the amalgamating company for the previous year in which the amalgamation was effected for the purposes of the Income Tax Act, the Central Government must, upon the recommendation of the specified authority, be satisfied that the amalgamating company was not, immediately before the amalgamation, financially viable by reason of its liabilities, losses and other relevant factors, and that the amalgamation was in the public interest.

By reason of Section 32(2) of the said Act, where there has been under any scheme thereunder an amalgamation of a sick industrial. company with D another company, the provisions of Section 72A of the Income Tax Act shall apply in relation to suyh amalgamation, subject to this modification that the power of the Central Government is to be exercised by the BIFR without the necessity of a recommendation by the specified authority mentioned in Section 72A of the Income Tax Act. This is because, for the purposes of

according sanction to a scheme of amalgamation of a sick industrial undertaking with any other company under Section 18 of the said Act, the BIFR has to be satisfied that the amalgamating company is not financially viable, which is the effect of Section 3(o) of the said Act, and that the amalgamation is necessary or expedient in the public interest, which is the effect of Sections 17 and 18 of the said Act read together. Sanction of a scheme of amalgamation under Section 18 of the said Act necessarily implies that the requirements of Section 72A of the Income Tax Act have been met and the BIFR must exercise the power conferred upon it by Section 32(2) of the said Act and make the declaration contemplated by Section 72A of the Income Tax Act.

The conditions for sanctioning a scheme under Section 18 of the said Act being the same as those required for a declaration under Section 72A of the Income Tax Act, the BIFR could not have sanctioned the scheme of amalgamation of Sharp Edge with the appellant but declined to make the declaration under Section 72A of the Income Tax Act with regard to that amalgamation.

INDIAN SHAVING PRODUCTS LTD. v. BD. OFJNDL. & FINANCIAL RECONSTRUCTIONS [BHARUCHA. J.] 4 l

The appeal is allowed. The order under appeal as also the order of the A BIFR declining to make a declaration under Section 72A of the Income Tax Act in respect of the 1malgamation of Sharp Edge Ltd. with the appellant are set aside and the BIFR is directed to make such declaration.

No order as to costs.

M.K.

Appeal allowed.