COMMISSIONER OF INCOME TAX, BOMBAY AND OTHERS v. MAHINDRA AND MAHINDRA LIMITED & ORS

Citation: [1983] 3 S.C.R. 773

Court: Supreme Court of India

Bench: V.D. TULZAPURKAR, D.P. MADON

Case summary

- The aforesaid recommendation of the Specified Authority and the Central Government's decision based thereon were challenged by M & M by filing a writ petition in the Delhi High Court, the challenge was principally met by raising a· contention ·that the Central Government....

Judgment text

• COMMISSIONER OF INCOME TAX, BOMBAY AND OTHERS MAHINDRA AND MAHINDRA LIMITED & ORS. ,. ,, Septemb~r 2, 1983 [V. D. TULZAPURKAR D. P. MADON; JJ. ] Judicial Review-Courts' power to interefere and review administrative or executive decisions and actions-Conditions precedent. ' .. Loss-Accunwlated loss and unabs(Jrbed depreciation-Conditions requisite for carryingfo~ward and setting off, by an amalgan:zating company o(s~ch lo~~7 Whether the recommendation of a specified authority ond the Centr~I Government's deCision, thereon allowing the amalga1nated company lo carryforward and set off losses is open to judicial review-lricome Tax Act, 1961 section 72A as introduced by Finan~e Act l\'o. 2 of 1977 scope of.

"- Section 72A of the Incon1e Tax Act, 1961 enables an An1alga1nated· Con1pany to carry forward and set off accumulated Joss -·- On April 27, 1978, M & M, moved an application under Section 72A of the Income Tax, 1961 Act for the grant of relief of the requisite declaration from file Central Government which was rece. ived by the Central Govcrrnment on Ma"y 3of1978. As the amalgamation had been· effected from November 1, 1977 M & M filed the said . application so as to . ;! nable the authorities to investi~ eate . the requisite factual pre~conditions for the grant of the. relief and to arrive at a decision in order to enable. it to file its retu. rn of income for the assessment -;" year 1979-80 (the relevant previous year being 1. 1 l. l977 to 31. 10. 1978 dnrin& whihh the amalgamation . was effected) alongwith the requisite certificate of the Specified Authority before the due date June 30, 1979.

Later M & M also furnished the latest audited financial position _of fTCI together with other particulars as desired. By a notification No. S 0. 710(E) dated 11. 10. 1977 the Central Government constituted and ·notified the Specified Authority consisting QfrespondCnt·Nos. 6 to 10 under S. 72A of the Act and at the suggestion or"the Specified Authority the Central Government also set up a ·separate Screening Committee of experts to investigate as to wh. ether the requisite statutory condi- ' tions were prCsent or not. After considering the particulars furnished _in the application made by M & M, further correspondence and evidence produced in that. be_h Government's order, comprising 'three aspects which constitute the substratum of the reasoning behind· the ·conclusion, will show that both 'had misdirected themselves in law by adopting a wrong . appro·ach and proceeding on. a w. roQg assumption about the_possibi!

ity of financial assistance from M & M which did not exist either in fact . 6. t. t. v. MAH! NbRA AND MAHINDRA (Tulzapurkar, J. ) 193 or in law. that the undertaking of ITCI had incurred huge losses in the relevant years w. as admitted but that has been explained away by both by observing that 'it merely created a temporary problem of liquidity and did not mean that the undertaking was basically nonviable' (vide reason (v) of the Specified Authority)-clearly a wrong approach, for the section does not require the undertaking to be basically non-viable but merely financially non-viable which,.. as stated earlier, must of necessity be of a temporary character. Further, the 'close link' between· the two companies referred to by both, divorced from financial assistance, would be an irrelevant factor and on the prospect or possibility offinancial assistance from M & M a wrong assumption in fact and law had been made by the Specified Authority and the Central Governmeni.

Indisputably at the relevant . ; time having regard to the provisions of s. 370 of the Companies Act, 1956 the maximum limit up to which M & M could lend and advance was Rs. 120 lakhs and in view of the advances already made to ·various parties to the tune of Rs. 70 lakhs it could have advanced only Rs. 50 lakhs to ITCI as against its requirement of over ten times that amount namely, Rs. 5 crores and odd ; moreover any financial help in excess of Rs. 50 Jakhs would have visited M & M am! its directors or officers with penal consequences onder s. 371 of the Companies Act. These legal provisions were completely ignored and both the Specified Authority and the Central Government observed that the problem of temporary liquidity faced by ITC! could be solved by receiving a doze of liquidity from M & M. In fact, in the circumstances further financial assistance worth the name could be rendered by M & M to ITCI only after amalgamation.

It is thus clear that both of the Specified Authority as well as the Central ' ·Government had come to the impugned conclusion by wrongly equating financial non·viability with basic non-viability and in complete disregard of the provisions of ss. 370 and 371 of the Companies Act. Further the fact'that during the year 1977-78 following the amalgamation M & M took adequate steps for the revival of ITCI's undertaking by making repayments to its creditors to the tune of Rs.. 4 crores and by making investment of Rs. 0. 7 crore on maintenance, replacement of machinery etc. thereby enabl(ng the undertaking to earn a cash profit of Rs. 3. 9 crores could not be regarded as a factor showing the financial viability of ITCi prior to 1. 11. 1977 as was wrongly done by the Specified Authority and the Central Government. All this shows. that the impugned conclusion was the result of an entirely wrong approach being adopted. as regards the true concept of financial non-viability.

On the other hand, while stating the ·facts in the earlier part of our judgment we have pointed out that at the· material time namely, immediately before its amalgamation with M & M which took place on l. ll. 1977 ITCI, having regard to its financial position, was commercially insolvent and that all the three parameters of profitability, liquidity and solvency, by reference to which its sickness (financial non-viability) is required to be judged, showed negative figures. A n deserved to be quashed. The second contention -0f counsel for the appellants need not detain us very long, for, having regard to the materials that are available on record it will be difficult to accept it. In the first place in the writ petition respondent No. I, after referring to several facts which tended to show that the amalgamation was in the public intereilt, had specificalty averred that the amalgamation was in the public interest as required by cl. (b) of sub-s.

(I) of s, 72A (vide para 18B) and these averments were not specifically denied in the counteraflidavit where it was merely stated that reference was invited to the C. I. T. v. MAHINDRA AND MAHINDRA (Tu/zapurkar, J. ) 797 proceedings and order of the Specified Authority. But that apart, the admitted facts . are (a) ITCI was engaged in the manufacture bf agricultural tractors which have been declared as an essential commodity under the Essential Commodities Act, 1955, (b) the production had declined to 2000 tractors as against its licensed and installed capacity of 10,000 tractors during the period 1. 10. 76 to 31. 10. 1977, (c) because of its adverse financial position ii was facing the prospect 8 of immediate closure entailing social costs in terms of!

oss of production of an essential commodity and loss of employment to over 2000 workers employed by it, (d) the closure of ITCI would have rendered idle a large investment in productive capacity which would not have been in the national interest, and (e) the amalgamation forestalled the necessity for the State Government to take over that. unit and conduct it as a relief undertaking, thereby avoiding a heavy burden · falling on the public exchequer. Further, the proceedings of the Specified Authority, particularly the minutes of the Third Meeting . held on July 19, 1978 clearly show that it was in the light of the aforesaid factors that the Specified Authority expressed a clear opinion that it would be diflkult to take the view that the test of public interest was not met and the said opinion was substantially reiterated in its Thirteenth Meeting held on July 1. 1, 1979.

Therefore, the Specified Authority made a negative recommendation in its order dated May/June 2, 1980 that the condition specified in cl. (a) of sub-s. (! ) of s. 72A had not been fuliilled. It is also clear that it was on the basis of such recommendation that the Central Government passed its order where the relief was refused to M & M on the ground that the condition specified in cl. (a) of sub-s. (1) had· not been fulfilled and no other ground was given. In this view of ) the matter it is difficult to accept the contention that the High Court was wrong in pre. suming that the condition in cl. (b) had been fulfilled in the instant case. In our view, from the aforesaid material on record an irresistible inference arises that relief under s. 72A was refused by the Central Government to M & M only on the ground that candition specified in cl. (a) of sub-s. (! )had not been fulfilled.

It is also clear from the record that M & M had taken adequate steps for the revival of ITCI and had carried on the same business without any modification or reorganisation during the :felevant previous year. In the result we confirm the High Court's decision as also the ' several directions issued by it in the operative part of its order subject to one modification that the Specified Authority and the Central A Government should dispose of M & M's appli~ation within three months from the date hereof (instead of six months as directed by the High Court) in light of our Judgment. Assessment proceedings for the years 1979-80 and 1980-81 will proceed only after the declaration is issued by the Central Government and the Certificate is issued by the Specified Authority. We dismiss the appeal with costs in B favour of the contesting regpondent, namely, M & M. S. R. Appeal dismissed, ' . •