# [1983] 3 S.C.R. 773

- **Citation:** [1983] 3 S.C.R. 773
- **Court:** Supreme Court of India
- **Decided:** 1980-06-02
- **Bench:** V. D. Tulzapurkar D. P. Madon
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1983-3-s-c-r-773-8404
- **Pages:** 26

## Headnote

,.,,
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 carrying fo~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 <ind \.inabsorhed,
depreciation allowance ih. certain cases of amalgamation on the fulfiJment·of
thrC:e conditions viz; (a) that the ama~gan1ating company was, immediately
befofe its amalgimation financially non-viable by reason of its liabilities,
losses and other relevant factors; (b) that the amalgamation was in the public
ihterest; and (c) such other conditions. as central government may by notification in the official Gazette specify, to ensure that
tl~e benefit"under the section
is ·restricted to amalgamation which would facilita~e the .rehabilitation of
revival of the business of amalgamating company. The Central Government's
satisfaction in·respect of the three conditions is to be based on the recOinnlendation of the specified Authority, referred to in Section 72A." The Centra'i
Government then has to make a declaration to that effect and the effe<;t and.
consequence. of such a declaration is that notwithstanding anything contained
in any other provision ~f the Act, the accumulated loss and unabsorbed depreciation of amalgantating company is 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 amalg<i.mation was effected: For claiming the benefit of the
section, the certificate issued by the· specified authority undCr sub~section 2(ii)
Of sectiOn 72A to th~ effect tha·t adequate steps have been taken by the amalg~
nl~ted company for the r~h3.bilitation or revival of the ·business of the .imaigamatiiig·c.ompany" must be.submitteQ · alongWith the· return of th"C income for the
said assessment year .
Mahindra and Mahindra Ltd. was incorpor.ated uilder
the Indian
Con1panies Act 1913 and is thus duly registered under the Act cif 1956. lts:
share capitil.1 has been widely held, the prinCipal share holders beirig the pLibtic'·
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financial institutions to the extent of about 40% of its equity share capital; it
is engaged in the manufacture Of jeeps, motor vehicles etc. Olle M/s. International Tractor Company of India Ltd. incorporated on April 15, 1963 under
the Indian Companies Act, 1956 as a public company for the manufacture of
e~sential commodities like agricultural .. tractors was commercially insolvent at
the close of the financial year ending October 31, 1977. Therefore, proposal
for amalgamating ITC! with M & M was considered and approved by the
Boards of Directors of both the companies by two resolutions dated 4.10.76
since it was felt that it Would be advantageous to both if their operations could·
he rationalised for better and more efficient utilisatiOn of their existing
capacities and f~ciliti~s.
A scheme of Amalgamation effective from 1.11.1977 was prepared and
finalised and, after obtaining the approval of the Central Govetnmi.:nt to the
scheme of amalgamation as required under section 2J(2) of the Monopolies
and Restrictive Trade Practices Act, 1969, the Bombay High Court was moved
under sections 391 and 394 of the Companies Act, 1956 seeking its sanctioa
which was granted.
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 G

## Text

_Characters 0–39,903 of 71,954. This is a partial read: ask again with offset=39903 for what follows._

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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 carrying fo~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 <ind \.inabsorhed,
depreciation allowance ih. certain cases of amalgamation on the fulfiJment·of
thrC:e conditions viz; (a) that the ama~gan1ating company was, immediately
befofe its amalgimation financially non-viable by reason of its liabilities,
losses and other relevant factors; (b) that the amalgamation was in the public
ihterest; and (c) such other conditions. as central government may by notification in the official Gazette specify, to ensure that
tl~e benefit"under the section
is ·restricted to amalgamation which would facilita~e the .rehabilitation of
revival of the business of amalgamating company. The Central Government's
satisfaction in·respect of the three conditions is to be based on the recOinnlendation of the specified Authority, referred to in Section 72A." The Centra'i
Government then has to make a declaration to that effect and the effe<;t and.
consequence. of such a declaration is that notwithstanding anything contained
in any other provision ~f the Act, the accumulated loss and unabsorbed depreciation of amalgantating company is 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 amalg<i.mation was effected: For claiming the benefit of the
section, the certificate issued by the· specified authority undCr sub~section 2(ii)
Of sectiOn 72A to th~ effect tha·t adequate steps have been taken by the amalg~
nl~ted company for the r~h3.bilitation or revival of the ·business of the .imaigamatiiig·c.ompany" must be.submitteQ · alongWith the· return of th"C income for the
said assessment year .
Mahindra and Mahindra Ltd. was incorpor.ated uilder
the Indian
Con1panies Act 1913 and is thus duly registered under the Act cif 1956. lts:
share capitil.1 has been widely held, the prinCipal share holders beirig the pLibtic'·
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SUPRBME COURT REPORTS
U983i ~ s.c .i.
financial institutions to the extent of about 40% of its equity share capital; it
is engaged in the manufacture Of jeeps, motor vehicles etc. Olle M/s. International Tractor Company of India Ltd. incorporated on April 15, 1963 under
the Indian Companies Act, 1956 as a public company for the manufacture of
e~sential commodities like agricultural .. tractors was commercially insolvent at
the close of the financial year ending October 31, 1977. Therefore, proposal
for amalgamating ITC! with M & M was considered and approved by the
Boards of Directors of both the companies by two resolutions dated 4.10.76
since it was felt that it Would be advantageous to both if their operations could·
he rationalised for better and more efficient utilisatiOn of their existing
capacities and f~ciliti~s.
A scheme of Amalgamation effective from 1.11.1977 was prepared and
finalised and, after obtaining the approval of the Central Govetnmi.:nt to the
scheme of amalgamation as required under section 2J(2) of the Monopolies
and Restrictive Trade Practices Act, 1969, the Bombay High Court was moved
under sections 391 and 394 of the Companies Act, 1956 seeking its sanctioa
which was granted.
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 conditions 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<ilf and after hearing M & M the Specified Authority ·by its order
dated _fylay/June 2, 1980 recommended that the amalgamation of ITCI with
M & M did not satisfy the condition specified in cl. (a); in other words, it
~pined that aQlalgamating company was financially viable and not non-viable
immediately before its amalgamation with ~f & M. The Central Government,
adopting the reasons recorded .~Y the specified Aμthority for its opinion,
accepted the recommendation made by it and passed an order on December 1,
1980 ·whereby it refused to issue the declaration unde"r Section 72A of the,_ Act
to M&M.
The aforesaid reco1nmendation of the Specified Authority and the
Central Government's decision based thereop were challenged by M & M by
filing a writ petition in the ri!lhi High Court; the c'.1allenge was principally
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c.i.r. v. i.!Aii1NDRA Aiio MAHINDRA
775
met by raising a contention that the Central Government had refused the relief
to M & M on the basis of its subjective decision aboi.it th'e non-fulfilment of
the condition specified in cl. (a) of S. 72A (1) and for relevant and cogent
reasons and hence the decision could not be revie"wed or interferred with by
the: Court and with a view to show that both the Specfiied Authority and the
Central Government had consjdered all the relevant factors and that M & M
had -been fairly treated in the matter great reliance was placed on the minutes
of the several meetings held by the Specified Authority which were produced
before the Court. On a consideration of the entire material placed before it
aS well as the rival submissions made by counsel for. the parties the High Court
c~me to the conclusion that the view taken ·by the Specified Authority and th;
Central Government in the impugned orders was just not possible to be formed
and that no reasonable authority much less the Specified Authority or an expert
body of the Central Government could have reasonably come to the conclusion
that ITCl was
immediately before its amalgamation with M&M, financially
viable. The High Court quashed the impugned recorrimandation dated May,
June 2, 1980 of the Specified Authority as well as the Central Governments dcci·
sion dated December I, 1980 and directed (i) them to deal with M&M's application and dispose it of within a pedod of six months from the date of its order in
light of its judgment; (ii) the specified Authority to consider and issu~ the requi·
site statutory certificate under Section 72A (2)(ii) of the Act within one month
of the declaration made by the Central Government; and (iii) the Income Tax
Officer concerned to treat the statutory certificate when furnished by the M&M,
as if it was filed by M&M with its Return for the concerned year. Hence the
appeal by Special Leave
Dismissing the appeal, the Court
HELD : 1. By now, the parameters of the Court's power of judicial
review of administrative or executive action or decision and the grounds on
which the Collet can interfere with the same are well settled. If the action or
~ecision is p~rvcrs~ O';'- is such that no reasonable body of persons, properly
informed, could come to or has been arrived at by the authority misdirecting
itself by adopting a wrong approach or has been influenced by irrelevant
or extraneous matters, the Court would be justified 'in interfering with
the same. [786 F-H]
Bariu1n Chemicals Ltd. v. Company Law Board [1966] Supp. SCR 311;
Smt. Shafini Soni. etc, v. Union of India and Ors. etc. [1981] l SCR. 962
referred to.
2:1. The budget speech of the Finance Minister and the Notes on
clauses of the~Finance Bill (No. 2) of 1977 explaining the provision of the said
Bill, make it clear that sickness an1ong industrial und~rtakin&s was regarded
as a matter of grave national concern inasmuch :is closure of any sizable
manufacturing unit in any industry entailed social costs in terms of loss of
production and unemployment as also waste of valuable cai)ital assets and
experience had shown that taking _over of such sick units by GOvernmedt was
not always a satisfactory or economical solution; and that a more effectivq
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SUPREME COURT REPORTS
[1983) 3 s.c.k.
n1etho_d would be to' facilitate amalgamation of sick industrial units with sound
Ones by providing- incentives' and removing impediments in the way of such
amalgamation which would not merely relieve the Government of uneconomical·
burden· of taking over and running sick units but save the Governinent. frOm
S0Cial costs in terms of loss of production arid unemployment. With suCh
objective in view, in order to facilitate the ·merger of sick industrial units with
sOund ones and as and by way of offering an incentive in that behalf S. 72A.
Was introduced in the Act whereunder by a deeming fiction the accumulated.
IoS's or'unabsorbed depreciation of the amalgamating company is treated to be
a loss or, as the cas~ may be, allowance for depreciation of-the amalgamatedcompanY in the previous year in whiCh the amalgaffiation was effCcted;·but the
amalganiated ~ompany, although a successor in interest, would" be entitled to
carry forward and set-off the accumulated loss and unabsorbed depreciation
Of the amalgamating compJny only where the amalgamating company was riot,
immediately before such am1lgam1tion, financialiy viable and t.hc amalga·-
matiori~ was in public interes~.
[789 H, 790 A-EJ
•
2:2. The C<pression "financial non-viability•= has not been defined in
the Incoine Tax Act, 1961. However, the Finance J\1inister's speech, the notes
oO clauses of the Bi'll and the !\1emorandun1 explaining the provisio~s thereof
make· it clear that the financial non-viability of an undertaking has been equated ·with the 'sickness' of such undertaking a.1d Obviou:;Jy in the context of its
revival ·by a sound undertaking the sickiless nn1st be· of a temporary charUcter
and not any basic or permanent ·sickness. An undertaking which is basi~ally
or potentially non viable will ordinarily be incapable of revival and would face
a closure; in other words, tl1e financial non-viability spoken of by the section
must refer to sickness brought about by ten1porary adverse financial circumstances that disables the unit to stand and work on its own. This is. also made
clear by the provisions contained in cl. (a) of sub-sec. (1) which states that
the financial non-viability of the amalgamating~ company has to be judged by
reference to "its liabilities, losses and other relevant factors". [790 F-H]
· "· Moreover, since the expression is occurring in a taxing statute in the
context of amalgamation of companies it wlrl have to· be llndersiood in its
poplllar sense, that is to say, thC . sense or meaning that is attributed· tO it by
men of business, trade or commerce and by persons or institutions interested
in or dealing with companies. [790 H, 791 A)
-2:3. The true concept of finaricial non-viability as uhderstoo.d ,by 1ncn
of' business and commence and by financial institutions may b~ discerned.
While announcing its schen1e of merging sick ullits with healthy ones .(Finance
A.Ct~ 1977) Government of India had classified."those· units where the losses,
past ·and present, have eroded 50% of capital and reserves as sick". According
t6"t.he Reserve Bank of India, commercial ·banks consider a. u'?-it to be sick ''if
ifhaS incurred cash loss for one year and in their judgment is likely to continue
tO ·incur ca'ih losseS for the current year as well as the following year atid w_hi~~
has an imbalance in its financial structure, such as current ratio ·of Jess than
1:1 an wo·rseniflg debt-equity ratio (total outside liabilities tO net, worth)''.
While the coffimercial ba'.nks follow these ·criteria for . banking purpos·es, the
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C.I.T. v. MAH!NbRA AND MAHINDRA
77'1
State Bank ofI~dia 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. According to National Council of Applied Economic
R~Search, \.Vhere all the three parameters-profitability, liquidity and solvenciy'
Sliow positive figures the unit's financial viability will be sound; where ori.e, of
the three parameters shows a negative. figure the unit could be regarded·as
'tending towards sickness'; when two Of the three parameters show, negativ~
figures, it would be a case of 'incipient siCkn~ss' and when all the three para:M
1neters show negaiive figures the uriit is 'sick'. It is by reference to thes~
several tests or criteria adopted. by them that the questi.on has to be decided
whether a particular undertaking is financially non·viabie at ·a given point'
of time. [791 B-F, 792 A-BJ
3:1. A careful and close scrutiny of para 3 of the Central Government's
order comprising three aspects which constitute the substratum of the reasoD.lng
behind the .conclusion will show that both had misdirected themselves in law by
adopting a wrong approach and· proceeding on a wrong assumption about the
possibility of financial assista'nce from M & . M· which did not exist either in
fact or in law:--(i] Section 72A does not requiie the undertaking to be basically
non-viable, but merely financially non-viable which must of necessity be ofa
temporary character; (ii) further the ·close link' between the two compar,ies
referred to by both, divorced from financial assistance· would be an irrelevant·
factor; (iii) the provisions of Sections 370 and 371 o. the co1npanies Act, 1956
have been completed ignored. Indisputably at the relevant timt:_haVing regard
to the provisions of S. 370 of the Companies Act, 1956 the maximum lin1it up
to which M & M could Jend and· advance was· Rs.· 120 lakhs and in view of
the advances already made to various parties to the· tune of Rs. 70 lilkhs-it
could have advanced only Rs. 50 lakhs to lTCl as against its requitement of
over 'ten times that an1ount namely, Rs. 5 crores alld odd; moreover any finan-
- cial help in excess of Rs. 50 lakhs would have visited M & M and its directors
or officers with penal consequences under S. 371 of the Companies Act.; \iv) the
fact that during the· year 1977-78 following the ·amalgamation M & M t~ok
adequate steps for the revival of lTCl's undertaking by making repayments to
- its-creditors tO the tUne of Rs. 4 crores and by making investn1ent ol Rs. 0.7
crore on n1aintenance, re,-,lacement of machinery etc. therby enabling the
undertaking to eatn a·cash profit of R·s. 3.9 crores could not be regarded as a
factor showing the financial viability of ITCI prior to 1.11.1977 its 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 fiiiancial non-viability: on·- the
other hand, at the J?.aterial time namely, immediately before· its amalgamation
With M &'M which took place on 1.lf.1977 ITCI, having regard to its financial
position, was= commetcially insolvant and th_at all the three parameters of
.Pro~tability, iiquidity·and solvency, by refe-renceto which its sickness (financial
~?°:·viability) is required to be judged. showCd negative figures:
Adm_ittedly~
du,ting' the two years 1974·75 and'1976~77 it had nlade huge IoSses to the tune
ofRs'.·253 lakhs and Rs. 433 lakhs respectively and the noniinal pfofits'~f
~'.70 lakhs (of for"thai matter even Rs. 208 lakhs) earned by ii in 1975·76 ~_id
bot convert it into ·a prOfitable · concern· as on· 31st of Oc.tober~ 1977 .; ·(v) As
regards ·solv~ncy,. admittedly~·· cheqiiCs arid bill issued by ITCI had:bouflced;·
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SUPREME COURT REPORTS
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suppliers had stopped supply of raw materials, financial institutions had
stopped further monetary help and legal actions including winding up proceedings had been threatened. Further, the excess of liabilities (including loans)
over jhe assets (share capital plus rree reserves) was to the tune of Rs. 63 lakhs
and odd as on 31st October, 1977 and as such the entire share capital plus
free reserves had been eroded (and not merely 50% ·as per the test of Government of India) and the 'current ratio' was extremely strained at 40:60 (being
less than l:l as.required by the test adopted by commercial banks). In other
words according to the tests or criteria adopted by men of business or commerce and financial institutions ITCI, immediately before its amalgamation
with~ & M, was clearly and blatantly financially non-viable. In spite .of such
situation that obtained and which was brought ·to the notice of the Specified
Authority and the Central Government an almost perverse ·conclusion was
arrived at; at any rate it was a conclusion which no reasonable body of persons,
properly informed, could come to; (vi) The so. called statement at "para 14 of
ITCI's com Jany petition No. 789/77 co.uld not be given any significance at alJ;
(vii) Admittedly the poor performance and loss-es incurred by ITCI were due
to factor& such as mechanics of price control and the sluggishness in the market
over whic;h it had no control: (viii) The share eXchange ratio fixed under the
Amalgamation scheme does not passes the negative effect, but it would only
be a neutral factor. After all Several aspects and considerations weigh with
the share-holders of the companies concerned in the amalgamation while
approving the proposed shate exchange ratio and since in the instant case
all thC concerned share holders of M & M including the public .financial institutions had, with full knowledge of all the facts including the con1mercially
insolve~t position of IfCI, agreed to the ratio and which was not disturbed by
the l:ligh Court in spite of objection bein& raised by the Regional Director,
Company Law Board, it cannot be said tflat the exchange ratio so fixed ·
possesses probative value of negative character; and (ix) According to well
settled principles and· practice of Commercial Accounting, the concept of
"N~t Worth" of ITCI as per the bookS of account was negative on the date of
amalgamation and therefore when· the Specified Authority and the Central
GOvCrnment took into consideration the market value of the assets of the ITC!
as On the date of amalgamatio~ for
con1ing
to the conclusion that the
corDPany was a viable unit, they were clearly inftuenced by "irrelevant and.
extrlineous material vitiatina the impJgned c.onclusion.
[792 G-H, 793 A-H, 794 A-R 79; A-H, 796 A-E]
3:2. That the amalgamation was in pllblic ·interest iS
cl~ar. There is a
specific avennents made to it in the writ petition itself. ~But that_ apart, the
admitted.facts are .(a} ITCI was engaged in the manufacture of''.agricultu.ral
tractors which have been declared as an essential commodity undef: the Essen·
t"ial Commodities Act, 1955, (b) the production had declined to 2000 tractors
as against its licensed and installed capacity of 10,000 tractors during the
pCriod 1.10. 76 to.31.10.1977, (C)·because of its. adverse financial position it was
fi-cing the prospect of immediate closure entailing social costs in terms of loss
O't 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
1•ge investment in productive capacity which would not have been in the
nafi~nal interest, and (e) the amalgamation forestalled the necessity for-the
State Government to take over that unit and conduct it as a relie(~~ndertaking,
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C.J.T. v. MAHINDRA AND MftHINDRA (Tulzapurkar. J.)
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thereby avoiding a heavy burden fallina on the publiC cxc.hequer. In Fact
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
relevant previous year. [796 H, 797 A-G]
C1v1L APPELLATE JURJSDJCTJON : Civil Appeal No. 3685 of
1982.
Appeal by Special Leave from the judgment and Order dated
the 7th May, 1982 of the Delhi High Court in Civil Writ Petition No.
99 of 1981.
S. T. Desai, Miss A. Subhashini and M. N. Tandon, for tht
Appellant.
F. S. Nariman, F. H. J. Talya Khan, R. K. Kulkarni, Ravinder
Narain, J.B. Dadachanji, 0. C. Mathur, D. N. Mishra and Miss
Rainuwa/ia, for the Respondents.
The Judgment of the Court was delivered by
TuLZAPURKAR, .J. This· appeal by special leave raises the
question whether on the facts and in the circumstances of the case
the recon1mendation of a statutory body (specified Authority under
sec. 72 A of the Income-tax Act, 1961) and the Central Government's decision based on it-a matter of subjective satisfactionwere open to judicial review and whether the High Court was justified
in interferiug with the .same ?
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Mahindra and Mahindra Limited (for short 'M & M') was incorporated under the Indian Companies Act 1913 and is thus duly
registered under the Companies Act, 1956 ; its· share capital has been
widely held, the principal shareholders being the public financial
institutions to the extent of about 40 per cent of its equity share
capital; it is engaged in the manufacture inter ·a/ia of jeeps and other
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motor vehicles on a large scale.
M/s. Inter-national Tractor Company of India Limited (for
short 'ITCI') was incorporated on April 15, 1963 under the Com·
panies Act, 19 56 as a public company and was carrying on the
business of 'manufacture and sale of agricultural tractors and
impliments which are an essential commodity under the Essential
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[1983] 3 s.c.R.
Commodities Act; 1955. Though it commenced production within
three years of its incorporation, ITCI incurred a loss of Rs. 253 lacs
in the year 1974-75 ; ~ith the financial. assistance received from
M & M, ITCI was able to improve. its ~perating picture and its
working results· for the year 1975-76 showed a profit of Rs. 70 lacs
(Rs .. 208 lacs a~~ording to the Central Government but that was
without providing for depreciation to the extent of Rs. 138 lacs)
but again in the pnancial year 1976,77 (ending October 31, 1977) for
various reason_s its working was.not satisfactory and it _made a huge
loss to the tune of Rs. 433 lacs.
Cheques issued by ITCI bounced,
suppliers had stopped the supplies orr"aw materials to it and financial
institutions were not willing to h.elp jt any more.. During the period
of 13 months, (1.10.1976 to 31.10.1977) its producti~n had declined
to 2004 tractor units as against the licensed and . installed capacity of
JO, 000 tractor units and on a turn-over of Rs. 9. 94 crores it had
i"ncurred an operational loss.of Rs: 4.33 crores and it had received
se~eral notices threatening legal actions including winding up proceedings. At at 31st of October 1977 the accumulated losses were
to the tune of Rs. 555 lacs and the _excess of liabilities (including
loans) over the assets (share capital Rs. 306.99 lacs plus free reserves
Rs. 184 95 lacs,,...Rs. 491.94 lacs) was 'to the tune of Rs. 63 lacs and
. ~dd. In short as at the close of the financial year ending 31st of
O~tober, 1977 !TCI was commercially insolvent.
In October 1976 a proposal for amalgamating ITCI wiih M&M
was· c'?nsidered by the Boards of Directors of the two companies
since it was felt that it would be advantageous to both if their
operations could be rationalised for better and more efficient utilisation of their existing capacitjes and facilities and by two resolutions
dated 4.10.1976 passed by the Bo11rds of Directors of both the
cJmpa~ies the proposal was approved and a scheme of Amalgamation
"eff~ctlve from Lll.1977 was prepared and finalised. As both the
companies were 'undertakings' to which Part. A of Chapter HI of
Moriopoli~s and R_estrictivc Trade Practices Act, 1969 (for ~ho rt
MRTP Act) was applicable, M&M made an application on October
30, 1976 under sec. 23 (2) of the Act seeking approval of the Central
Government to the Scheme of Amalgamation. At the hearing given
by the Cen_tral Government u,nder the M_RTPAct it was brought to
the notice of the Central Government- and this is so mentioned in
the Approval Order-that ITCI was not doing well for want of
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sufficient working Capital, that production by ITC! had declined and
if that state of affairs continued for an.other. tivo to three years it
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would lead to the closure of its entire undertaking and consequent
unemployment of about 2, 400 employees. By its order dated August
10, 1977
p~ssed under sec. 23 !2) read with sec. 54 of MRTP Act
and communicated to M&M and ITCI, the Central Government
accorded its approval to the amalgamation as per the scheme subject
to the condition that the exchange ratio of the shares proposed in
the scheme was approved by ·£th majority of the equity share-holders
of both the companie.s. It was however, specificially stated that tliis
order was not to be construed as conveying .any approval of the
Central Govermnent that may be required under any other law.
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ThereaftedTCI and M&M preferred Company Petitions (NC!.
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789of1977 by ITCI and No. 2 of 1978 by M&M) in the Bombay
High Court under secs. 39] and 394 of the Companies Act, 1956
seeking the Court's sanction to the scheme of Amalgamation; and
during the pendency of the Petitions pursuant to the interim direc~
tions given by the learned Company judge meetings of the share,
holders of both ·the companies were held at which the scheme of
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amalgamation was approved by them and ultimately ~y its Order
dated March 9, 1978 the Bombay High Court sanctioned the Scheme
of Amalgamation effective from 1.1 1.19?7. It needs to be stated that
at the hearing befNe the Company Judge, the Regional Director,
Company Law BoarJ (representing the Central Government to whom
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notice is statutarily required to be issued and was issued) appearing
through Counsel raised a specific contention that the exchange ratio
of the shares fixed under the scheme (two shares of M&M in exch.ange
for three shares of ITC!) was not fair to the share-holders of M&M
~onsidering the ITCI's very bad financial position ; the Company
Judge took this contention into account but after considering the
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fact that all concerned parties, namely, the share-holders ineluding .
the public financial institutions had considered the ratio so fixed as
fair and equitablcdeGided not to disturb the said ratio. Subsequently,
on receipt of the requisite report under the second proviso to sec. 394
(I) of the Companies Act, 1956 from the Official Liquidator based on
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the findings of an independent firm of chartered accountants (M/s.
Batliboi & Purohit) to the effect that the affairs o( ITCI had not
bee~ conducted in a manner prejudicial to the interests of the llleinbers or to public 'nteres_t, the learned Company judge'passed an order
under sec. 394 (l) (v) for the dissolution of ITCI without winding
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up.
Upon amalgamation the,undertaking of ITCI became a division
of M&M known as International Tractor Division which is being
continued without modification or re-organization as a separate
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division and it is carrying on the same business· a~ ITCI carried 011
prior to amalgamation, namely manufacture and sal~ of agricultural
tractors and allied impliments.
Section .72A of the Income tax Act, 1961 (herein-after referred
to as the Act) was inserted therein by Finance Aci No. 2 of 1977 with
effect from J.4.1978. This section enables an amalgamated company
to. carry forward and set off accumulated lqss and unabsorbed
depreciation allowance in certain cases of amalgamation on fulfilment
of the conditions mentioned in clauses (a), (b) and (c) of sub-sec. (I}
and the Central Government's ·satisfaction in respect thereof, which
satisfaction is to be based on the recommendation of the specified
Authority referred to in the section. The conditions required to be
fulfilled are : (a) that the amalgamating_ company was, immediately
before its amalgamation, financially non-viable by reason of its
liabilities, losses and other relevant factors, (b) that the amalgamation
was in the public interest and (c) such other conditions as Central
Government may, by 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
amalgamating company. In other words, sub-sec. (I) of sec. 72A
provides that if the Central Government, on tlie re.commendation of
the specified Authority, ·is satisfied that the aforesaid conditions are
fulfilled in a given case of the amalgamation then
the Central
Government has to make a declaration to that effect and the consequence of such
declaration is that notwithstanding
anything
contained in any other provision of the Act, the accumulated loss
and the unabsorbed depreciation of the amalgamating company is
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. An .additional statutory function of the
Specified Authority under sub-sec. (2) (ii) of sec. 72A 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, which certificate is required to be
furnished along with its return of the income for the said assessment
year by" the amalgamating company for claiming the benefit of the
section.
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On April 27, 1978, M&M made an application in the approved
form under sec. 72A of the Act for the grant of relief of the requisite
declaration fro11J. the Central Government which was received ·by the
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C.I.T. v. MAHINDRA AND MAHINDRA (Tulzopurkar, J.) . 783
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Central Government on May 3 of 1978. As the amalgamation had
been effected from November .I, 1977 M&M filed the said application
so as to enable the authorities to investigate 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 return of income for the assessment
year 1979·8~ (the relevant previous year being 1.11.1977 to 31.10.1978
during which the amalgamation was effected) along with the requisite
certificate of the Specified Authotity before the due date June 30,
1979. Later M&M also furnished the latest audited financial position
Of lTCI together with other particulars as desired. By a notification
No. S. 0. 710 (E) dated 11.10.77 the Central Government constituted
and notified the Specified Authority consisting of respondent Nos. 6
to IO under s. 72A of the Act and at the suggestion of the Specified
Authority the Central Government also set up a separate screening _
Committee of experts to investigate· as to whether the ·requisite
statutory conditions were present or not. It may be stated .that
admittedly -no other condition bad been specified by the Central
Government under cl. (c) of sub-sec. (I} of s. 72A and the grant of
the relief of declaration depended only on the fulfilment of the two
conditions mentioned in els. (a) and (b) of sub·s. (!).·After consider·
ing the particulars furnished in the application made by _M_ & M,
further correspondence and evidence produced in that behalf and
after hearing M & M the Speified Authority by its order dated May/
-June 2, 1980 recommended that the amalgamation ofITCI with M&M
did not satisfy the condition specified in cl. (a) ; in other words, it
opined that ·amalgamating company was financially viable and not
non-viable immediately before its amalgamation with M &.M. The
Central Government, adopting the reasons recorded by the specified
- Authority for its opinion, accepted the recommendation made by it
and passed an order on December 1, 1980 whereby it refosed to
i~sue the declaration under s. 72A of the Act to M .& M ..
- 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. had refused the relief to M ·& M on the basis
of its subjective decision about the non-fulfilment of the condition
specified in cl. (a) of s. 72A (I) and for relevant and cogent reasons
and hence the decision could not be reviewed or interfered with by
the Court and with a view to show that both the Specified -Authority
' and the Centr<1l Government ha<I considered a,11 the ·relevant fac~qrs
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alid that M & M had been fairly treated in the matter great reliance
· was placed on the minutes of the several meetings held by the
Specified Authority which were produced before the Court. On a
.-consideration of the- entire material placed before it as well as. the
rival submissions made by counsel for the parties the High Court
came to the conclusion that the view taken by the Specified Authority
and the Central Government in the impugned orders was just not
possible to be formed and that no reasonable authority much less
the Specified Authority or an expert body of the Central Government
could have reasonably come to the conclusion that ITCI was,
immediately before its amalgamation with M & M, financially viable
and, therefore, the orders were liable to be struck down. The High
Court further found from the proceedings of the Specified Authority
that it had accepted· the position that the amalgamation was in the
puplic interest and that the Central Government bad also declined
-the relief to M & M only on the ground that the condition in cl. (a)
had not been fulfilled. In the circumstances the High Court quashed
the impugned recommendation dated May/June 2, 1980 of the
Specified Authority as well as the Central Government's decision
dated, December 1, 1980 and directed them both to deal with
M & M's application and to dispose it of within a period of six
months from the date of its order in accordance with the provisions
of s. 72A (I) of the Act in light of its judgment. The High Court
further directed 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 Government
under s. 72A (I) of the Act; the High Court gave the further direction
that the statutory certificate when it will be furnished by M & M to
the concerned Income Tax Officer shall be deemed to have been filed
by M & M with its Retnrn of Income for the concerned assessment
year. The appellants have challenged the High Court's view and its
directions in this appeal.
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Counsel for the appellants mainly raised tw·o contentions before
us in support of the appeal. In the first place relying upon the words
"•·· ... amt the Central Government, on the recommendation of the
Specified Authority, is satisfied that the following conditions are
fulfilled" occurring in sec. 72A (1) of the Act, counsel contended
that the issuance of the declaration under the section by the Central
Government depended upon its subjective satisfaction about the
'fulfilment or otherwise of the conditions mentioned therein and if
-such subjective satisfaction of the Central Government was based
oμ relevant and cogent materials on record its decision was not open
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C.I.T. v. MAHINDRA AND MAHIDDRA (Tulzapurkar, J.)
785.
to judicial review and could not be interfered with by any Court ..
Elaborating the contention counsel pointed out that in this ·case th~,
Central Government's decision was based on the recommendation of
a statutory body namely, the Specified Authority. which in its turn
had on relevant and cogent materials opined that the condition
specified in cl. (a) of sub-sec. (I) was not satisfied in the case of the
instant amalgamation. It was further pointed out that both the
Specified Authority a·s well as the Central had inter a/ia relied upon
two conspicuous factors that emerged from the materials on record,
(a) the exchange ratio of shares fixed under· the Scheme of
Amalgamation (two shares of M & M in exchange for ·three shares
of ITC!) and (b) the admission on the part of ITCI about its sound
financial position contained in para 14 of its Company Petition No.
789 of 1977, for coming to the conclusion that the amalgamating
company (ITCI) was financially viable immediately before its amalgamation with M & M and since the opinion of the statutory body
as well as the decision of the Central Government were based on
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the aforesaid relevant and cogent materials the High Court was in
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error in interfering· with the same. Secondly, Counsel cont~uded
that neither the Specified Authority iu its order of recommendation
dated May/June 2, 1980 nor the Central Government in. its order
dated December 1, 1980 had indicated that the second condition
mentioned in cl. (b) of sub-sec.(!) (about the amalgamation being
in public interest) had been fulfilled nor was it clear on the record
Ill
that the relief sought by M & M was denied only on the ground of
non-fulfilment of the condition specified· in cl. (a) of ~uh-sec. (1) and
therefore the High Court was wrong in presuming that the condition
in cl. (b) had been fulfilled in the instant case and as such if . at all
the matter was to be remanded for reconsideration this . ·asp~ct
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.ought to have been left open for being considered by the Central
Government. In these circumstances counsel urged that the several
directions given by the High Court were improper and its entire
decision was liable to be set aside.
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On the other ha11,d counsel for the contestill'g · respondent
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(M & M Ltd.) tried to support the judgment of the High Court on
more than one ground; according to him even assuming, without
admitting, that the impugned decision of the Central Government
was based on the aforesaid two factors said to be relevant and cogent
(which is disputed), the said decision, being a result of subjective
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satisfaction, would be liable to be quashed or set aside if it could be
shown that the same was arrived at by taking into consideration
extraneous or irrelevant materials, for, it wou)d not be .known how
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far and to what extent such vitiating materials had influenced the
mind of the Central Government and in the instant case some of
the other factors admittedly taken into consideration for arriving
at the decision were extraneous and irrelevant.