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PETITIONER: COMMISSIONER OF INCOME TAX,BOMBAY AND OTHERS

       Vs.

RESPONDENT: MAHINDRA AND MAHINDRA LIMITED & ORS.

DATE OF JUDGMENT02/09/1983

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

CITATION:  1984 AIR 1182            1983 SCR  (3) 773  1983 SCC  (4) 392        1983 SCALE  (2)236  CITATOR INFO :  R          1988 SC1737  (89)

ACT:      Judicial Review-Courts’  power to  interfere and review administrative or executive decisions and actions-Conditions precedent.      Loss-Accumulated  loss   and  unabsorbed  depreciation- Conditions requisite  for carrying  forward and setting off, by  an   amalgamating  company   of  such  loss-Whether  the recommendation of  a specified  authority  and  the  Central Government’s  decision.  thereon  allowing  the  amalgamated Company to  carry forward  and set  off losses  is  open  to judicial  review-Income   Tax  Act,   1961  section  72A  as introduced by Finance Act No. 2 of 1977 scope of:

HEADNOTE:      Section 72A  of the  Income Tax  Act, 1961  enables  an Amalgamated Company to carry forward and set off accumulated loss and  unabsorbed depreciation allowance in certain cases of amalgamation  on the  fulfilment of three conditions viz; (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 the  section  is  restricted  to  amalgamation  which  would facilitate the rehabilitation. Or revival of the business of amalgamating company.  The Central Government’s satisfaction in respect  of the  three conditions  is to  be based on the recommendation of  the specified  Authority, referred  to in Section 72A.  The Central  p Government  then has  to make a declaration to that effect and the effect and consequence of such  a   declaration  is   that  notwithstanding   anything contained in any other provision of the Act, the accumulated loss and  unabsorbed depreciation of 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. For claiming the benefit  of the  section, the  certificate issued by the specified authority  under sub-section  2(ii) of section 72A to the  effect that  adequate steps  have been  taken by the

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amalgamated company for the rehabilitation or revival of the business of  the  amalgamating  company  must  be  submitted alongwith the  return of  the income for the said assessment year.      Mahindra and  Mahindra Ltd.  was incorporated under the Indian Companies  Act 1913 and is thus duly registered under the Act of 1956. Its share capital has been widely held, the principal share holders being the public 774 financial institutions  to the  extent of  about 40%  of its equity share  capital; it  is engaged  in the manufacture of jeeps, motor  vehicles etc.  One M/s. Inter national Tractor Company of  India Ltd.  incorporated on April 15, 1963 under the Indian  Companies Act,  1956 as a public company for the manufacture  of   essential  commodities  like  agricultural tractors was  commercially insolvent  at the  close  of  the financial year  ending October 31, 1977. Therefore, proposal for amalgamating ITCI 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   be rationalized for  better and  more efficient  utilisation of their existing capacities and facilities.      A scheme  of Amalgamation  effective from 1.11.1977 was prepared and  finalised and, after obtaining the approval of the Central  Government to  the scheme  of  amalgamation  as required  under   section  23(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 sanction 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  v  from  the  Central Government which  was received  by the Central Government on May 3  of 1978.  As the  amalgamation had been effected from November 1,  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  1979-80  (the  relevant previous year being 1.11.1977 to 31.10.1978 during which 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 ITCI  together with other particulars as  desired.   By  a  notification  No.  S.O.  710(E)  dated 11.10.1977 the  Central Government  constituted and notified the Specified  Authority consisting  of respondent Nos. 6 to 10 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. After  considering the  particulars  furnished  in  the application made  by  M  &  M,  further  correspondence  and evidence produced in that behalf and after hearing M & M the Specified Authority  by its  order dated  May/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 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 refused  to  issue  the  declaration  under Section 72A of the Act to M & M.

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    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 challenges was principally 775 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 (1) 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   Central   Government   had considered 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 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  IICI  was, immediately before  its amalgamation  with M&M,  financially viable. The  High Court  quashed the impugned recommendation dated May,  June 2,  1980 of the Specified Authority as well as the  Central Governments  decision dated December 1, 1980 and directed  (i) them  to deal with M & M’s application and dispose it of within a period of six months from the date of its order  in light  of its  judgment;  (ii)  the  specified Authority to  consider and  issue, the  requisite  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 Court can interfere with the same are well settled. If the action or decision is perverse or  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]      Barium Chemicals Ltd. v. Company Law Board [1966] Supp. SCR 311;  Smt. Shalini  Soni etc, v. Union of India and ors. etc. [1981] 1 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  among industrial undertakings was regarded as a matter  of grave  national concern  inasmuch as 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 capital assets, and experience had shown that  taking over of such sick units by Government was not always a satisfactory or economical solution; and that a more effective 776

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method  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 Government from  social costs in terms of loss of production and 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  where under by a deeming  fiction   the  accumulated   loss   or   unabsorbed depreciation of  the amalgamating company is treated to be a loss or,  as the  case may be, allowance for depreciation of the amalgamated  company in  the previous  year in which the amalgamation was  effected;  but  the  amalgamated  company, although a successor in interest, would be entitled to carry forward and  set-off the  accumulated  loss  and  unabsorbed depreciation of  the amalgamating  company  only  where  the amalgamating  company   was  not,  immediately  before  such amalgamation, financially  viable and  the amalgamation, was in public interest. [789 H, 790 A-E]      2:2. The  expression "financial  non-viability" has not been defined  in the  Income Tax  Act,  1961.  However,  the Finance Minister’s  speech, the notes on clauses of the Bill and the Memorandum explaining the provisions thereof make it clear that the financial non-viability of an undertaking 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 temporary character and not  any basic  or permanent  sickness.  An  undertaking which is basically or potentially non viable will ordinarily be incapable  of revival  and would face a closure; in other words, the  financial non-viability spoken of by the section must refer  to sickness  brought about  by temporary 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 P  context of  amalgamation of  companies it will have  to be understood in its popular sense, that is to say, the 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 financial  non-viability  as understood by  men of business and commence and by financial institutions may  be discerned.  While announcing its scheme of merging  sick units with healthy ones (Finance Act, 1977) Government of  India had  classified "those  units where the losses, past  and present,  have eroded  50% of  capital and reserves as  sick’. According  to the Reserve Bank of India, commercial banks  consider a  unit to  be sick  "if  it  has incurred cash  loss for  one year  and in  their judgment 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  an   worsening   debt-equity   ratio   (total   outside liabilities to  net  worth)".  While  the  commercial  banks follow these criteria for banking purposes, the 777 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

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outside. According  to National  Council of Applied Economic Research,  where  all  the  three  parameters-profitability, liquidity and  solvency show  positive  figures  the  unit’s financial viability  will be  sound; where  one of the three parameters  shows  a  negative  figure  the  unit  could  be regarded as  ’tending towards-sickness’;  when  two  of  the three parameters  show negative  figures, it would be a case of ’incipient  sickness’ and  when all  the three parameters show negative figures the unit is ’sick’. It is by reference to these  several tests or criteria adopted by them that the question has  to be decided whether a particular undertaking is financially  non-viable at a given point of time. [791 B- F, 792 A-B]      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  reasoning  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  assistance from M & M which did not exist either i fact or in law:- (i) Section 72A does not require the undertaking to be basically non-viable, but  merely financially non-viable which must of necessary be  of a  temporary character,  (ii)  further  the close link  between the  two companies  referred to by both, divorced from  financial assistance  would be  an irrelevant factor; (iii)  the provisions of Sections 370 and 371 o. the companies   Act,   1956   have   been   completed   ignored. 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  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  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 enabling 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,  at the material time namely, immediately before its amalgamation  with M  & M  which took place on 1.11.1977 ITCI,  having   regard  to   its  financial   position,  was commercially insolvant  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. Admittedly, during the two years 1974-75  and 1976-77  it had  Made huge  losses to the tune of Rs. 253 lakhs and Rs. 433 lakhs respectively and the nominal profits of Rs. 70 lakhs (or for that matter even Rs. 208 lakhs) earned by it in 1975-76 did not convert it into a profitable concern  as on  31st of  October, 1977..  (v)  As regards solvency,  admittedly, cheques  and bill  issued  by ITCI had bounced, 778 suppliers had  stopped supply  of  raw  materials  financial

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institutions had  stopped further  monetary help  and  legal actions  including   winding   up   proceedings   had   been threatened. Further,  the excess  of liabilities  (including loans) over  the assets  (share capital  plus free reserves) was to  the tune of Rs. 61 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  1:1 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  & 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  company petition No. 789177 could not be given any  significance at  all; (vii)  Admittedly the  poor performance and  losses incurred by ITCI were due to factors such as  mechanics of  price control and the sluggishness in the market  over which  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  share  exchange ratio and  since in the instant case all the concerned share holders of M & M including the public financial institutions had, with  full knowledge  of all  the facts  including  the commercially insolvent position of ITCI, agreed to the ratio and which  was not  disturbed by  the High Court in spite of objection being  raised by the Regional Director Company Law Board, it  cannot be  said that tile 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 "Net 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  Government took  into consideration  the market value  of  the  assets  of  the  ITCI  as  on  the  date  of amalgamation for  coming to  the conclusion that the company was  a   viable  unit,   they  were  clearly  influenced  by irrelevant and  extraneous material  vitiating the  impugned conclusion.                 [792 G-H, 793 A-H, 794 A-H 79; A-H, 796 A-E]      3:2. That  the amalgamation  was in  public interest is clear. There  is a specific averments made to it in the writ petition itself.  But that apart, the admitted facts are (a) ITCI was engaged in the manufacture of 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 it  was facing  the prospect  of immediate  closure entailing social  costs in terms of loss 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

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undertaking, 779 thereby avoiding  a  heavy  burden  falling  on  the  public exchequer. In  Act 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]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: 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 the Appellant.      F. S.  Nariman, F.  H. J.  Talya Khan,  R. K. Kulkarni, Ravinder Narain,  J. B.  Dadachanji, O.  C.  Mathur,  D.  N. Mishra and Miss Rainuwalia, 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 recommendation  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 satisfaction-were  open to  judicial  review  and whether the High Court was justified in interfering with the same ?      The facts  giving rise to the aforesaid question may be stated: 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 alia of jeeps and other 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 Companies Act, 1956 as a public company and was carrying on the  business of  manufacture and  sale  of  agricultural tractors and  implements which  are an  essential  commodity under the Essential 780 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;  with  the  financial assistance received from M & M, ITCI was able to improve its operating picture and its working results for the year 1975- 76 showed a profit of Rs. 70 lacs (Rs. 208 lacs according to the Central  Government but  that was  without providing for depreciation to the extent-of Rs. 138 lacs) but again in the financial year 1976-77 (ending October 31, 1977) for various reasons 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 of raw materials to it and financial institutions were not willing to help it any more.  During the  period of  13 months,  (1.10.1976  to 31.10.1977) its  production had  declined  to  2004  tractor units as  against the  licensed and  installed  capacity  of 10,000 tractor  units and on a turn-over of Rs. 9. 94 crores it had  incurred an  operational loss of Rs. 4.33 crores and it had  received several  notices threatening  legal actions

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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 odd In short  as at the close of the financial year ending 31 st of October, 1977 ITCI was commercially insolvent.      In October  1976 a  proposal for amalgamating ITCI with M&M was  considered 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  rationalized for better and more  efficient utilisation of their existing capacities and facilities and by two resolutions dated 4.10.1976 passed by the  Boards  of  Directors  of  both  the  Companies  the proposal was approved and a scheme of Amalgamation effective from 1.11.1977  was prepared  and  finalised.  As  both  the companies were  ’undertakings’ to  which Part.  A of Chapter III of  Monopolies and Restrictive Trade Practices Act, 1969 (for  short  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 Central Government under the  MRTP Act  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 sufficient working Capital, that production by ITCI had declined and if that state  of affairs  continued for  another two  to three years it 781 would lead  to the  closure of  its entire  undertaking  and consequent unemployment  of about  2, 400  employees. By its order dated  August 10,  1977 passed  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  3/4th majority  of the  equity share-holders of both the companies. It was however, specifically stated that this order was not to be construed as conveying any approval of the  Central Government  that may  be required  under any other law.      Thereafter ITCI  and M&M  preferred  Company  Petitions (No. 789  of 1977  by ITCI  and No. 2 of 1978 by M&M) in the Bombay High  Court under  secs. 391 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  directions given  by  the  learned Company judge  meetings of  the  shareholders  of  both  the companies were  held at which the scheme of amalgamation was approved by  them and ultimately by its order dated March 9, 1978  the   Bombay  High  Court  sanctioned  the  Scheme  of Amalgamation effective from 1.11.1977. It needs to be stated that at  the hearing  before the  Company Judge the Regional Director,  Company   Law  Board  (representing  the  Central Government to  whom E  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 exchange for three shares  of ITCI)  was not fair to the share-holders of M&M considering  the ITCI’s very bad financial position; the Company Judge  took this  contention into  account but after considering the fact that all concerned parties, namely, the share-holders including  the public  financial  institutions had considered  the ratio  so fixed  as fair  and  equitable decided not  to disturb  the said  ratio.  Subsequently,  on

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receipt of  the requisite report under the second proviso to sec. 394  (1) of  the Companies  Act, 1956 from the official Liquidator based  on the  findings of an independent firm of chartered accountants  (M/s.  Batliboi  &  Purohit)  to  the effect that  the affairs of ITCI had not been conducted in a manner prejudicial  to the  interests of  the members  or to public interest,  the learned  Company judge passed an order under sec  394 (1)  (v) for  the dissolution of ITCI without winding 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 782 division and  it is  carrying on  the same  business as ITCI carried on  prior to  amalgamation, namely  manufacture  and sale of agricultural tractors and allied implements.      Section 72A  of the  Income tax Act, 1961 (herein-after referred to  as the Act) was inserted therein by Finance Act No. 2  of 1977  with  effect  from  1.4.1978.  This  section enables an  amalgamated company to carry forward and set off accumulated loss  and unabsorbed  depreciation allowance  in certain  cases   of  amalgamation   on  fulfilment   of  the conditions mentioned in clauses (a), (b) and (c) of sub-sec. (1) 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. (1) of sec. 72A  provides   that  if  the  Central  Government,  on  the recommendation 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.      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  from  the  Central Government which was received by the 783 Central Government on May 3 of 1978. As the amalgamation had been effected  from November  1, 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

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file its  return of  income for  the assessment year 1979-80 (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 Authority before the due date  June 30, 1979. Later M&M also furnished the latest audited financial  position  of  ITCI  together  with  other particulars as  desired. By  a notification No. S.O. 710 (E) dated  11.10.77   the  Central  Government  constituted  and notified the  Specified Authority  consisting of  respondent Nos. 6  to 10  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 had been specified by the Central Government under cl. (c)  of sub-sec.  (1) of  s. 72A  and the  grant of  the relief of declaration depended only on the fulfilment of the two conditions  mentioned in cls. (a) and (b) of sub-s. (1). After  considering   the  particulars   furnished   in   the application made  by  M  &  M,  further  correspondence  and evidence produced in that behalf and after hearing M & M the Specified Authority  by its  order dated  May/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 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 refused  to issue  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  (1) 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 Central Government had considered all the relevant factors 784 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 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  public interest and  that the  Central Government had 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

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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 (1) 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 (1) 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 Return of  Income for  the concerned  assessment  year.  The appellants have  challenged the  High Court’s  view and  its directions in this appeal.      Counsel  for   the   appellants   mainly   raised   two contentions before us in support of the appeal. In the first place  relying   upon  the   words  "...   and  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 on relevant and cogent materials on record its decision was not open 785 to judicial  review and  could not be interfered with by any Court. Elaborating  the contention  counsel pointed out that in this  case the 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. (1)  was not  satisfied in  the case of the instant amalgamation. It  was further  pointed  out  that  both  the Specified Authority  as well  as the  Central had inter alia 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 ITCI) 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  the aforesaid relevant and cogent materials the  High Court  was in  error in interfering with the same.  Secondly,  Counsel  contended  that  neither  the Specified Authority  in 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. (1) (about the amalgamation being  in public  interest) had  been fulfilled nor was it clear on the record that the relief sought by M&M was denied  only on  the ground  of  non-fulfilment  of  the condition specified in cl. (a) of sub-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  aspect   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

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set aside.      On the other hand counsel for the contesting respondent (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 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 would not be known how 786 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.  Counsel urged  that apart  from the  aspect that the  conclusion arrived  at by  the Specified Authority and the  Central Government  about the non-fulfilment of the condition specified in cl. (a) of sub-sec. (1) was such that no reasonable body of persons, properly informed, would come to, the  same was  also vitiated  by (a)  the adoption  of a wrong  approach  to  the  true  concept  of  "financial  non viability", and (b) having taken into account irrelevant and extraneous  matters.   Counsel  further   urged   that   the proceedings before  the Specified  Authority clearly  showed that it  was fully satisfied that the condition mentioned in cl. (b)  of sub-sec.  (1) (about  the amalgamation  being in public interest) was fulfilled and if the Central Government had disagreed  with that  opinion of the Specified Authority its refusal  of relief  would have  been based  on  the  non fulfilment  of  both  the  conditions  instead  of  one  and therefore the  inference  was  irresistable  that  both  the Specified Authority  as well  as the  Central Government had refused relief  to M  &  M  only  on  the  ground  that  the condition specified in cl. (a) had not been fulfilled and if that conclusion was vitiated on any of the aforesaid grounds the High  Court was  right in  striking  down  the  impugned orders and  remanding the  matter to  Central Government for doing the needful in the light of its judgment; and the High Court was also right in issuing the directions which it did.      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 Court can interfere with the same are well  settled and  it would be redundant to recapitulate the whole  catena of decisions of this Court commencing from Barium Chemicals  Ltd. v.  Company Law  Board(1) case on the point. Indisputably,  it is  a settled  position that if the action or decision is perverse or 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. This Court in one of its later  decisions in  Smt. Shalini  Soni etc. v. Union of India  and  Ors.  etc.(2)  has  observed  thus:  "It  is  an unwritten rule of 787 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." Suffice  it  to  say  that  the  following  passage appearing at  pages 285-86  in  Prof.  de  Smith’s  treatise

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’Judicial  Review   of  Administrative  Action’  (4th  Edn.) succinctly summarises  the several  principles formulated by the Courts in that behalf thus:           "The  authority  in  which  a  discretion  is      vested  can   be  compelled   to   exercise   that      discretion,  but   not  to   exercise  it  in  any      particular manner.  In general,  a discretion must      be exercised  only by the authority to which it is      committed. That  authority must  genuinely address      itself to  the matter  before it:  it must not act      under the  dictation of  another body  or  disable      itself  from   exercising  a  discretion  in  each      individual case;  In the purported exercise of its      discretion  it  must  not  do  what  it  has  been      forbidden to  do, nor  must it  do what it has not      been authorised  to do. It must act in good faith,      must have  regard to  all relevant  considerations      and   must    not   be    swayed   by   irrelevant      considerations must  not seek  to promote purposes      alien to  the letter  or  to  the  spirit  of  the      legislation that  gives it  power to act, and must      not act  arbitrarily or  capriciously. Nor where a      judgment must be made that certain facts exist can      a discretion  be validly exercised on the basis of      an erroneous  assumption about  those facts. These      several principles  can conveniently be grouped in      two  main   categories;  failure   to  exercise  a      discretion, and  excess or  abuse of discretionary      power. The  two classes are not, however, mutually      exclusive.  Thus,  discretion  may  be  improperly      fettered because  irrelevant  considerations  have      been taken  into account;  and where  an authority      hands over  its discretion to another body it acts      ultra vires.  Nor, is it possible to differentiate      with precision the grounds of invalidity contained      within each category."      As  stated   earlier  the  issuance  of  the  requisite declaration in  R favour  of M & M by the Central Government under  sec.   72A  depended  in  the  instant  case  on  the fulfilment of  only two conditions mentioned in sub-sec. (1) namely, (a) that ITCI was not, immediately 788 before its  amalgamation with  M & M, financially viable and (b) that  the amalgamation  was in the public interest. Both the Specified  Authority as  well as the Central Government, on the  materials before  them, came to conclusion that ITCI was,  immediately  before  its  amalgamation  with  M  &  M, financially  viable  and  ’  as  such  the  first  condition mentioned in cl. (a) of sub-sec. (1) had not been fulfilled. In its  order of  negative recommendation  dated May/June 2, 1980 the  Specified Authority  has set  out six reasons that led it to form the aforesaid conclusion and it is undisputed that substantially  the same  six reasons have been given by the Central  Government, though  couched in  better language and  compressed  in  four  paragraphs  of  its  order  dated December 1,  1980 while  upholding the recommendation of the Specified Authority and declining the relief to M & M. These reasons for the impugned conclusion as appearing in the four paragraphs (paras  3 to 6) of the Central Government’s order are:           3. It  has been claimed by Messrs. M & M that      having regard  to the losses incurred by ITCI, the      company  was  financially  non-viable  immediately      before the amalgamation. The amalgamation with M&M      took  place   with  effect  from  1.11.1977.  ITCI

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    suffered losses  for two  years i.e.  1974-75  and      1976-77 while  it earned  a profit of 208 lakhs in      1975-76. It cannot be denied that the large losses      incurred in  one year  viz.  1976-77  had  created      certain  financial  difficulties  for  ITCI.  This      however, does  not mean  that the  undertaking  of      ITCI  was  non-viable.  The  problem  was  one  of      temporary liquidity,  all that  was needed  was  a      doze of liquidity to nurse it back to health. This      is  borne   out  by   the  events   subsequent  to      amalgamation. After  the repayment of liabilities,      ITCI actually  earned a  cash profit of 3.9 crores      in the  year after  amalgamation. There is also no      reason to  think that  without  amalgamation,  the      liquidity problem would have remained unsolved. In      this connection,  the close  link between  the two      companies  and   the  possibility   of   continued      financial support even without amalgamation cannot      be ignored.  (same as Reasons (i), (v) and (vi) of      the Specified Authority).           4. The statement made by ITCI in the petition      filed before  the Bombay  High Court  as  late  as      December, 1977 789      that though  the Company  had sustained losses, it      was in  a sound  financial position and its assets      were more than sufficient to meet the liabilities,      cannot just  be ignored.  (same as  Reason (iv) of      the Specified Authority).           5. It  is also  pertinent to mention that the      reports presented  by ITCI to its shareholders for      the  year   1975  and  1976  attributed  the  poor      performance of  the company  to the  mechanics  of      price control  which did not take into account the      cost increase  and also sluggishness in the demand      for tractors, principally because of the stringent      credit restrictions imposed by the Government from      time  to   time.   Thus,   admittedly   the   poor      performance of  ITCI for  the years  of losses are      due to  short term  difficulties existing  in  the      relevant years.  Once the  short term difficulties      were got  over, the  company was  expected to take      profits. (same  as Reason  (ii) of  the  Specified      Authority).           6.  Note  has  been  taken  that  the  share      exchange  ratio   fixed  under   the  scheme   of      amalgamation was  two shares  of M  & M for every      three shares of ITCI in the case of equity shares      and one  share of  M & M for one share of ITCI in      the  case   of  preference   shares.  This  share      exchange ratio  does not indicate any sickness or      non-viability on  the  part  of  ITCI.  Moreover,      although as per accounts the net worth of ITCI on      the date  of amalgamation  was negative,  if  the      market value of the assets is taken into account,      the assets exceeded the liabilities by 790 lakhs.      This shows  that the  company was  a viable unit.      (same  as   Reason   (iii)   of   the   Specified      Authority).      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

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the mischief  or situation  that was intended to be remedied by its  introduction as  also the  true concept of financial Don- viability.  From  the  budget  speech  of  the  Finance Minister, the  Notes on  Clauses of the Finance Bill (No. 2) of 1977  and the  Memorandum explaining to provisions of the said Bill it will appear clear that 790 sickness among  industrial undertaking  was  regarded  as  a matter of  grave national concern inasmuch as 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  capital assets,  and experience had shown that  taking over of such sick units by Government was not always  a satisfactory  or economical  solution; it  was felt that  a more  effective method  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 Government  from social  costs  in terms of  loss of  production and  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 where under by a deeming fiction the accumulated loss or  unabsorbed depreciation of the amalgamating company is treated  to be  a loss  or, as the case may be, allowance for depreciation  of the amalgamated company in the previous year  in  which  the  amalgamation  was  effected;  but  the amalgamated company, although a successor in interest, would be entitled  to carry  forward and  set-off the  accumulated loss and unabsorbed depreciation of the amalgamating company only where  the amalgamating  company was  not,  immediately before  such   amalgamation,  financially   viable  and  the amalgamation  was   in  public   interest.  The   expression "financial non-viability"  had not  been defined  in the Act but the  Finance Minister’s  speech, the notes on Clauses of the  Bill  and  the  Memorandum  explaining  the  provisions thereof make it clear that the financial non-viability of an undertaking 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  temporary character and  not  any  basic  or  permanent  sickness.  An undertaking which  is basically  or  potentially  non-viable will ordinarily  be incapable  of revival  and would  face a closure; in  other words, the financial non-viability spoken of by  the section  must refer  to sickness brought about by temporary adverse  financial circumstances that 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. (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".  Moreover,  since  the expression is  occurring in  a taxing statute in the context of amalgamation of companies it will have to be 791 understood in  its popular  sense, that is to say, the 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. In this behalf counsel for the contesting respondent  invited our  attention to the several criteria adopted  by various  bodies like  the Government of India, financial  institutions and  commercial banks on what could be  regarded as  a  sick  unit.  For  instance,  while announcing its  scheme of  merging sick  units with  healthy

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ones (Finance  Act, 1977) Government of India had classified "those Units where the losses, past and present, have eroded 50% of  capital and  reserves as  sick".  According  to  the Reserve Bank  of India,  commercial banks consider a unit to be sick  "if it  has incurred  cash loss for one year and in their judgment  is likely  to continue  to incur cash losses for the  current years  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)".  Counsel pointed out  that while  the commercial  banks follow  these criteria for  banking purposes,  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".  Counsel further pointed  out that  the National  Council of  Applied Economic Research  (for short  ’NCAER.) an approved research association,  having  senior  Government  officials  on  its governing body  and which  has a  large number  of  research projects  to   its  credit,   had  undertaken   a  study  of ’industrial sickness’  in 1979  and  in  its  Report,  after noting the  aforesaid criteria adopted by various bodies for deciding whether  a unit  could be  regarded as  sick it has expressed its  own conclusion  on the  concept of  financial viability thus:           "Financial viability: Sickness is "defined in      terms of  financial viability  since this  is  the      only known  indicator of  he  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." NCAER  has   further  observed  that  where  all  the  three parameters-profitability,  liquidity   and   solvency   show positive figures the unit’s 792 financial viability  will be  sound; where  one of the three parameters  shows  a  negative  figure  the  unit  could  be regarded as  ’tending towards  sickness’; when  two  of  the three parameters  show negative  figures, it would be a case of ’incipient  sickness’ and  when all  the three parameters show negative  figures the  unit is  ’sick’. This  being the true concept of financial non-viability as understood by men of business and commerce and by financial institutions it is by reference  to these  several tests or criteria adopted by them  that   the  question  has  to  be  decided  whether  a particular undertaking  is financially non-viable at a given Point of time.      lt may  be stated  that by  a Press-Note  issued by the Government (Ministry  of Industry)  on 23rd  February,  1981 certain guidelines for approval of amalgamation under s. 72A in regard  to the  fulfilment of  the condition specified in cl. (a)  of sub-s. (1) were laid down but for the purpose of deciding the  issue raised  in this appeal those guide-lines would not  be of  any avail for the simple reason that those did not  exist when  the Specified  Authority as well as the Central  Government  arrived  at  its  impugned  conclusion. Suffice it  to say  that the factors which these guide-lines lay down  as being  required to  be taken  into account  for deciding the  question of  non-viability of the amalgamating company are  more or  less similar  to and  in  accord  with

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aforesaid tests  or criteria  adopted by  men  of  business, trade or commerce and financial institutions and Counsel for the contesting respondent claimed that those guide-lines had been  more  than  fulfilled  in  the  instant  amalgamation. However, for  the purpose  of this  appeal we  would  rather ignore the said guidelines contained in the Press Note dated 23rd February,  1981 and  decide the  question  whether  the impugned conclusion  of the  Specified Authority  as well as the Central  Government is  liable to  be interfered with or not by  having regard  to the true concept of financial non- viability as  discussed above and applying the several tests or criteria mentioned in that behalf earlier.      Turning now  to the reasons that prompted the Specified Authority and the Central Government to come to the impugned conclusion, a  careful and  close scrutiny of paragraph 3 of the Central  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  approach and  proceeding on  a wrong  assumption   about  the   possibility  of   financial assistance from M & M which did not exist either in fact 793 or in  law. That  the undertaking  of ITCI had incurred huge losses in  the relevant years was 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 of financial assistance from M & M a wrong assumption  in fact  and law  had  been  made  by  the Specified Authority and the Central Government. 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 lakhs would have visited M & M and its directors  or officers  with penal consequences under 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 ITCI 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 enabling the undertaking  to earn  a cash  profit of  Rs. 3.9  crores could not  be regarded  as a  factor showing  the  financial

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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 794 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 1.11.1977 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. Admittedly, during the two years 1974-75 1976-77 it had made huge losses to the tune of Rs. 253 lakhs and Rs. 433 lakhs respectively and the nominal profits of  Rs. 70  lakhs (or  for that  matter even Rs. 208 lakhs) earned  by it  in 1975-76  did not  convert it into a profitable concern  as on  31st of October, 1977. As regards the liquidity  even the  Specified Authority and the Central Government have  observed that  the large losses incurred in the year 1976-77 had made ITCI face the problem of temporary liquidity. As  regards  solvency,  admittedly,  cheques  and bills issued  by ITCI  had bounced,  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, as stated earlier, the excess of liabilities (including, loans) over the assets (share capital plus free 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 then  1:1 as required by the test adopted by commercial banks). Tn  other words  according to  the tests or criteria adopted by  men of  businesses  or  commerce  and  financial institutions ITIC,  immediately before its amalgamation with M &  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 it  is surprising how the impugned conclusion was reached by  them and  the same  appears to  us to  be almost perverse;  at   any  rate  it  was  a  conclusion  which  no reasonable body  of persons,  properly informed,  could come to.      In  paragraph  4  of  the  Central  Government’s  order reliance has  been placed  on the so called admission on the part of ITCI about its sound financial position contained in para 14  of its  Company Petition No. 789/1977. The relevant statement runs  thus: "Although  the petitioner  company has sustained a loss it is in a sound financial position and its assets are  more than  sufficient to  meet its  liabilities" Torn out of context it might support the suggested inference but if. 795      paragraph 14  is read  as a  whole it will appear clear that the  said statement  was based  on the  latest  audited accounts for  the year  ending 30th September, 1976 referred to in  the same  paragraph and  as such  it referred  to the company’s position  as on 30th September, 1976 and not as on 31st  October,   1977  (i.e.   immediately  prior   to   the amalgamation).  Admittedly  the  balance-sheet  as  at  31st October, 1977  was ready only in May, 1978 and was furnished to  the   Specified  Authority  in  July,  1978.  Obviously,

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therefore, the  so-called admission  was  referable  to  the position as  on  30th  September,  1976  and  it  cannot  be forgotten that at the close of that year the working results of ITCI  had shown  a profit  of Rs. 70 lakhs, though in the following year it again made a huge loss. Further, all these facts were  clearly stated  in para  6 of  M &  M’s petition seeking Court’s  sanction for  amalgamation and averments in both the  petitions, (which  were heard together by the High Court) will  have to be read together. So read the so-called admission on  the part  of the  ITCI could  not be given any significance as has been done by the Specified Authority and the Central Government. - D      Paragraph S  of the  Central Government’s  order merely refers to  the poor  performance  of  the  lTCI  during  the relevant years  and points  out that  the same  was  due  to factors such  as the  mechanics of  price  control  and  the sluggishness in  the demand for tractors over which the ITCI had no  control but  these factors were no pointers to - the financial position  of the  ITCI one  way or  the other.  If anything they  showed that  for  the  poor  performance  and losses incurred  by ITCI  which were admittedly due to short term difficulties, no blame could attach to the management,      Lastly paragraph  6 of  the Central  Governments  order mentions to  factors that were taken into account for coming to the  impugned conclusion  (a) share  exchange ratio fixed under the  amalgamation scheme  and (b) net worth of ITCI on the date  of amalgamation.  The  former,  according  to  the Specified Authority  and the  Central Government  negatively showed that  ITCI was  not sick or non-viable and as regards the latter  it is  stated that "although as per accounts the net worth  of ITCI on the date of amalgamation was negative, if the market worth of the assets is taken into account, the assets exceeded  the liabilities by 790 lakhs and this shows that the  company was a viable unit". In our view the former does not  possess the negative effect as suggested but would be a neutral factor.      After all several aspects and considerations weigh with the share- 796 holders of the companies concerned in the amalgamation while approving the proposed share exchange ratio and since in the instant case  all the  concerned  share-holders  of  M  &  M including the  public financial  institutions had, with full knowledge  of  all  the  facts  including  the  commercially insolvent position  of ITCI,  agreed to  the ratio and which was not  disturbed by  the High  Court in spite of objection being raised by the Regional Director, Company Law Board, it cannot be  said that  the exchange  ratio so fixed possesses probative value  of  negative  character  as  suggested.  As regards the latter, according to well-settled principles and practice of commercial accountancy (vide Cost and Management Accounting by  J. Batty)  the concept  of ’Net Worth’ always denotes the  excess of  the book  value of  all assets  over liabilities and  market value  of the  assets is never taken into consideration  in fact the market value of assets which gives the  ’current worth’ becomes a relevant factor when in liquidation the  question has  to be  considered whether the company possesses  assets which  would be sufficient to meet all its creditors or not. Admittedly the ’Net 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  Government took  into consideration  the market value  of  the  assets  of  the  ITCI  as  on  the  date  of amalgamation for  Coming to  the conclusion that the company was  a   viable  unit,   they  were  clearly  influenced  by

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irrelevant and  extraneous material  vitiating the  impugned conclusion.      Having regard  to the  above discussion the High Court, in  our  view,  was  right  in  holding  that  the  impugned conclusion  of  the  Specified  Authority  and  the  Central Government on  the aspect of non-fulfilment of the condition specified in  cl. (a) of sub-s. (1) of s. 72A being vitiated was liable  to  be  set  aside  and  that  consequently  the Recommendation of  the Specified  Authority and the order of the Central Government based thereon deserved to be quashed.      The second  contention of  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.  1, after  referring to  several facts  which tended to  show that  the amalgamation  was  in  the  public interest, had specifically averred that the amalgamation was in the  public interest as required by cl. (b) of sub-s. (1) of s.  72A (vide  para 18B)  and these  averments  were  not specifically denied  in the  counter affidavit  where it was merely stated that reference was invited to the 797 proceedings and  order of  the Specified Authority. But that apart, the  admitted facts  are (a)  ITCI was engaged in the manufacture  of   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 it was facing the prospect  of immediate closure entailing social costs in terms of  loss 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 difficult 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 11,  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. (I) of s. 72A had not been fulfilled 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 presuming  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  condition specified in cl. (a) of sub-s. (1) 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

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during the relevant 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 798 to one  modification that  the Specified  Authority and  the Central Government  should dispose  of M  & M’s  application 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 favour of the contesting respondent, namely, M & M. S. R.                                      Appeal dismissed, 799