MAHINDRA AND MAHINDRA LIMITED Vs. UNION OF INDIA

JUDGEMENT

(1.) Section 72A of the Income Tax Act, 1961 (hereinafter called the Act) was inserted by the Finance (No.2) Act, 1977 with effect from April 1, 1978. By this section, a provision is made to enable an amalgamated company to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain in cases of amalgamation of companies on fulfilment of conditions mentioned in sub-section (1) of Section 72A and the Central Government's satisfaction in respect thereof, namely that the amalgamating company was not immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors and that the amalgamation was in the public interest. The satisfaction of the Central Government is to be arrived at after considering the recommendations of the Specified Authority being such authority that the Central Government, may, by notification in the Official Gazette specify for the purposes of Section 72A. The effect of such declaration is, that notwithstanding anything contained in any other provision of the Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company, was 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 Section 72A (2) (ii) is to issue a certificate to the effect that adequate steps have been taken by the amalgamated company for the rehabilitation or revival of the business of the amalgamating company. The filing of such a certificate by the amalgamated company is one of the requisites for grant of relief under Section 72A. There was amalgamation of M/s. International Tractor Company of India Ltd. (hereinafter referred to as ITCI) with M/s. Mahindra & Mahindra Ltd. (hereinafter referred to as M&M) with effect from November 1, 1977. M&M made an application under section 72A of the Act for grant of the relief of the declaration. By an order dated May, 19801 June 2, 1980, the Specified Authority after considering the particulars furnished in the application under sub-section (1) of Section 72A of the Act of M&M dated May 3, 1978 and further correspondence and evidence produced in this behalf and after hearing M&M recommended that the amalgamation of ITCI with M&M did not satisfy the conditions enumerated in Section 72A(1) (a). The reasons that led the Specified Authority in making the foregoing recommendations are stated in the said letter. The Central Government by an order dated December 1, 1980 accepted the recommendations made by the Specified Authority and for similar reasons, the Central Government thereby refused to issue the declaration under Section 72A (1) (a) of the Act to M&M. The legality and validity of the said order of the Central Government dated December 1. 1980 refusing to make a declaration under Section 72A of the Act as also the recommendations of the Specified Authority to the Central Government dated May, 1980/ June 2, 1980 under Section 72A of the Act are questioned in this petition under Article 226 of the Constitution.

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

(3.) ITCI commenced production within three years of its incorporation and from then onwards was carrying on the business of manufacture and sale of tractors and allied equipment. The licensed and installed capacity in 1977 of ITCI was 10,000 tractor units per annum. ITCI was then producing tractors less than its capacity. For various reasons, ITCI incurred a loss in 1975. ITCI was able to change its operating picture in the next financial year of 13 months ended Septmber 30, 1976 by making a reasonable profit. For the financial year 1976-77, the working of ITCI was again not satisfactory for various reasons. In October, 1976, the ^ Board of Directors of M&M and ITCI considered a proposal for the merger and/or amalgamation of ITCI with M&M as the Board of the two companies felt that it would be advantageous for both ITCI and M&M that their operations be rationalised for better and more efficient utilization of their existing facilities; that the products of M&M and ITCI were of such a nature as to make it possible for the utilization of the capacity of one company for the products of the other with marginal investments in tooling: that the proximity of the major manufacturing facilities of M&M and ITCI in adjoining locations at Kandivili was an added advantage which would promote the use of current capacities, avoid duplication and ensure economic future expansions at marginal costs and that with the amalagamation of ITCI with M&M it would be possible for M&M to utilise its surplus capacity to meet the expected increasing demand for tractors in the next few years in the domestic and foreign markets. The proposal for the merger between ITCI arid M&M was approved by the Board of Directors of the two companies in the resolutions passed on October 4, 1976. A scheme of amalgamation was duly prepared and finalised.