INDIAN SHAVING PRODUCTS LTD v. BOARD OF INDUSTRIAL AND FINANCIAL

Judgment

thereunder. Learned counsel G H "Before undertaking a scrutiny of these reasons for ultimately deciding whether the impugned conclusion of the specified author ity and the Central Government is liable to be interfered with or not it will be useful to indicate briefly the object with which this new provision of s.72A was introduced in the Act as it will throw light on what was the mischief or situation that was intended to be remedied by its introduction as also the true concept of financial IND!AN SHAVING PRODUCTS LTD. 1: BD. Of' lNlJL. &. I l~:.\NCIAL RECONSTRUCT/fll\S IP.HARlXTIA, J.I 39 non-vi;ibiliiy. From the Budget speech of the Finance Minister. the Notes on Ciauses of the Finance (No. 2) Bill of 1977 and the 1ncn101·audu1n cxplJining the provisions of the s~1id Bili it \vt-ll appear clear that sickness among industrial u1H ..

1L·rtakings \Vas rt:> gai·Jcd as a n1atlcr of grnve national concern inas111uch as closurL' of any sizable 111anufacluring unit in any industry c?1tailc<l social costs in te1n1s of loss of produ:.-:tion an<l uncn1ploy1ncnt as al s() \Vastc of valuable capital assets, ::in<l experience had sho\vn tln1t taki.ng oVcr of such Sick units by Govcrn1nent \Vas .not _always ~· ..... 11 i-;factory or er:ono1nical solution: it \\/'.JS felt that a 111orc effective nicthod \Vouk.J· be to facil iu·1tc an1algan1ation of sick industrial units \Vi th sound.qncs by providing incentives anJ reJ11(•''iilg i1npedi111cnts in the WJ.)r of 'iuch an1algcunation \vl~ich \vould not 1nc,cly relieve the Govt. of uncconon1ic~1l burrlcn of 1.aking ovc~· <:111J run·iing sick units but save the G?vt. l"ro1T1 social ::osts in tcnns of loss ol productiorv and U~1en1pJoyme11t.

W; th <;UCh objc:.:t1 \'C in ViC\\I, in order to facilitate the 1nerger of sick indu~tri~:: uni ls 'Vllh sound lJnes and as and. by: way of offering an incCHlivc in lhat behalf. s. 72A \vas introduced in.thC Act, \vhcreunder, by a· ch·cn1ing fiction. th~ accu1nulated loss or unabsorbed depreciation of the a1nalga111~1l!ng co1npany i_s treated to be a loss or, as the ca5"c n1ay be, allov. ance fo·· dcpreciriiion of the ~nnalga111ated co1npa11v in the previous year iay.:h!i.·h the a1'nalgan1~1- tion \Vas effected; but the :.n11algan1atcd co1npany although a Suc cessor in interest, would be cntit!cJ to cany for\vard an<l set otJ the accumulated IOss and unabsorb~d depreciation of the ama~gamating company on.ly where the a1na1gan1ating con1pnny \Vas not, immedi· ately before such amalgamation, financially. viable ..tn<l the amaJg;1- in public interest.

The expression "financial non· 1nation \Vas viability" has not been defined in the Act but the Finance Minister's speech, the Notes on Clauses of th·e Rill and the Memorandum explaining the prov;sions thereof :nakc it clear that the financial non-viability of an underta]<ing has been equated with the 'sickness' of such undertaking and obviously in the context of its revival by a sound undertaking the sickness must be of a tcniporary character ;ind not any basic or pcnnanent sickness.· .L\n 1indCrtakiµg which is basically or potc11tially non-viable wiH ordinarily be incapable of revival rind \vould face a closure; in other \\'Ctds. the financial !ll1ll· viUbility spoken of by the section n1ust .refer t.o sickness brbught ;,:.bnut by te.mporary adverse financial circumstances tl~at disables the ,\ [) . [: F G H 40 A SUPREME COURT REPORTS (1996] 1 S.C.R. unit to stand and work on its own.

This is also made clear by the provision contained in cl. (a) of sub-s. (!) which states that the financial non-viability of tile amalgamating company has to be judged by referepce to "its liabilities, losses and other relevant facts". B c D E F G H Under Section 72 of the Income Tax Act, to give to the amalgamated company the benefit of tbe loss or, as the case may be, allowance for depreciation of the amalgamating company for the previous year in which the amalgamation was effected for the purposes of the Income Tax Act, the Central Government must, upon the recommendation of the specified author ity, be satisfied that the amalgamating company was not, immediately before the amalgamation, financially viable by reason of its liabilities, losses and other relevant factors, and that the amalgamation was in the public interest.

By reason of Section 32(2) of the said Act, where there has been under any scheme thereunder an amalgamation of a sick industrial. company with another company, the provisions of Section 72A of the Income Tax Act shall apply in relation to suyh amalgamation, subject to this modification that the power of the Central Government is to be exercised by the BIFR without the necessity of a recommendation by the specified authority mentioned in Section 72A of the Income Tax Act. This is because, for the purposes of according sanction to a scheme of amalgamation of a sick industrial undertaking with any other company under Section 18 of the said Act, the BIFR has to be satisfied that the amalgamating company is not financially viable, which is the effect of Section 3(o) of the said Act, and that the amalgamation is necessary or expedient in the public interest, which is the effect of Sections 17 and 18 of the said Act read together.

Sanction of a scheme of amalgamation under Section 18 of the said Act necessarily implies that the requirements of Section 72A of the Income Tax Act have been met and the BIFR must exercise the power conferred upon it by Section 32(2) of the said Act and make the declaration contemplated by Section 72A of the Income Tax Act. The conditions for sanctioning a scheme under Section 18 of the said Act being the same as those required for a declaration under Section 72A of the Income Tax Act, the BIFR could not have sanctioned the scheme of amalgamation of Sharp Edge with the appellant but declined to make the declaration under Section 72A of the Income Tax Act with regard to that amalgamation. INDIAN SHAVING PRODUCTS LTD. v.

BD. OFJNDL. & FINANCIAL RECONSTRUCTIONS [BHARUCHA. J.] 4 l The appeal is allowed. The order under appeal as also the order of the A BIFR declining to make a declaration under Section 72A of the Income Tax Act in respect of the 1malgamation of Sharp Edge Ltd. with the appellant are set aside and the BIFR is directed to make such declaration.