1. Amalgamation of a sick industrial company — Denial of tax benefits under Section 72A, Income Tax Act, 1961 — Challenge to BIFR and AAIFR orders. (Para 1 , 5 , 6 )
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1996 Supreme(SC) 17
1996(1) Supreme 183
SUPREME COURT OF INDIA
S.P. Bharucha and S. Saghir Ahmad, JJ.
Indian Shaving Products Ltd. -Appellant
versus
Board of Industrial and Financial Reconstruction & Anr. -Respondents
Civil Appeal No. 5638 of 1994
Decided on 3.1.1996
Important Points
IMPORTANT POINT
Sanction of a scheme of amalgamation under Section 18 of Sick Industrial Companies (Special Provision) Act, 1985 necessarily implies that the requirements of Section 72A of I.T. Act, 1961 have been met and the Board of Industrial and Financial Reconstruction (BIFR) must averase the power conferred on it by Section 32(2) of the said Act and make the decleration contemplated by Section 72A of I.T. Act.
Sanction of a scheme of amalgamation under Section 18 of Sick Industrial Companies (Special Provision) Act, 1985 necessarily implies that the requirements of Section 72A of I.T. Act, 1961 have been met and the Board of Industrial and Financial Reconstruction (BIFR) must averase the power conferred on it by Section 32(2) of the said Act and make the decleration contemplated by Section 72A of I.T. Act.
Subject
Taxation Law - Income Tax
Act Referred
Headnote
Sick Industrial Companies (Special Provisions) Act, 1985-Sections 3(o), 17, 18 and 32(2)-Income tax Act, 1961-Section 72A-Benefit of accumulated loss and allowance for depreciation of amalgamating Co.-Amalgamation of Sharp Edge Ltd. with appellant-BIFR not extended benefit of provisions of Section 72A of I.T. Act to the appellant-Affirmed by AAIFR-Appeal against to Supreme Court by special leave-Whether orders of BIFR and AAIFR declining to make a declaration under Section 72A of Income Tax Act in respect of the amalgamation of Sharp Edge Ltd. with appellant be set aside ? (Yes) (Para 11)
Held : Under Section 72 of the Income Tax Act, to give to the amalgamated company the benefit of the 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 authority, 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 such 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. (Para 9)
Legal Category Hierarchy
Table of Contents
2. Whether tax benefits under Section 72A, Income Tax Act, 1961, are warranted if a sick company shows incipient viability prior to amalgamation. (Para 6 , 7 )
3. Section 72A aims to facilitate mergers of sick units with sound ones to avoid social costs, equating financial non-viability with temporary sickness. (Para 8 , 9 )
4. Sanctioning an amalgamation scheme under Section 18 of the SICA implies that the requirements of Section 72A of the Income Tax Act have been satisfied. (Para 10 )
5. Appeal allowed — Orders of BIFR and AAIFR set aside — BIFR directed to grant benefits under Section 72A, Income Tax Act, 1961. (Para 11 )
6. What is the objective of Section 72A of the Income Tax Act, 1961?
The provision aims to facilitate the amalgamation of sick industrial units with sound ones by providing incentives, thereby reducing social costs such as unemployment and loss of production, and relieving the government of the burden of running sick units. (Para 8 )
7. How is financial non-viability interpreted under Section 72A of the Income Tax Act, 1961?
Financial non-viability is equated with the sickness of an undertaking, specifically referring to sickness caused by temporary adverse financial circumstances that disable the unit from operating independently, rather than basic or permanent non-viability. (Para 8 )
8. What is the relationship between sanctioning a scheme under Section 18 of the SICA and the grant of benefits under Section 72A of the Income Tax Act?
Sanctioning a scheme of amalgamation under Section 18 of the SICA necessarily implies that the requirements of Section 72A of the Income Tax Act have been met, and the BIFR must exercise its power to make the necessary declaration. (Para 9 , 10 )
JUDGMENT
Bharucha, J.-This appeal by special leave impugns an order of the Appellate Authority for Industrial & Financial Reconstruction. The impugned order upheld the order of the Board for Industrial and Financial Reconstruction, established under the Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter called the said Act), by which the benefit of the provisions of Section 72A of the Income Tax Act, 1961, was not extended to the appellant upon the amalgamation of Sharp Edge. Limited with it.
2. Notice upon this appeal was issued to the Central Board of Direct Taxes and it was duly served. It has not entered appearance.
3. Section 72A of the Income Tax Act states "that where there has been an amalgamation of a company owning an industrial undertaking with another company and the Central Government, on the recommendation of the specified authority, is satisfied that the following conditions are fulfilled, namely :-
"(a) the amalgamating company was not, immediately before such amalgamation, financially viable by reason of its liabilities, losses and other relevant factors ;
(b) the amalgamation was in the public interest ; and
(c) such other conditions as the Central Government may, by notification in the Official Gazettee, specify, to ensure that the benefit under this section is restricted to amalgamation which would facilitate the rehabilitation or revival of the business of the amalgamating company.
then, the Central Government may make a declaration to that effect, and, thereupon, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be 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, and the other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly .............".
"Specified authority" has been defined for the purposes of Section 72A to mean such authority as the Central Government might, by notification in the Official Gazette, specify.
4. The said Act was enacted to make, in the public interest, special provisions with a view to securing the timely detection of sick and potentially sick companies owning industrial undertakings, the speedy determination by a board of experts of the preventive, ameliorative, remedial and other measures which were needed to be taken with respect to such companies and the expeditious enforcement thereof. Section 4 constitutes the Board for Industrial and Financial Reconstruction (BIFR) and Section 5 constitutes the Appellate Authority. Chapter III deals with references, inquiries and schemes. The provisions of Section 15(1) state that where an industrial company has become a sick industrial company, its Board of Directors shall within sixty days from the date of finalisation of the duly audited accounts of the company for the financial year as at the end of which the company has become a sick industrial company, make a reference to the BIFR for determination of the measures which should be adopted with respect to the company. A "sick industrial company" was defined by Section 3(o) to mean an industrial company which had at the end of any financial year accummulated losses equal to or exceeding its entire net worth and had also suffered cash losses in such financial year and the financial year immediately preceding such financial year. This definition was substituted in 1994 so that it now means an industrial company (being a company registered for not less than five years) which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Section 16 requires the BIFR to make such inquiry as it may deem fit for determining whether any industrial company has become a sick industrial company, inter alia, upon receipt of a reference with respect to such c
