1996 (1) TMI 375 - SC - Income Tax

Order of the Appellate Authority for Industrial and Financial Reconstruction - impugned order upheld the order of the BIFR by which the benefit of the provisions of section 72A of IT Act 1961 was not extended to the appellant upon the amalgamation of Sharp Edge Limited with it - order under appeal as also the order of the BIFR declining to make a declaration u/s 72A in respect of the amalgamation of Sharp Edge Ltd. with the appellant set aside and the BIFR is directed to make such directed

Summary

Issues Involved: Applicability of Section 72A of the Income-tax Act, 1961; Financial viability of the amalgamating company; Public interest in amalgamation; Powers of the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985.

Issue-wise Detailed Analysis:

1. Applicability of Section 72A of the Income-tax Act, 1961:
The central issue revolves around whether the benefit of Section 72A of the Income-tax Act, 1961, should be extended to the appellant upon the amalgamation of Sharp Edge Limited with it. Section 72A states that where there has been an amalgamation of a company owning an industrial undertaking with another company, and the Central Government is satisfied that certain conditions are fulfilled, the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or allowance for depreciation of the amalgamated company. The conditions include financial non-viability of the amalgamating company, amalgamation being in the public interest, and other specified conditions to ensure the rehabilitation or revival of the business.

2. Financial Viability of the Amalgamating Company:
The BIFR and the appellate authority both assessed the financial viability of Sharp Edge Limited. The BIFR noted that Sharp Edge had been showing cash profits for the last three years and its net worth had become positive, primarily due to the management and financial support from the appellant. The appellate authority affirmed this view, stating that the sick company had generated cash profits in the preceding two years prior to the date of amalgamation, indicating it was in a stage of incipient sickness and potentially financially viable.

3. Public Interest in Amalgamation:
The BIFR and appellate authority evaluated whether the amalgamation was in the public interest. The appellate authority emphasized that public interest must be judged by examining whether the rehabilitation-cum-merger scheme would succeed or fail without the income-tax benefit. It concluded that the scheme would succeed even without the benefit, and granting it would be unwarranted and undeserved, thus affirming the BIFR's decision not to extend the benefit under Section 72A.

4. Powers of the BIFR under the Sick Industrial Companies (Special Provisions) Act, 1985:
The BIFR's role under the said Act is to secure the timely detection of sick and potentially sick companies and to determine and enforce measures for their rehabilitation. Section 17 of the Act empowers the BIFR to make suitable orders upon completing an inquiry into whether a company has become a sick industrial company. Section 32(2) of the Act modifies the application of Section 72A of the Income-tax Act, allowing the BIFR to exercise the power of the Central Government without the need for a recommendation by the specified authority.

Judgment and Conclusion:
The Supreme Court concluded that the conditions for sanctioning a scheme under Section 18 of the said Act are the same as those required for a declaration under Section 72A of the Income-tax Act. Therefore, the BIFR could not have sanctioned the scheme of amalgamation of Sharp Edge with the appellant while declining to make the declaration under Section 72A. The appeal was allowed, and the orders of the BIFR and the appellate authority were set aside. The BIFR was directed to make the declaration under Section 72A of the Income-tax Act in respect of the amalgamation of Sharp Edge Ltd. with the appellant. No order as to costs was made.