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TMI Blog2025 (3) TMI 465X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner had not sought any relaxation of the said conditions either at the time of amalgamation or immediately thereafter. The petitioner had made its first application seeking relaxation of the conditions under proviso to Rule 9C of the Rules, one day prior to the expiry of period of four years from the date of amalgamation, that is, on 30.03.2011. It is material to note that on that date, the petitioner had sought an extension of three years to achieve the installed capacity of 50% production. Admittedly, the threshold capacity was not achieved within the extended period, that is within 31.03.2014. However, the petitioner's application for relaxation continued to be pending and was not disposed of. The petitioner once again sent a communication modifying its request to relax the condition regarding achieving the level of production to 40% instead of 50% as required and sought extension of further one year, that is, till 31.03.2012. It is material to note that the said request was made by a separate application in response to proceedings/communications in relation to the petitioner's earlier application for extension of time for achieving the threshold production level of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. This court had, by an order dated 13.08.2008 in Company Petition No.139/2008, sanctioned a scheme of arrangement (hereafter the Scheme) under Section 391-394 of the Companies Act, 1956 involving the petitioner. In terms of the Scheme, four separate companies, namely, (i) Cargill Foods India Ltd. (CFIL); (ii) Global Oils and Facts Ltd. (GOFL); (iii) Duckworth Flavours (India) Pvt. Ltd. (DFIPL); and (iv) Cargill Matrix Feeds Pvt. Ltd. (CMFPL) were amalgamated with the petitioner company with effect from the appointed date, which was fixed as 01.04.2007. 5. As on the appointed date, the accumulated losses and unabsorbed depreciation of the four amalgamated companies amounted to Rs. 141 crores. The breakup of the said accumulated losses is reproduced below: Name of entity Accumulated Losses (INR) Cargil Foods India Limited (CFIL) 874,076,607 Global Oils and Fats Limited (GOFL) 447,986,447 Cargill Matrix Feeds Private Limited (CMFPL) 86,715,084 Duckworth Flavors India Private Limited (DFIPL) 2,609,034 Total 1,411,387,172 6. In terms of Section 72A of the Act, the accumulated losses and unabsorbed depreciation of the amalgamated companies are deemed to be un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achieving the production level of 50% of the installed capacity and the circumstances under which the same was not achieved. The said communication was sent, in the context of the petitioner's request, for extension of three years, that is, upto 31.03.2014 for achieving the threshold level of 50% of the capacity utilization of the undertakings of the amalgamated companies. 13. Thereafter on 10.02.2014, the petitioner sent a letter providing certain details and modifying its request. The petitioner reiterated that the production capacity utilization had increased from 23.5% as on 01.04.2007 to 42.16% as on 31.03.2013 but due to circumstances beyond its control, the threshold minimum level of 50% of the installed capacity was not achieved. The petitioner now sought that; (a) that the conditions of achieving the level of production be relaxed to 40%; and (b) the time for meeting the said condition be extended from 31.03.2011 to 31.03.2012. 14. On 21.06.2018, the petitioner once again made an application seeking relaxation of the conditions as stipulated under Rule 9C of the Rules. The petitioner requested that the stipulated condition of achieving minimum level of capacity utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it was prevented from achieving the stipulated minimum level of capacity utilization due to various circumstances such as shortage of water, deteriorating power condition in the region, scarcity of primary fuel (sugarcane bagasse) and higher transportation cost. He submitted that there were other factors including reduction in the import duty on refined oil, thus, making the imported refined oil cheaper than the domestically manufactured refined oil. Additionally, he stated that the currency fluctuations and volatility of crude oil in the international market and further delays in granting approval for use of alternate fuels also prevented the petitioner from achieving the desired production levels. 17. He submitted that the capacity utilization had doubled from 23.5% in FY 2006-07 to 45.56% in FY 2014-15. However, the aforesaid facts had been disregarded. He contended that there was no finding that the petitioner had not made genuine efforts or that the mitigating factors as pointed out by the petitioner were not genuine. He also submitted that the Revenue did not contest that the petitioner had invested Rs. 176 crores, which clearly established petitioner's bona fide efforts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section was amended thereafter by the Finance Act 2023, (Act 8 of 2023). But the said amendments are inapplicable to the present case. 22. Section 72A of the Act allows set off and carry forward of losses of an amalgamating company subject to certain conditions being satisfied. The relevant extract of Section 72A of the Act as in force at the material time, is set out below: "72A. (1) Where there has been an amalgamation of- (a) a company owning an industrial undertaking or a ship or a hotel with another company; or (b) ; or (c) ............ then, 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 unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly. (2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both in suitable cases having regard to the genuine efforts made by the amalgamated company to attain the prescribed level of production and the circumstances preventing such efforts from achieving the same; (b) the amalgamated company shall furnish to the Assessing Officer a certificate in Form No. 62, duly verified by an accountant, with reference to the books of account and other documents showing particulars of production, along with the return of income for the assessment year relevant to the previous year during which the prescribed level of production is achieved and for subsequent assessment years relevant to the previous years falling within five years from the date of amalgamation. Explanation.-For the purposes of this rule,- (a) "installed capacity" means the capacity of production existing on the date of amalgamation; and (b) "accountant" means the accountant as defined in the Explanation below sub-section (2) of section 288 of the Income-tax Act, 1961." NON OBSTANTE CLAUSE - SECTION 72A AND RULE 9C 24. It is relevant to note that Section 72A (2) of the Act contains a non obstante clause. Thus, if the conditions as specified in Section 72A (2) of the Act are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, it is also necessary to bear in mind that every power is coupled with duty to exercise the same. Thus, an application to the Central Government to relax the conditions as stipulated is required to be considered bearing in mind the object of Section 72A (2) of the Act as well as the guiding factors as expressly indicated in the proviso itself. 30. The limited aspect to be examined in the present case is whether the decision of the Central Government to reject the petitioner's application for relaxation of the conditions as stipulated in Rule 9C (a) of the Rules is manifestly arbitrary or unreasonable. THE OBJECTIVE OF SECTION 72A OF THE ACT 31. Plainly, the discretionary power is required to be exercised to further the object of the statutory provision. It is thus necessary to briefly examine the objective of Section 72A of the Act. 32. Section 72A of the Act was inserted by virtue of Finance (2) Act of 1997 with effect from 01.04.1998. The object and purpose of Section 72A of the Act can be discerned by the legislative history of the said provision. Prior to 01.04.2000, carry forward of losses by an amalgamated company was permissible only if the specified authority so recom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enable the amalgamated company to carry on such business more economically or more efficiently; (ii) the amalgamated company furnishes, along with its return of income for the said assessment year, a certificate from the specified authority to the effect that adequate steps have been taken by that company for the rehabilitation or revival of the business of the amalgamating company. (3) where a company owning an industrial undertaking or a ship purposes to amalgamate with any other company and such other company submits the proposed scheme of amalgamation to the specified authority and that authority is satisfied, after examining the scheme and taking into account all relevant facts, that the conditions referred to in sub-section (1) would be fulfilled if such amalgamation is effected in accordance with such scheme or, as the case may be, in accordance with such scheme as modified in such manner as that authority may specify, it shall intimate such other company that, after the amalgamation is effected in accordance with such scheme or, as the case may be, such scheme as so modified, it would make (unless there is any material change in the relevant facts) a recommendation to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary to examine the said amendments. Suffice, it is to state that the object of Section 72A of the Act continues to remain the same, that is to serve as an incentive for undertaking schemes for rehabilitating and reviving companies owning industrial undertakings or engaged in other specified business. 36. We consider it relevant to refer to the following extract from the decision of the Supreme Court in Commissioner of Income-tax, Bombay and Ors. v. Mahindra & Mahindra Ltd. and Ors., which sets out the purpose and object of introduction of Section 72A of the Act: "13. 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 Section 72-A 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 non-viability. From the budget speech of the Finance Minister, the Notes on Clauses of the Finance Bill (No. 2) of 1977 and the Memorandum explaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al circumstances that disables the unit to stand and work on its own. This is also made clear by the provision contained in clause (a) of sub-section (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". EXERCISE OF POWER TO RELAX 37. As noted above, Rule 9C (a) of the Rules sets out an objective parameter for availing the benefit of Section 72A of the Act - achievement of 50% of the installed capacity of the industrial undertaking of the amalgamating company and maintaining the same till the end of five years from the date of amalgamation. The petitioner claims that it is entitled to relaxation of the said condition under the proviso to Rule 9C (a) of the Rules. 38. In terms of Rule 9C (a) of the Rules, the Central Government can relax (i) the capacity utilisation to be achieved; or (ii) the time period to achieve the same; or both. Such relaxation can be granted by Central Government having regard to the two factors: (i) the genuine efforts made by the amalgamated company to attain the prescribed level of production; and (ii) the circumstances preventing such eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s very nature the power to relax a Rule or a condition is by way of an exception and the scope of such power cannot be construed in an expansive manner. In West Bengal State Electricity Board v. Patel Engineering Co. Ltd. & Ors. (2001) 2 SCC 451, the Supreme Court had observed that "where power to relax or waive a rule or a condition exists under the Rules, it has to be done strictly in compliance with the Rules". It is further necessary that the power is exercised reasonably and objectively. It is also well settled that the power to relax a Rule or a condition is required to be exercised only to the extent it is necessary.[Ref:Union of India v. Narendra Singh, (2008) 2 SCC 750; J.C. Yadav and others v. State of Haryana and others, (1990) 2 SCC 189.] The necessity for using such power must obviously be dictated by the object of the Rules or condition sought to be relaxed. JUDICIAL REVIEW OF EXERCISE OF DISCRETIONARY POWER 41. Bearing the aforesaid principles in mind, we may now proceed to examine whether the impugned order or the subsequent decision to reject the petitioner's application for reconsideration (communicated by the impugned communication) warrants any interference by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mum level of production capacity and the circumstances that prevented achievement of such capacity. But a decision that makes allowance for the same. 46. The petitioner claimed that it had made substantial investments for meeting the efficiency of operations and for removing constraints that had hindered the production level. It claimed that during the period from 13.08.2008 till January, 2011, it had invested an amount of Rs. 22.27 crores in Kurkumbh plant alone and the same constituted 24% of the gross block on the date of the merger. The petitioner had set out the expenditure incurred by it in removing the bottlenecks and for upgrading and improving the efficiency and productivity of the plant in question. 47. The petitioner had also set out the reasons that prevented it from achieving the requisite threshold installed capacity. First, it stated that there was paucity of time. It stated that there was time lapse of almost one and half years between the appointed date and the effective date of amalgamation. This, according to the petitioner, was a constraint that prevented it from achieving the prescribed level of production. Second, the petitioner stated that Kurkumbh plant wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicated in proviso to Rule 9C (a) of the Rules would be of little relevance after the extended period had expired. 51. It is also relevant to bear in mind the overall arching purpose of Section 72A of the Act, which as discussed above, is to ensure that the industrial undertakings of the amalgamating companies are revived. 52. As indicated in the proviso to Rule 9C (a) of the Rules, the Central Government may either relax the time period within which the production capacity is to be achieved or the threshold level of capacity utilization is achieved or both. 53. The petitioner's application was confined to seeking relaxation of the period for achieving the minimum capacity utilization. The petitioner had thereafter entered into correspondences seeking to modify its earlier request. By a communication dated 10.02.2014, the petitioner sought relaxation of the minimum level of production capacity from 50% to 40%. It further expanded its requests by seeking the relaxation in the level of production from 50% to 40% with extension of one-year upto 31.03.2012 [By communication dated 09.04.2014.]. The said request was also modified subsequently by requesting that the requirement for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely. The principles of interpretation of a main rule and an exception to the rule are not necessarily the same. 57. The observations made by the court in Commissioner of Income- tax v. Mahindra & Mahindra Ltd. have little application after introduction of an objective criteria of achievement of 50% of the installed capacity of the industrial undertakings of the amalgamating companies. The question that arises in the present petition is not one of the stipulating conditions for the grant of benefit of Section 72A of the Act but the exercise of power to relax the Rule prescribing an objective criterion for availing the benefit of Section 72A of the Act. 58. As noted above, the power of relaxation cannot be exercised liberally but must be exercised only to the extent it is necessary and keeping in view the relevant factors and the objective of the main statute. 59. At this stage, it is relevant to note that the Scheme was sanctioned by an order dated 13.08.2008 and in terms of the Scheme, the transferred companies dissolved without undergoing the process of winding up from the appointed date, that is from 01.04.2007. The Scheme was not framed with the object of revival of the amal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is engaged in the business in which accumulated losses have occurred or depreciation remains unabsorbed for three or more years and the amalgamating company continues to hold three-fourth of the book value of fixed assets held by it two years prior to the date of amalgamation. In terms of clause (b) of Section 72A (2) of the Act, the amalgamated company is required to hold the three- fourths of the book value of fixed assets of the amalgamating company for a minimum period of five years from the date of amalgamation and to continue the business for a minimum period of five years from the date of amalgamation. 62. In a case such as the present one where the objective of the Scheme was "simplifying the corporate structure of Cargill Group in India, with a view to maximize shareholders value", it would be all the more imperative for the petitioner to achieve the requirement of achieving the stipulated threshold capacity utilization. The objective of Section 72A of the Act is not to extend the benefit of carry-forward of unabsorbed losses to the amalgamated company for the purposes of encouraging simplification of corporate structure; it is to extend the benefit to encourage s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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