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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 ..... all losses of the companies that had amalgamated with the petitioner, for an extended period of three years. The said application was rejected by the impugned order. The petitioner had, thereafter, requested for reconsideration of the petitioner's request for relaxation, which was also rejected and the same was communicated to the petitioner by the impugned communication dated 30.06.2021. Thus, essentially, the petitioner seeks to assail the impugned order dated 25.10.2019 rejecting the petitioner's requests for relaxation of the conditions as prescribed under Rule 9C of the Rules. 3. The only controversy that requires to be considered is whether the impugned order rejecting the petitioner's request for relaxation of the conditions under Rule 9C of the Rules is arbitrary, unreasonable, and contrary to law. FACTUAL CONTEXT 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) Duc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, that is, till the end of five years from the date of amalgamation. 10. In the petitioner's case, the said 50% of the installed capacity was achieved by three of the amalgamating companies, namely, (i) GOFL (ii) DFIPL and (iii) CMFPL. However, the industrial undertaking of CFIL located at Kurkumbh did not achieve the prescribed level of production. In the given circumstances, by the aforementioned letter dated 29.03.2011, the petitioner sought extension of three years for achieving the prescribed level of production. 11. The petitioner was called upon to approach the respondent after filing of the return for the financial year (FY) ending 31.03.2012. 12. Thereafter, the respondent sent a letter dated 20.01.2014 seeking (i) details of the production achieved for FYs 2011-12 and 2012-13; and, (ii) efforts taken for 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 amalgamate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the achieving of such prescribed level. He submitted that in the present case, the petitioner had submitted overwhelming material to establish that it had made genuine efforts to achieve the prescribed production capacity. He submitted that the petitioner had invested a sum of Rs. 176.95 crores in CFIL, which was twice the amount of the likely incentive considering that the brought forward loss and unabsorbed depreciation of CFIL was only Rs. 87 crores. He submitted that the said investment also exceeded 100% of the gross block of CFIL. He stated that the investments made were for increasing the overall efficiency and productivity and to remove bottlenecks, which were set out in detail in the communications sent by the petitioner. Further, he submitted that the petitioner had also provided sufficient material to establish that 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement for the competent authority to consider the same, nonetheless, the competent authority had considered and rejected the same. He contended that the letter dated 30.06.2021 merely conveyed the response of the Revenue to the petitioner's request for reconsideration of its application which was already rejected in terms of the impugned order. RELEVANT STATUTORY PROVISIONS 21. At the outset, it is relevant to refer to the relevant provisions of Section 72A of the Act as were in force at the material time. Reference to Section 72A of the Act in this order, unless the context indicates otherwise, is to the said Section as was in force on 01.04.2007 (the Appointed Date under the Scheme). Section 72A of the Act was amended by virtue of Act 14 of 2010, but the said amendments are not material to the controversy. The said 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, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing forward or set-off of accumulated loss and unabsorbed depreciation allowance in case of amalgamation. The conditions referred to in clause (iii) of sub-section (2) of section 72A shall be the following, namely:- (a) the amalgamated company, owning an industrial undertaking of the amalgamating company by way of amalgamation, shall achieve the level of production of at least fifty per cent of the installed capacity of the said undertaking before the end of four years from the date of amalgamation and continue to maintain the said minimum level of production till the end of five years from the date of amalgamation: Provided that the Central Government, on an application made by the amalgamated company, may relax the condition of achieving the level of production or the period during which the same is to be achieved or 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 bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uine efforts made by the amalgamated company to attain the prescribed level of production and the circumstances preventing such efforts from achieving the same. 28. As is apparent from the above, the proviso to Rule 9C (a) of the Rules is an enabling provision that empowers the Central Government to relax the stipulated conditions. This power is not unbridled but its exercise is guided by the considerations as set out in the proviso - (i) genuine efforts made by the amalgamated company to attain the prescribed level of production; and, (ii) the circumstances preventing such efforts from achieving the same. 29. As contended by the learned counsel appearing for the Revenue, the Central Government has a wide discretion in considering whether the conditions as stipulated under Rule 9C (a) of the Rule ought to be relaxed. However, 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 limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation 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. (2) Notwithstanding anything contained in sub-section (1), the accumulated loss shall not be set off or carry forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless the following conditions are fulfilled, namely:- (i) during the previous year relevant to the assessment year for which such set off or allowance is claimed, the business of the amalgamating company is carried on by the amalgamated company without any modification or reorganisation or with such modification or reorganisation as may be approved by the Central Government to 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther forms of power. The benefit was also extended to a company owning hotel as well as to a banking company. However, the condition that the benefit be restricted only for revival of the business of amalgamating company, continued to be the substratal theme. The benefit was restricted to those cases where the amalgamated company fulfilled the condition, as may be prescribed; (i) to ensure revival of business of the amalgamating company; and (ii) to ensure that the amalgamation is for a genuine purpose. 35. Sub-section (2) of Section 72A of the Act, as substituted with effect from 01.04.2000, continues to read the same as in force at the material time [(that is prior to the Finance Act, 2025 coming into force)]. There were other amendments to Section 72A of the Act, which were legislated subsequently. However, it is not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediately before such amalgamation , financially viable and the amalgamation was in public interest. The expression "financial non-viability" has not been defined in the Act but the Finance Minister's speech, the Notes on Clauses of the Bill and the Memorandum explaining the provisions thereof make it clear that the financial non-viability of an undertaking 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 temporary character and not any basic or permanent sickness. An undertaking which is basically or potentially non-viable will ordinarily be incapable of revival and would face a closure; in other words, the financial non-viability spoken of by the section must refer to sickness brought about by temporary adverse financial 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It indicates that in exercising the power, regard must be had also to the factors enumerated together with all factors relevant for exercise of that power. One such factor specified in clause 12 is "such as an increase or decrease in the cost of production or distribution". Admittedly, the fixation of the uniform retention price at Rs 100 per tonne was made on the industry's demand for revision of the price as a result of increase in the cost of production, the only dispute between the industry and the Central Government being with regard to the extent of increase and not to the effect of increase or the mode of increase by fixation of a uniform price. It is, therefore, difficult to appreciate the support that the learned counsel for the appellants seek from Clause 12." 40. It is also relevant to bear in mind that by its 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive at the first blush, a closer examination of the same would indicate that the same are unmerited. This is so because in the first instance, the petitioner had sought for relaxation of the requisite Rule by citing various reasons to buttress its claim that it had made genuine efforts for revival of the industrial undertaking of the amalgamating company but was prevented by mitigating circumstances. But, the condition as specified - that is, achieving production equivalent to at least 50% of the installed capacity of the undertaking of the amalgamating company - was not satisfied even if the extended time for satisfying the same was taken into account. Thus, the impugned order/decision to deny relaxation of the stipulated condition is not in disregard of the petitioner's claim regarding the efforts taken to achieve the minimum 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion that the Central Government had rendered a decision in disregard of the relevant factors, namely, the efforts made by the petitioner to achieve the requisite level of production capacity and the circumstances that prevented it from doing so is clearly unmerited. The impugned order is premised on the basis that even if the conditions as mentioned by the petitioner are accepted, it had failed to achieve the requisite level of production capacity. The impugned order does not indicate that the two factors as stated above were disregarded. The impugned order was passed after the extended period of three years - the relaxation as sought by the petitioner - had expired. The concerned authority thus had the benefit of hindsight. The petitioner's application for relaxation of the conditions on the basis of two guiding factors as 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussion was in the context of granting such benefit by the Central Government keeping in view the guidelines and the object of introducing Section 72A of the Act. The said objective being to incentivize revival of financially unviable industrial undertakings. The Supreme Court noting the objective of introducing Section 72A of the Act had made observations to the effect that the Central Government must extend the benefit by construing the financial unviability from a businessman's perspective and in a commercial sense. The sweep of the main section - which is to provide incentive to encourage revival of financially unviable industrial undertaking - is required to be interpreted expansively so as to cover all intended cases. But the provision to carve out an exception to the stipulated standard cannot be interpreted expansively. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not dissolved on account of amalgamation with the amalgamated company. 61. However, as noted above, this benefit is subject to the amalgamated company complying with certain conditions as stipulated in Sub-section (2) of Section 72A of the Act. A plain reading of the said conditions clearly indicates that the said conditions have been stipulated to preclude abuse of the said provision by profit making companies amalgamating with loss making companies solely to avoid tax without any intention of continuing the business. It is also apparent that the rationale is to ensure that the business of amalgamating company continues and sustains. In terms of Clause (a) and (b) of Sub- section (2) of Section 72A of the Act, the benefit of carry forward of losses of an amalgamating company would be available only if the amalgamating 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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