Director General Of Income Tax ... vs Board For Industrial & Financial ...
2011 Latest Caselaw 1646 Del

*         IN THE HIGH COURT OF DELHI AT NEW DELHI


%                                                          Date of decision: 23.03.2011

+               WP (C) Nos.1940, 1942, 1943, 1945, 1946, 1948-1958 of 2011


DIRECTOR GENERAL OF INCOME TAX
(ADMN.) & ANR., NEW DELHI                  ...PETITIONERS
                     Through: Mr. Sanjeev Sabharwal &
                              Mr. D.R. Jain, Advocates.


                                          Versus


BOARD FOR INDUSTRIAL & FINANCIAL
RECONSTRUCTION, NEW DELHI & ORS.          ...RESPONDENTS
                   Through:  Ms. Maneesha Dhir, Ms. Purti
                             Marwaha & Mr. Abhirup Dasgupta,
                             Advocates for Respondent No.2 in
                             WP (C) Nos.1943/2011, 1945/2011,
                             1948/2011, 1955/2011 & 1956/2011.


CORAM:
HON'BLE MR. JUSTICE SANJAY KISHAN KAUL
HON‟BLE MR. JUSTICE RAJIV SHAKDHER

1.     Whether the Reporters of local papers
       may be allowed to see the judgment?              Yes

2.      To be referred to Reporter or not?              Yes

3.      Whether the judgment should be                  Yes
        reported in the Digest?


SANJAY KISHAN KAUL, J. (Oral)

CM No.4130/2011 in WP (C) No.1940/2011 (Exemption) CM No.4132/2011 in WP (C) No.1942/2011 (Exemption) CM No.4133/2011 in WP (C) No.1943/2011 (Exemption) CM No.4135/2011 in WP (C) No.1945/2011 (Exemption) CM No.4136/2011 in WP (C) No.1946/2011 (Exemption) CM No.4138/2011 in WP (C) No.1948/2011 (Exemption) CM No.4139/2011 in WP (C) No.1949/2011 (Exemption) CM No.4140/2011 in WP (C) No.1950/2011 (Exemption) CM No.4141/2011 in WP (C) No.1951/2011 (Exemption) CM No.4142/2011 in WP (C) No.1952/2011 (Exemption) _____________________________________________________________________________________________

CM No.4143/2011 in WP (C) No.1953/2011 (Exemption) CM No.4144/2011 in WP (C) No.1954/2011 (Exemption) CM No.4145/2011 in WP (C) No.1955/2011 (Exemption) CM No.4146/2011 in WP (C) No.1956/2011 (Exemption) CM No.4147/2011 in WP (C) No.1957/2011 (Exemption) CM No.4148/2011 in WP (C) No.1958/2011 (Exemption)

Allowed subject to just exceptions.

WP (C) Nos.1940, 1942, 1945, 1946, 1948-1958 of 2011

1. In the captioned writ petitions the Income Tax Department (for short „the

Department‟) has laid an omnibus challenge under Article 226 of the

Constitution of India to the following orders dated 12.6.2007, 4.7.2008,

17.11.2008, 10.7.2008, 19.5.2009, 6.10.2009, 26.11.2009, 2.12.2009, 1.8.2005,

20.2.2007, 2.1.2008, 16.12.2009, 2.2.2009, 30.12.2009, 7.8.2006, 13.8.2007

(challenged in WP (C) Nos.1940, 1942, 1945, 1946, 1948-1958 of 2011

respectively) passed by the Board for Industrial & Financial Reconstruction (for

short „BIFR‟), without taking recourse to an appellate remedy, available under

Section 25 of the Sick Industrial Companies (Special Provisions) Act, 1985

(hereinafter referred to as the „SICA‟). The reason supplied for not doing so

were told is two-fold: - First, the decisions of the Appellate Authority for

Industrial and Financial Reconstruction (in short „AAIFR‟) in the case of M/s.

Symphony Comfort Systems Ltd. (Appeal Nos.78/2009 & 254/2009); M/s.

Howrah Mills Ltd. (Appeal No.219/2008) & M/s. Siris Ltd. (Appeal

No.229/2009); and second, the decision of this Court in M/s. Synergy Steels

Limited Vs. The Appellate Authority for Industrial & Financial Reconstruction

& Ors. (2011) 1 Compl L J 371 (Del).

1.1 Since the ground of challenge in each of the writ petitions is common we

will be referring to the aforementioned orders collectively as the impugned

orders.

_____________________________________________________________________________________________

2. As is apparent, the impugned orders span a period commencing from

August, 2006 till December, 2009. Delay and latches is starkly evident on the

face of these impugned orders. Since the issue raised is important, we have

decided to deal with the writ petitions on merits.

3. There is a common question arising in all these writ petitions, i.e.

whether the discharge of the reference by the BIFR, on the sick industrial

company‟s net worth becoming positive, would entitle the Department to

withdraw the concessions which form part of a sanctioned scheme

4. The gravamen of the submissions of the Department (as is apparent from

the grounds laid in these writ petitions) is that, once the net worth of the referrer

(i.e., the sick industrial company) becomes positive, and the BIFR chooses to

discharge the reference, then the protective umbrella of the provisions of SICA

or the sanctioned scheme will automatically stand withdrawn.

5. It is pertinent to note that in the captioned cases, references were

discharged by the BIFR at the request of the referrer on the ground that their net

worth had become positive.

6. In nutshell, the contention of the Department is as follows:

With the net worth turning positive and the reference pending before the BIFR being discharged; the Department ought to be in a position to recover its dues de hors the concessions incorporated in the sanctioned scheme.

7. We are unable to accept this plea. However, we articulate reasons for coming

to this conclusion, it would be appropriate to briefly touch upon the legislative scheme

of SICA.

7.1 A perusal of the statement of objects and reasons encapsulated in SICA clearly

provides that the intendment of the Legislature is that in order to overcome the ill

effect of sickness such as loss of production, loss of employment, loss of revenue to

_____________________________________________________________________________________________

central and state government and the blockage of illiquid funds of the bank and

financial institutions given in the form of financial assistance; led to the enactment of

SICA. The avowed object of enactment of SICA is not only to fully utilize the

productive industrial assets (which included both tangible and intangible assets) and

human resources but also to salvage the locked investible funds of banks and financial

institutions in such sick industrial companies which were non-viable. Therefore, the

legislature in its wisdom decided to enact a special law to deal with the industrial

sickness.

7.2 This necessarily meant that the provisions of SICA would engage the attention

of expert bodies constituted under it (i.e., BIFR and AAIFR) in respect of only those

companies which fall within the four corners of the act. In this regard the definition of

a sick industrial company is paramount. Therefore, in order to enter the domain of

SICA the referrer would have to be a sick industrial company. What is a sick

industrial company is ascertainable on reading the provisions of Section 3(1)(o) along

with provisions of Section 3(1)(e), 3(1)(f) and 3(1)(n) of the SICA. Briefly, what is

discernable on reading of these provisions, is that, a sick industrial company is one

which (i) owns one or more industrial undertakings; (ii) the industrial undertakings

should pertain to a scheduled industry falling in the first schedule to the Industries

(Development & Regulation) Act, 1951 (in short „IDR‟); (iii) the business of the

industrial undertaking(s) could be carried on in one or more factories; and (iv) lastly,

the accumulated losses of such company equal to or exceed its entire net worth. The

aforementioned conditions are cumulative.

7.3 The additional conditionalities which are provided in Section 3(1)(o) and

Section 3(1)(f) are that: the company should have been registered for not less than five

years and that such a company should not be an ancillary industrial undertakings or a

small scale industrial undertakings as defined in clause (aa) of Section 3 and clause (j)

of the very same Section, i.e., Section 3 of the IDR Act.

7.4 As to what the act means by net worth is defined in Section 3(1)(ga). _____________________________________________________________________________________________

7.5 Therefore, once the accumulated loss of a company which falls within the

provisions of this act is eroded it necessarily has to file a reference with the BIFR. It

may not be out of place to mention here that as a matter of fact the act envisages a

mandatory reporting by companies falling within the provisions of SICA, its potential

sickness. Under the provisions of Section 23 of SICA potential sickness is reached

when at the end of a given financial year of a company 50% or more of its peak net

worth during the immediately preceding four financial years gets eroded. Under

Section 23 of SICA the onus is on the company, while under Section 23A of SICA the

Central Government, Reserve Bank of India or the State Government or even a public

financial institution or a State financial institution or a scheduled bank is empowered

to report such potential sickness, if it has sufficient reasons to believe that the 50% or

more of the peak net worth during immediately preceding four financial years at the

end of any financial year stands eroded.

7.6 Therefore, the act provides for a mandatory reporting of not only sickness but

also potential sickness of companies governed by the provisions of SICA. Once such

an eventuality is reached, the referrer is required to approach the BIFR by filing a

reference, in the prescribed format.

7.7 The point in time at which a company is required to mandatorily report its

reference is provided under Section 15 of SICA. As observed by us above, the onus is

on the company and, therefore, the board of directors of such a company.

7.8 Once a reference is filed under Section 16; as per the regulations enacted under

SICA i.e., the Board for Industrial and Financial Regulations, 1987 (hereinafter

referred to as „Regulations‟), the initial scrutiny of the particulars provided in the

reference and the material appended to it is carried out by the prescribed authority.

The Regulations provided for a scrutiny by the Secretary or the Registrar as the case

may be and if for some reason the Registrar declines to register the reference, an

appeal is provided to the Secretary. In the event of the Secretary also declining to

register the reference, an appeal is provided to the Chairman of the BIFR (see _____________________________________________________________________________________________

Regulations 19). The importance of the registration of reference cannot be

undermined as once a reference is registered, the provisions of SICA get triggered.

7.9 In the ordinary course of things the reference comes up before the BIFR, that

is, the board which sits in Benches. The BIFR or the Board is empowered to make an

inquiry upon receipt of reference under Section 16 of SICA. For the purposes of this

inquiry, the Board is empowered, if it so desires, to appoint one or more persons as

special directors. The special directors under sub-section (6) of Section 16 are

insulated from the vagaries of change at the behest of the shareholders, since they

report directly to the BIFR and stay on the board of directors of the referencee

company at the pleasure of the BIFR. [See clause (a) to (d) of sub-section (6) of

Section 16] Upon inquiry once the BIFR comes to the conclusion that the referrer is a

sick industrial company, then it has to take a view as to whether it is practicable for

the sick industrial company to make its net worth exceed its accumulated losses within

a reasonable time on its own or, if it is not practicable for the sick industrial company

on its own to revive itself or it is of the opinion that it is expedient in public interest to

adopt all or any of the measures provided in Section 18 of the SICA, it can appoint an

operating agency to formulate a scheme for revival of the referrer [see sub-section (2)

and (3) of Section 17].

7.10 If the BIFR passes an order under Section 17(3), then an operating agency is

required to prepare a scheme ordinarily within a period of 90 days. Such a scheme can

provide for measures, which are necessarily broad and wide, as contained in clause (a)

to (f) of sub-section (1) of Section 18. In addition the scheme prepared by the

operating agency can also provide for various aspects as delineated in clause (a) to (m)

of sub-section (2) of Section 18.

8. Once such a scheme is prepared by an operating agency it is required to be

examined by the BIFR. The BIFR, thereafter is required to send the scheme (which at

that point of time is only a draft scheme) with modifications, if it so chooses to the

sick industrial company and the operating agency. In the event, in the scheme, _____________________________________________________________________________________________

amalgamation is proposed as a measure of revival, then such a draft scheme is also

sent to any other company which is concerned with the amalgamation. In order to

invite suggestions and objections the BIFR is required to get such a draft scheme in

brief, published in daily newspapers, as considered necessary by it [see Section

18(3)(a)].

8.1 Further on receipt of „suggestions‟ and „objections‟ from entities detailed out

under Section 18(3)(b), which includes the sick industrial company, the operating

agency, the transferee companies (in case of amalgamation), shareholders, creditors

and employees of such companies, the BIFR may make modifications, and thereafter,

proceed to sanction the scheme under sub-section (4) of Section 18 of SICA. In case

the scheme involves amalgamation which needs approval of the shareholders of such

other company other than the sick industrial company under clause (b) of sub-section

(3) of Section 18, the BIFR is empowered under Section 18(4) to provide in such a

sanctioned scheme the date from which the scheme will come into force or even dates

from which different provisions of the scheme would come into force.

8.2 The BIFR has been conferred the power of reviewing a sanctioned scheme

under sub-section (5) of Section 18. However, once a scheme gets sanctioned then it

is presumed that all requirements of the scheme relating to reconstruction or

agreement or any other measure have been complied with. A certified copy of the

sanctioned scheme issued by the officer of the BIFR can be admitted as evidence in all

legal proceedings.

8.3 Once the scheme becomes operable or any of its provisions become operative,

it binds the sick industrial company, the transferee company or as the case may be

such other company as also the shareholders, creditors, guarantors, or employees of

the said companies.

8.4 The power of removing difficulties vis-à-vis a sanctioned scheme is conferred

on the BIFR under Section 18(9) provided such an order or direction is not

inconsistent with the provisions of the sanctioned scheme. _____________________________________________________________________________________________

8.5 Under Section 18(10) the BIFR is empowered to direct a specified operating

agency to implement the sanctioned scheme in consonance with the terms and

conditions contained therein and in relation to such a sick industrial company.

8.6 Under sub-Section (12) of Section 18, the BIFR has been given the power to

periodically manage the implementation of the sanctioned scheme.

8.7 We may only point out that in so far as certain entities are concerned, such as

the Central Government and the State Government or other bank or even a public

financial institutions or State level institution or any institution or authority, SICA

provides for obtaining their consent to the draft scheme where the scheme provides for

financial assistance to a sick industrial company by way of loans advances, guarantees

or reliefs and concessions or calls upon them to make sacrifices in relation to financial

assistance already granted by such entities [See section 19(1) and (2)]. The entities

described in Section 19(1) are required to convey their consent or response to draft

scheme within 60 days. In case no response is reached within the period of 60 days or

within such further period not exceeding 60 days then sub-Section (2) of Section 19

provides for a deemed consent. Once the process under sub-Section (2) of Section 19

is over the scheme becomes binding on all concerned from the date of such sanction

[see clause (3A) of sub-Section (3) of Section 19].

8.8 If for any reason BIFR, after making an inquiry under Section 16 and after

considering all relevant facts and circumstances, forms an opinion that it is not

possible for the sick industrial company to make its net worth exceed accumulated

losses within a reasonable time while meeting all its financial obligations, it can

recommend its winding up to the concerned High Court. Though this

recommendation can be made only after hearing all concerned.

8.9 In order to provide a protective umbrella to a sick industrial company, Section

22 of SICA provides for bar against institution and if already instituted suspension of

legal proceedings of the kind referred to in the said Section except with the consent of

BIFR or the AAIFR as the case may be. In so far as the suspension of contracts etc. is _____________________________________________________________________________________________

concerned, protection provided for is under sub-Section (2) of Section 22. The

prohibitions on the management of the sick industrial company are contained under

sub-section (2) of Section 22. The act specifically provides under sub-section (4) of

Section 22 that any declaration made under sub-section (3) with respect to a sick

industrial company shall have effect notwithstanding anything contained in the

Companies Act, 1956 or any other law, memorandum or articles of association of

company or any instrument having effect under the said act or other law or any

agreement, decree or order of the Court, Tribunal, officer or authority or any

submission, settlement or standing order etc.

9. Section 22A empowers the BIFR to issue necessary direction to the sick

industrial company to desist from disposing of its assets during preparation or

consideration of the scheme under Section 18 and during the period falling between its

order recommending winding up and the commencement of the proceeding relating to

winding up before the concerned High Court.

9.1 It is in this scenario, that Section 32 of SICA provides that the provisions of

the scheme framed under the SICA, i.e., the sanctioned scheme, shall override all

other laws except the Foreign Exchange Regulations Act, 1973 and the Urban Land

(Ceiling & Regulations) Act, 1976. The Section states in the same vein that a scheme

framed under SICA will override also the memorandum and articles of association of a

sick industrial company or any other instrument having effect by virtue of any law

other than this act.

10. In the context of the above discussion we would like to reproduce specifically

the provisions of Section 32(1) of SICA. Section 32 (1)of the SICA reads as follows:

"32. EFFECT OF THE ACT ON OTHER LAWS.

(1) The provisions of this Act and of any rules or schemes made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the _____________________________________________________________________________________________

Memorandum or Articles of Association of an industrial company or in any other instrument having effect by virtue of any law other than this Act."

11. In view of the aforesaid provision there can hardly be any doubt that

once a scheme is formulated after a reference is gone through the process of

Sections 17 & 18 of the SICA, the said scheme would have the force of law

notwithstanding anything inconsistent therewith contained in any other law.

Thus, neither the party making any concessions at the time of the formulation of

the scheme nor the company at whose behest the scheme is formulated and

sanctioned can get out of the scheme. As noticed above, a draft scheme is

sanctioned under the provisions of sub-section (4) of Section 18 of the SICA.

Once a draft scheme is sanctioned it is binding on those concerned as is

reflected in sub-section (8) of Section 18 and Section 19(3) of SICA. Thus,

once a sanctioned scheme or any of its provisions is made operable it binds the

sick industrial company, and the entities referred to in Section 18(8) and 19(3)

of SICA. In these circumstances, the Department cannot surely be heard to

argue that the provisions of the scheme are not binding on it.

12. We have to keep in mind that any scheme is a package to rehabilitate the

company. It is possible that such rehabilitation may result in early success or at

times may take a greater period of time to achieve financial stability. If the

argument of the Department were to be accepted it would imply that if a sick

industrial company achieves success in making its net worth positive, all

benefits of a sanctioned scheme would stand withdrawn whether exhausted or

not, even though the emergence from sickness, and its continued health is

dependent on the sanctioned scheme being fully implemented. This would,

according to us, defeat the very purpose of formulating a sanctioned scheme. A

sanctioned scheme in myriad ways would ordinarily devise ways and means by _____________________________________________________________________________________________

which the assets of the referrer are to be dealt with. The provisions of the

sanctioned scheme would bind both the referrer and those who are party to it,

including those in respect of which SICA makes a specific provision. It has to

be appreciated that to forge a consensus on rehabilitation of a sick industrial

company is no mean task. But once consensus is arrived at, and a scheme is

sanctioned, it cannot equally be jettisoned without due deliberation and

adherence to the provisions of law. Thus, the apprehension of the Department

that assets will be salted away is misconceived. The company which is the

beneficiary of the sanctioned scheme can be brought to heel by taking recourse

to appropriate remedies in order to obtain its obeisance to the sanctioned

scheme.

13. We may also note that the mere fact that the net worth has become

positive does not provide an automatic exit route from the proceedings before

the BIFR. It is open to the BIFR to continue to monitor the implementation of

the unimplemented part of the sanctioned scheme. In the captioned cases, the

BIFR appears to have discharged the reference solely on the ground that the net

worth had turned positive. The discharge of reference is followed by

consequent directions of relieving the operating agency and the independent

director, of its mandate. The BIFR has noticed that a substantive part of the

sanctioned scheme has been implemented, while issuing a direction to

implement the remaining part of the sanctioned scheme. If one may say so, the

second part is really redundant since, as observed above by us, once a scheme is

sanctioned it has the force of law; making its enforcement amenable as a matter

of law, even in foras other than BIFR. We may emphasise at the cost of

repetition that gaining entry within the domain of BIFR, the erosion of net

worth (amongst other jurisdictional attributes) is an essential criteria; the _____________________________________________________________________________________________

inverse does not necessarily follow. In other words a referrer cannot seek an

exit as a matter of right merely on the ground that net worth has turned positive,

especially where a sanctioned scheme is under implementation. This is a call

that the BIFR has to take. Where the BIFR takes such a call by discharging the

reference, it does impact the sanctity of a sanctioned scheme which continues to

bind all concerned.

14. A Division Bench of this Court in M/s. Synergy Steels Limited case

(supra) has discussed this aspect in the facts of that case. The BIFR found that

since the referrer had ceased to be a sick industrial company, it was liable to be

discharged from the purview of SICA. The referrer was apprehensive of the

consequences thereof. The relevant paragraphs of the said judgement are

reproduced as under:

"7. We agree with all the contentions as raised by the counsel for the petitioner. Surely, a sanctioned scheme is a scheme in its entirety. Implementation is also therefore to be in entirety. To show that a part implementation can result in absurdity, let us take the example where under a sanctioned scheme a company takes all the benefits of reliefs and concessions but does not perform the obligations as envisaged in a sanctioned scheme. Surely, this is impermissible. If this is impermissible, then, it is equally impermissible that if the sick company perform its obligations, then, it should be deprived of its rights under the sanctioned scheme. Merely, because a writ petition has been filed in the Rajasthan High Court would not mean that the proceedings cannot continue under SICA. May be the petitioner was not properly advised in filing of the writ petition or it took that action out of abundant precaution though it need not have, yet it does not mean that the authorities acting under SICA can simply discharge a sick company from the provisions of SICA although the sanctioned scheme is not fully implemented.

8. The Supreme Court in the aforesaid case of Bombay Dyeing & Manufacturing Co. Ltd. (supra) has categorically held that all actions with respect to breach or implementation of the sanctioned scheme have necessarily to be either by BIFR or AAIFR under SICA.

_____________________________________________________________________________________________

9. In view of the above, we accept the petition and quash the impugned orders dated 21.9.09 of AAIFR and 23.3.06 passed by the BIFR. It is directed that the matter be listed before the BIFR on moving an application by the petitioner for monitoring and implementation of the sanctioned scheme in its entirety, especially as regards the reliefs and concessions as are envisaged to be available to the petitioner company in terms of the sanctioned scheme SS-02."

15. We may add that it is not the case of the Department that any part of the

scheme has been violated by the referrer company nor have we been made

aware of the non-implementation of any part of the sanctioned scheme. In fact,

so much time has elapsed since some of the impugned orders were passed, it is

quite possible that very many of the sanctioned schemes may have been totally

implemented by now.

16. We are, thus, of the view that the Department cannot resile from the

concessions made at the stage when the scheme was formulated and sanctioned

merely because the net worth of the company at whose behest the scheme was

sanctioned has become positive. That part of the sanctioned scheme which

remains to be implemented will have to be implemented. A contrary view

would result in disastrous consequences. Creditors, employees, shareholders,

amongst other dramatis personae will pull in different directions, thus defeating

the very purpose for which the sanctioned scheme was formulated in the first

instance.

17. Needless to say that if there is a grievance of the Department in respect

of any particular case, in as much that the concerned company is not

implementing the provisions of the sanctioned scheme, it will be open to the

Department to take action, in accordance with law, for enforcement of the

sanctioned scheme.

_____________________________________________________________________________________________

18. In view of the discussion above there is, thus, no ground made out to

exercise jurisdiction under Article 226 of the Constitution of India, since the

department seems to be aggrieved by only that part of the impugned orders

which tend to bind the department to the sanctioned scheme even after the

BIFR has discharged the reference. As observed whether or not the BIFR

implements the sanctioned scheme, it continues to bind the Department.

19. Accordingly, the captioned writ petitions are dismissed.

SANJAY KISHAN KAUL, J.

MARCH 23, 2011                                          RAJIV SHAKDHER, J.
b'nesh/kk

_____________________________________________________________________________________________