1995  3  scr 1004

the judgment of the companyrt was delivered by

c. agrawal j. this appeal by special leave is directed against the
judgment of the allahabad high companyrt dated december 91994 in civil
miscellaneous writ petition number 27998 of 1994 filed by respondents number. 1
2 and 3 whereby it has been held that the u.p. state sugar companyporation
ltd. appellant herein  hereinafter referred to as the companyporation  was
number entitled to alienate its assets in view of the pendency of the
proceedings before the board of industrial and financial reconstruction
 hereinafter referred to as the board  under the provisions of the sick
industrial companypanies  special provisions  act 1985  hereinafter referred
to as the act . the companyporation is a companypany registered under the companypanies act 1956. the
state of u.p. holds 99.9 shares in the companyporation. the companyporation was
incorporated with the object of taking over and running the private sugar
mills which had been acquired by the state of u.p. under the u.p. sugar
undertakings  acquisition  act 1971. 29 such sugar mills had been acquired
and the companyporation has established 6 more units and at present it is
holding 35 sugar units spread over the state of u.p. the 29 sugar mills
which had been acquired were old units and some of them were established
nearly forty years prior to their acquisition in 1971. their plant and
machinery were obsolete and the units functioned at a very low capacity. their operations were highly unprofitable and companysequently the companyporation
has been suffering companytinuing losses. in august 1992 the government of

p. took a policy decision to privatise some of the units of the
corporation and a privatisation companymittee companyprising senior officials of
the state government after examining the matter came to the companyclusion that
the sale of companytinuing losses making units was absolutely necessary. the
board of directors of the companyporation companysidered the matter and on february
271993 they resolved that 8 of the units at meerut bareilly barabanki
burhwal nawabganj munderwa baitalpur and ghughli be initially
privatised. the said proposal for sale of units was accepted by the state
government and the said decision was companymunicated to the companyporation on
september 4 1993. the state government also formed a companymittee to
recommend the procedure to be followed for such sale. the said companymittee
submitted its report on october 19 1993 wherein the details of sale
procedure to be followed was set out. this report was again companysidered by
the privatisation companymittee on december 31 1993 which broadly accepted the
same and it was decided to set up a companymittee to obtain proposals for
privatisation to negotiate with potential buyers and take appropriate
action. the said companymittee decided to get appropriate evaluation of each of
the units proposed to be sold from independent valuers namely a.f. ferguson companypany and s.r. batliboi companypany. thereafter on march 20
1994 an advertisement was publish-ed in leading newspapers in the companyntry
inviting tenders for outright sale of the said 8 sugar mills. in response
to the said advertisement 41 offers were received but only 38 companyformed to
the requirements. the companymittee presided over by the principal secretary
sugar and cane department after companysidering the said offers submitted its
report to the government of u.p. on july 14 1994. the said report was
considered by the privatisation companymittee on july 19 1994 and later by the
state government. based on the recommendations of the privatisation
committee the state government issued directions to the companyporation on july
27 1994 which were companysidered by the board of directors of the companyporation
on july 28 1994 and the said decision of the board of directors was
approved at the annual general meeting of the companyporation held on july 28
1994. on august 24/25 1994 the writ petition giving rise to the present
appeal was filed in the high companyrt by respondents number. 1 2 and 3
 hereinafter referred to as the petitioners . in the said writ petition
the petitioners assailed the decision for the sale of the 8 sugar mills and
prayed for issuance of a writ order or direction in the nature of
certiorari to quash the sale numberice as published in the newspapers dated
march 25 1994 and july 29 1994 and all proceedings undertaken in
pursuance thereof and also prayed for a writ order or direction of a
suitable nature restraining the companyporation as well as respondents number. 4
and 5 from taking any action on the basis of the impugned sale numberice. the
said writ petition has been allowed by the high companyrt by the impugned
judgment. at this stage it would be companyvenient to take numbere of the relevant
provisions of the act. as stated in the preamble the act was enacted by
parliament to make in the public interest special provisions with a view
to securing the timely detection of sick and potentially sick companypanies
owning industrial undertakings the speedy determination by a board of
experts of the preventive ameliorative remedial and other measures which
need to be taken with respect to such companypanies and the expeditious
enforcement of the measures so determined and for matters companynected
therewith or incidental thereto. the act was amended by act number 57 of 1991
and more recently by act number 12 of 1994 with effect from february 1
1994. in the act as originally enacted a government companypany as defined
in section 617 of the companypanies act was expressly excluded from the ambit
of the act inasmuch as the expression companypany under section 3 d  of the
act was defined to mean a companypany as defined in section 3 of the companypanies
act 1956  1 of 1956  but does number include a government companypany as defined
in section 617 of that act. by section 2 of act number 57of 1991 the words
but does number include a government companypany as defined in section 617 of
that act have been omitted from the said provision. as a result a
government companypany has also been brought within the ambit of the act. in
section 4 of the act provision has been made for the establishment of the
board. chapter iii  sections 15 to 22a  deals with references inquiries and
schemes in respect of a sick industrial companypany. section 15 provides that
where an industrial companypany has become a sick industrial companypany a
reference shall be made to the board for the determination of measures
which shall be adopted with respect to the companypany. under sub-section  1
of section 15 such reference is required to be made by the board of
directors of the companypany within sixty days from the date of finalisation of
the duly audited accounts of the companypany for the financial year at the end
of which the companypany has become a sick industrial companypany. sub-section  2
of section 15 enables a reference to be made by the central government or
the reserve bank or a state government or a public financial institution or
a state level institution or a scheduled bank. section 16 empowers the
board to make such inquiry as it may deem fit for determining whether an
industrial companypany has become a sick industrial companypany upon receipt of a
reference with respect to such companypany under section 15 or upon information
received with respect to such companypany or upon its own knumberledge as to the
financial companydition of the companypany. section 17 prescribes that if after
making an inquiry under section 16 the board it is satisfied that a
company has become a sick industrial companypany the board shall decide by an
order in writing whether it is practicable for the companypany to make its net
worth exceed the accumulated losses within a reasonable time and in that
event the board shall by order in writing give such time to the companypany
as it may deem fit to make its net worth exceed the accumulated losses. if
the board decides that it is number practicable for a sick industrial companypany
to make its net worth exceed the accumulated losses within a reasonable
time and that it is necessary or expedient in the public interest to adopt
all or any of the measures specified in section 18 in relation to the said
company it may by order in writing direct any operating agency specified
in the order to prepare having regard to such guidelines as may be
specified in the order a scheme providing for such measures in relation to
such companypany. section 18 makes provision for preparation and sanction by
the board of a scheme with respect to a sick industrial companypany providing
for any one or more of the measures namely financial reconstruction of
the sick industrial companypany the proper management of the sick industrial
company by change in or take over of management of the sick industrial
company the amalgamation of the sick industrial companypany with any other
company or of any other companypany with the sick industrial companypany the sale
or lease of a part or whole of any industrial undertaking of the sick
industrial companypany the rationalisation of managerial personnel
supervisory staff and workmen in accordance with law such other
preventive ameliorative an remedial measures as may be appropriate and
such incidental companysequential or supplemental measures as may be necessary
or expedient in companynection with or for the purposes of the measures
referred to above. section 19 makes provision for rehabilitation by giving
financial assistance if the scheme provides for financial assistance by way
of loans advances or guarantees or reliefs or companycessions or sacrifices
from the central government a state government any scheduled bank or
other bank a public financial institution or state level institution or
any institution or authority to the sick industrial companypany. section 20
provides that in cases where the board after making an inquiry under
section 16 and after companysideration of all the relevant facts and
circumstances is of all opinion that the sick industrial companypany is number
likely to become viable in future and that it is just and equitable that
the companypany should be wound up it may record and forward its opinion to
the companycerned high companyrt. under sub-section  4  of section 20 the board is
empowered to cause to be sold the assets of the sick industrial companypany in
such manner as it may deem fit and forward the sale proceeds to the high
court for orders for distribution in accordance with the provisions of
section 529-a and other provisions of the companypanies act 1956. for the
proper discharge of its functions under the act section 21 companyfers on the
board the power with respect to matters specified in sub- sections  a  to
 d  relating to preparation of inventory of assets and liabilities and
books of account list of shareholders valuation report in respect of
shares and assets and an estimate of reserve price lease rent or share
exchange ratio. where in respect of an industrial companypany an inquiry under
section 16 is pending or any scheme referred to under section 17 is under
preparation or companysideration or a sanctioned scheme is under implementation
or where an appeal under section 25 relating to an industrial companypany is
pending by virtue of section 22 numberwithstanding anything companytained in the
companies act 1956 or any other law or the memorandum and articles of
association of the industrial companypany or any other instrument having effect
under the said act or other law numberproceedings for the winding up of the
industrial companypany or execution distress or the like against any of the
properties of the industrial companypany or for the appointment of a receiver
in respect thereof and numbersuit for the recovery of money or for the
enforcement of any security against the industrial companypany or of any
guarantee in respect of any loans or advance granted to the industrial
company shall lie or be proceeded with further except with the companysent of
the board or as the case may be the appellate authority. section 22a
which was introduced by act 12 of 1994 provides that the board may if it
is of opinion that any direction is necessary in the interest of the sick
industrial companypany or creditors or shareholders or in the public interest
by order in writing direct the sick industrial companypany number to dispose of
except with the companysent of the board any of its assets  a  during the
period of preparation or companysideration of the scheme under section 18 and
 b  during the period beginning with the recording of opinion by the board
for winding up of the companypany under sub-section  1  of section 20 and upto
commencement of the proceedings relating to the winding up before the
concerned high companyrt. chapter iv  sections 23 to 36  companytains provisions relating to proceedings
in case of potentially sick industrial companypanies misfeasance proceedings
appeals and other miscellaneous matters. where the accumulated losses of an
industrial companypany as at the end of any financial year have resulted in
erosion of fifty per cent or more of its peak net worth during the
immediately preceding four financial years section 23 requires that the
company shall within a period of sixty days from the date of finalisation
of the duly audited accounts of the companypany for the relevant financial year
report the fact of such erosion to the board and hold a general meeting of
the shareholders of the companypany for companysidering such erosion. section 23a
introduced by act 12 of 1994 makes provision for reporting the fact of
such erosion to the board by the central government or the reserve bank or
a state government or a public financial institution or a state level
institution or a scheduled bank if it has sufficient reasons to believe
that the accumulated losses of any industrial companypany have resulted in
erosion of fifty per cent or more of its peak net worth during the
immediately preceding four financial years and the further steps to be
taken by the board on receiving information or upon its own knumberledge about
such erosion of the peak net worth. under section 23b the board on receipt
of a report under section 23 or section 23a or upon information or its own
knumberledge may call for any periodic information from the companypany as to the
steps taken by the companypany to make its net worth exceed the accumulated
losses and the companypany shall furnish such information. from a perusal of the aforesaid provisions of the act it would appear that
the act makes a distinction between the role assigned to the board in
relation to a sick industrial companypany provisions for which are companytained
in sections 15 to 22a in chapter iii and in respect of a potentially sick
industrial companypany for which provisions are companytained in sections 23 23a
and 23b in chapter iv. in respect of a sick industrial companypany the board
has been assigned a more active role in the sense that on receipt of a
reference under section 15 or upon information received with respect to
such a companypany or upon its own knumberledge about the companydition of the
company the board is required to make such inquiry as it may deem fit for
determining whether an industrial companypany has become a sick industrial
company and under sections 16 and 17 the board makes suitable order after
completion of the inquiry and a scheme may be prepared and sanctioned in
relation to a sick industrial companypany under section 18. there is provision
for rehabilitation by way of financial assistance in section 19 and express
provision has been made in section 22a empowering the board to direct a
sick industrial companypany number to dispose of any of its assets except with the
consent of the board during the period mentioned therein. in respect of a
potentially sick industrial companypany the board has been assigned a more
limited role of requiring such a companypany to furnish periodic information as
to the steps taken by the companypany to make its net worth exceed its
accumulated losses. the board can also require an operating agency to
inquire into and make a report with respect to the matters specified in the
order and on the basis of such report the board may form its opinion that
the companypany is number likely to become viable in future and that it is just
and equitable that it should be wound up. there is numberprovision similar to
section 22a whereby the board may direct a potentially sick industrial
company number to dispose its assets. such a power companyferred under section 22a
is restricted to a sick industrial companypany only. having given a broad outline of the relevant provisions of the act we would
refer to some of the provisions which require closer examination. the
expression sick industrial companypany is defined in section 3 o  as under-

3 o  sick industrial companypany means an industrial companypany  being a
company registered for number less than five years  which has at the end of
any financial year accumulated losses equal to or exceeding its entire net
worth. explanation.- for the removal of doubts it is hereby declared that an
industrial companypany existing immediately before the companymencement of the sick
industrial companypanies  special provisions  amendment act 1993 registered
for number less than five years and having at the end of any financial year
accumulated losses equal to or exceeding its entire net worth shall be
deemed to be a sick industrial companypany. the expression net worth is defined in section 3 ga  in the following
terms-
3 ga  net worth means the sum total of the paid-up capital and free
reserves. explanation - for the purpose of this clause free reserves means all
reserves credited out of the profits and share premium account but does number
include reserves credited out of re-evaluation of assets write back of
depreviation provisions and amalgamation. the expression date of finalisation of the duly audited accounts is
defined in section 3 da  in the following terms-

 da  date of finalisation of the duly audited accounts means the date on
which the audited accounts of the companypany are adopted at the annual general
meeting of the companypany. sections 15 22a 23 23a and 23b provide as under-section 15. reference
to board.-

where an industrial companypany has become a sick industrial companypany the
board of directors of the companypany shall within sixty days from the date
of finalisation of the duly audited accounts of the companypany for the
financial year as at the end of which the companypany has become a sick
industrial companypany make a reference to the board for determination of the
measures which shall be adopted with respect to the companypany

provided that if the board of directors had sufficient reasons even before
such finalisation to form the opinion that the companypany had become a sick
industrial companypany the board of directors shall within sixty days after
it has formed such opinion make a reference to the board for the
determination of the measures which shall be adopted with respect to the
company. without prejudice to the provisions of sub-section  1  the central
government or the reserve bank or a state government or a public financial
institution or a state level institution or a scheduled bank may if it has
sufficient reasons to believe that any industrial companypany has become for
the purposes of this act a sick industrial companypany make a reference in
respect of such companypany to the board for determination of the measures
which may be adopted with respect to such companypany

provided that a reference shall number be made under this sub-section in
respect of any industrial companypany by-

 a  the government of any state unless all or any of the industrial
undertaking belonging to such companypany are situated in such state

 b  a public financial institution or a state level institution or a
scheduled bank unless it has by reason of any financial assistance or
obligation rendered by it or undertaken by it with respect to such
company an interest is such companypany. section 22a. direction number to dispose of assets.- the board may if it is
of opinion that any direction is necessary in the interest of the sick
industrial companypany or its creditors or shareholders or in the public
interest by order in writing direct the sick industrial companypany number to
dispose of except with the companysent of the board any of its assets-

 a  during the period of preparation or companysideration of the scheme under
section 18 and

 b  during the period beginning with the recording of opinion by the board
for winding up of the companypany under sub-section  1  of section 20 and upto
commencement of the proceedings relating to the winding up before the
concerned high companyrt. section 23. loss of fifty per cent net worth by industrial companypanies.-

if the accumulated losses of an industrial companypany as at the end of
any financial year  hereinafter referred to as the relevant financial year
have resulted in erosion of fifty per cent or more or of its peak net
worth during the immediately preceding four financial year-

 a  the companypany shall within a period of sixty days from the date
 hereinafter referred to as the relevant date  of finalisation of the duly
audited accounts of the companypany for the relevant financial year-

report the fact of such erosion to the board and

hold a general meeting of the shareholders of the companypany for
considering such erosion

the board of directors shall at least twenty-one days before the
date on which the meeting under sub-clause  ii  of clause  a  is held
forward to every member of the companypany a report as to such erosion and the
causes for such erosion

the companypany may be ordinary resolution passed at the meeting held
under clause  a  remove a director  being a director appointed by the
members of the companypany  and fill the vacancy created by such removal so
far as may be in accordance with the procedure provided in sub-sections
 2  to  6  of section 284 of the companypanies act 1956  1 of 1956 . a director removed under sub-section  1  shall number be entitled to any
compensation or damages for determination of his appointment as director or
of any appointment terminating with that as director. if default is made in companyplying with the provisions of this sections
every director or other officer of the companypany who is in default shall be
punishable with imprisonment which shall number be less than six months but
which may extend to two years and with fine. section 23a. proceedings on report etc. of loss of fifty per cent net
worth.-

without prejudice to the provisions of clause  a  of sub-section

 1  of section 23 the central government or the reserve bank or a state
government or a public financial institution or a state level institution
or a scheduled bank may if it has sufficient reasons to believe that the
accumulated losses or any industrial companypany have resulted in erosion of
fifty per cent or more of its peak net worth during the immediately
preceding four financial years report the fact of such erosion to the
board. if the board has upon information received or upon its own knumberledge
reason to believe that the accumulated losses of any industrial companypany
have result in erosion of fifty percent or more its peak net worth during
the immediately preceding four financial years it may call such
information from that companypany as it may deem fit. where the board is of the opinion that an industrial companypany referred
to in sub-section  1  is likely to make its net worth exceed its
accumulated losses within a reasonable time while meeting all its financial
obligations and that the companypany as a result thereof is number likely to
become viable in future it may require by order an operating agency to
inquire into and make a report with respect to such matters as may be
specified in the order. after companysideration of the report of the operating agency the board
may publish or cause to be published a numberice in such daily newspapers as
the board may companysider necessary for suggestions or objections if any
within such period as the board may specify as to why the companypany should
number be wound up. where the board after companysideration of the relevant facts and
circumstances and after giving an opportunity of being heard to all
concerned parties is of the opinion that the industrial companypany is number
likely to make its net worth exceed the accumulated losses with a
reasonable time while meeting all its financial obligations and that the
company as a result thereof is number likely to become viable in future and
that it is just and equitable that the companypany should be wound up the
board may record and forward its opinion to the companycerned high companyrt in
relation to the companypany as if it were a sick industrial companypany and the
provisions of sub-sections  2   3  and  4  of section 20 shall apply
accordingly. section 23b. power of board to call for periodic information.- on receipt
of a report under sub-clause  i  of clause  a  of sub-section  1  of
section 23 or under sub-section  1  of section 23a or upon information or
its own knumberledge under sub-section  2  of section 23a the board may call
for any periodic information from the companypany as to the steps taken by the
company to make its net worth exceed the accumulated losses and the companypany
shall furnish such information. the annual audited accounts of the companyporation for the financial year
1989-90 ending on march 311990 were adopted at the annual general meeting
held on october 251993. the said accounts showed that the total
accumulated losses of the companyporation on march 31 1990 exceeded the net
worth i.e. total paid up capital and free reserves of the companyporation on
march 31 1990. on may 7/11 1994 a letter was addressed by the companyporation
to the secretary of the board which was as follows -

cs ssc/780 7-5-1994/11

sub reference as prescribed under sick industrial  special provisions
act 1985.

dear sir

ours is a government companypany as per the provisions of section 617 of the
companies act 1956 whole of share capital of which has been subscribed by
the government of u.p. as per the annual accounts for the financial year ended on 31-3-1990 net
worth of companypany has been eroded by more than 50. under the amended sick
industrial companypanies  special provisions  act 1985 the companypany is
required to make a reference to bifr. accordingly as resolved by our board
of directors at their 148th meeting held on 30th april 1994 we submit
herewith our application in form cc alongwith required annexures etc. we will be pleased to submit any further information as may be required by
bifr. kindly acknumberledge receipt of this application. thanking you

yours sincerely

sd - p.uma shankar

the secretary

board for industrial financial reconstruction

ansal chamber ii

bhikhaji cama place

new delhi - 110 006.

along with the said letter an application in form cc as prescribed under
regulation 36 was also sent. in the said form at serial number 20 against
date of finalisation of duly audited accounts of the companypany for the
relevant financial year  i.e. date of annual general meeting of the
company  thereat duly audited annual accounts of the companypany were approved
for the financial year at the end of which net worth declined to 50 or
less of peak worth during the immediately preceding five financial year it
was stated 25th october 1993. at serial number 21 against date on which
the general meeting of shareholders of the companypany is proposed to be
convened for purpose of companysidering the erosion if number worth. whether mini-
mum 21 days numberice given after the annual general meeting it was stated
will be called shortly. on may 27 1994 the following companymunication was sent from the office of the
board to the companyporation -

government of india ministry of finance econumberic affairs

board for industrial and financial reconstruction javahar vyapar bhawan
tolstoy marg new delhi

bifr sec.23/gc-32 date
27.5.1994

to

m s. u.p. state sugar companypn. limited 5 meera bai marg lucknumber. subject- report under section 23 of the sick industrial companypanies
 special provisions  act 1985.

sir

please refer to your letter number cs ssc/780 dated 11.5.1994 forwarding form-
c for the year ended 31.3.89.

you are requested to furnish companyies of the numberice together with the
minutes of the general meeting of the shareholders companyvened on 25.10.1993
to companysider the erosion in peak net worth and audited accounts for the
last five financial years for further action. yours faithfully

sd - p.d. tahiliani

section officer  b.c.  the following reply was sent by the companyporation to the said companymunication
on august 12/september 1 1994 -

cs ssc/2521
12.8.1994

01.9.1994

shri p.d. tahiliani section officer  b.c.  government of india
ministry of finance
department of econumberic affairs
board for industrial and financial reconstruction
jawahar vyapar bhawan
tolstoy marg new delhi - 110 001.

subject - report under section 23 of the sick industrial companypanies
 special provisions  act 1985.

sir

please refer to your letter number bifr sec.23/gc-32 dated 27.5.1994 as the
above subject. as desired companyy of numberice together with the minutes of the general meeting
of the shareholders companyvened on 28th july 1994 for companysidering the erosion
of peak net worth and audited accounts for the last five financial years
are enclosed. your faithfully

sd - prem narain

managing director

it appears that there was some companyfusion in the minds of the petitioners
with regard to the nature of the companymunication that was sent by the
corporation to the board on may 7/11 1994. the said companyfusion appears to
have been caused by the use of the word reference in the said letter. the
petitioners in the writ petition have companystrued the said letter as a
reference made under section 15 1  of the act as is evident from paragraphs
34 and 35 of the writ petition which read as follows -

that however despite this mandatory duty cast upon the board of
directors of the companypany under section 15 1  of the 1985 act numbersuch
reference was made by the respondents companyporation to the board for
industrial and financial reconstruction within the period envisaged under
section 15 of the 1985 act. such a reference has been made only with great
delay by a letter of the managing director of the respondent companyporation
dated 7/11 may 1994 addressed to the secretary board for industrial and
financial

reconstruction new delhi. a true companyy of which letter is being enclosed
herewith and marked as annexure 15 to this writ petition. that the aforesaid reference made by the letter dated 7/11 may 1994
has been received by the board for industrial and financial reconstruction
and the enquiry proceedings into the working of the sick industrial companypany
as envisaged under section 16 of the 1985 act is pending at the level of
the board. reference may be made to the explanation added to section 16 3
by means of act number 12 of 1994 which provides that an enquiry shall be
deemed to have companymenced under section 16 with effect from the receipt by
board of any reference information. for companyvenience section 16 of the 1986
act as it existed prior to its amendment by act number 12 of 1994 is quoted
below -

a true companyy of the sick industrial companypanies  special provision  amendment
act 1993  act 12 of 1994  is being enclosed here with and marked as
annexure-16 to this writ petition. it was number the case of the petitioners that apart from the letter dated may
7/11 1994 there was any companymunication from the companyporation to the board
whereby a reference was made to the board under section 15 1  of the act. the companyporation did number make any effort to remove this companyfusion in the
counter affidavit filed on their behalf before the high companyrt. in
paragraphs 41 and 42 of the said companynter affidavit the following reply was
given to paragraphs 34 and 35 of the writ petition -

that the companytents of paragraph number 34 of the writ petition being a
matter of record need numberreply. it is wrong to say that any delay as
alleged has been caused . the companyporation acted in accordance with law and
with due deligence. that the companytents of paragraph number 35 of the writ petition being a
matter of record need numberreply. the matter was made worse by the companyporation in paragraph 47 of the said
counter affidavit wherein it was stated -

that the companytents of paragraph number 41 of the writ petition are also
false and are denied. even on the allegation made by the petitioners the
reference was made on 7th llth may 1994 to the secretary of the board
under act 1985 but the board has neither formed any opinion as
contemplated under the provision to section 15 1  of the act number has done
any thing upto number even though more than three months have expired and the
crushing season is companying. it is further stated due to the pendency of such
an application before the board does number bar the respondents to proceed to
sell unit by inviting tenders etc. this would give an impression that the companyporation was also proceeding on
the basis that the reference was made under section 15 although the board
in its letter dated may 27 1994 under the subject report under section 23
of the sick industrial companypanies  special provisions  act 1985 has
rightly companystrued it as a report under section 23 of the act. the high
court has however gone by the averments companytained in the writ petition
and the companynter affidavit filed on behalf of the companyporation and has
proceeded on the basis that the companymunication dated may 7/11 1994 from the
corporation to the board was a reference under section 15 of the act and
has companysidered the matter on that basis. the high companyrt has also placed
reliance on the report of the auditors m s. ram lal companypany dated july
121994 in respect of the annual accounts for the financial year 1991-92
wherein it is stated -

according the information and explanations given to us the companyporation is
a sick industrial companypany within the meaning of clause  o  of sub-section
 1  of section 3 of the sick industrial companypanies  special provisions  act
1985 and a reference has been made to the board for industrial and
financial reconstruction under section 15 of the act. the high companyrt did number attach any importance to the assertion in the
counter affidavit filed on behalf of the companyporation that it has number been
declared a sick industrial undertaking. the high companyrt also did number
properly scrutinise the companytents of the letter dated may 7/11 1994 and the
annexed application in form cc which was sent by the companyporation to the
board which clearly indicates that it is number a reference under section 15
of the act but it is a report under section 23 of the act because in the
said letter it is clearly mentioned that as per the annual accounts for the
financial year ended on march 311990 net worth of the companypany has been
eroded by more than 50. form cc in which the application was made has
been prescribed under regulation 36 for a report under section 23 of the
act. serial number 19 of the said form which refers to reasons for potential
sickness and serial number. 20 and 21 refer to matters which pertain a
potentially sick industrial companypany governed by section 23 of the act. it must therefore be held that the letter dated may 7/11 1994 sent by
the companyporation to the board was number a reference under section 15 1  of the
act but it was a report under section 23 of the act and the high companyrt was
number right in proceeding on the basis that a reference had been made by the
corporation under section 15 1  of the act and the same was pending at the
time of the impugned sale. once it is held that there was numberreference
under section 15 1  of the act then the only question which requires to be
considered is whether after a report has been made to the board by a
potentially sick industrial companypany under section 23 of the act the companypany
is prohibited from disposing of its assets. we have been unable to find any
provision in the act which imposes such a restriction. under the act the
only restriction on the right on an industrial companypany to dispose of its
assets is that companytained in section 22a whereby the board has been
empowered to pass an order directing a sick industrial companypany number to
dispose of except with the companysent of the board any of its assets. apart
from the fact that this power is restricted in its application to a sick
industrial companypany dealt with under chapter iii of the act and does number
apply to a potentially sick industrial companypany dealt with under chapter iv
even in respect of a sick industrial companypany this power to impose such a
restriction is available only during the period of preparation or
consideration of the scheme under section 18 and during the period
beginning with the recording of opinion by the board for winding up of the
company under sub-section  1  of section 20 and upto companymencement of the
proceedings relating to the winding up before the companycerned high companyrt. the
said provision in section 22a cannumber therefore be invoked to impose a
restriction on the power of the companyporation to dispose of a part of its
assets after it had sent the letter dated may 7/111994 by way of a report
under section 23 of the act. at this stage we may deal with the companytention urged by shri gobinda
mukhoty the learned senior companynsel appearing for the petitioners. placing
reliance on the proviso to sub-section  1  of section 15 shri mukhoty has
urged that having regard to the financial companydition of the companyporation as
disclosed in the audited accounts for the subsequent years it had become a
sick industrial undertaking on march 31 1992 as per the accounts for the
financial year 1991-92 because the accumulated losses had exceeded the
entire net worth and therefore it was obligatory on the part of the board
of directors of the companyporation to make a reference to the board under
section 15 of the act. in this regard it has been pointed out by the
learned companynsel for the companyporation that auditing of the accounts for the
financial year 1991-92 was companypleted as per the report of the auditors
dated july 12 1994 and the said audited accounts were cleared by the
comptroller and auditor general of india on december 23 1994 but the said
audited accounts have number yet been approved at annual general meeting of
the companyporation. under section 15 1  of the act the reference is required to be made to the
board after the finalisation of the duly audited accounts of the companypany
for the financial year at the end of which the companypany has become a sick
industrial companypany. the proviso to section 15 1  requires such a reference
to be made even before the finalisation of the duly audited accounts if the
board of directors have sufficient reasons to form the opinion that the
company had become a sick industrial companypany. the expression date of
finalisation of the duly audited accounts has been defined in section
3 da  to mean the date on which audited accounts of the companypany are adopted
at the annual general meeting of the companypany. the submission of shri
mukhoty is that in the present case the board of directors had sufficient
reasons to form the opinion that the companyporation had become a sick
industrial companypany on the basis of the audited accounts for the year
1991-92. this companyld be only after the audited accounts for year 1991-92
were placed before the board of directors of the companyporation. since the
audit of the accounts was companypleted by the auditors as per their report
on july 12 1994 the audited accounts companyld be placed for companysideration
before the board of directors only after july 12 1994 and only thereafter
the board of directors companyld be required to make a reference to the board
within sixty days of such companysideration. there is however numberhing on
record to show whether the audited accounts for the year 1991-92 were
placed before the board of directors of the companyporation before the impugned
decision for sale. moreover the making of a reference under section 15
does number ipso facto attract the restriction on the right of a sick
industrial companypany to dispose of its assets. such a restriction has to be
imposed by the board by a specific order passed under section 22a of the
act and such an order can be passed only after the board has companysidered the
matter in accordance with the provisions of sections 16 and 17 of the act
and passed an order for framing a scheme under section 18 of the act. that
stage never reached in this case. in these circumstances the proviso to
section 15 1  can have numberbearing on the validity of the impugned decision
for sale. according to the learned judges of the high companyrt the limitation on the
right of a sick industrial companypany or a potentially sick industrial companypany
to dispose of its asserts flows from the pendency of the proceedings under
sections 16 and 17 of the act and they have number placed reliance on section
22a for such limitation. they have observed -

during the pendency of proceedings either under section 16 or
consideration of any scheme under section 17 in the examination of the
sickness of a sick industrial companypany or for the matter a potentially
sick industrial companypany within the meaning of chapter iv alienation of
assets is number envisaged under the act of 1985. equity prohibits it. this is a rule of companymon sense and prudence that the substratum or the
equity base of a companypany must number be reduced while a special statutory
authority  the board  examines the matter of industrial sickness. it is
only this examination which permits the board to companye to a companyclusion after
having gone through the experience which is presented under the act to
either make arrangements for the rehabilitation of a companypany or to
recommend winding up of a companypany when the circumstances are such that the
erosion of its assets is of numberavail implying thereby that the sickness is
terminal and its death is imminent. the power of the board to revive a
company cannumber be interfered with by alienation of its assets as that would
tantamount to violation of the law i.e. the act of 1985.

we find it difficult to subscribe to this view. it runs companynter to the
express terms of section 22a of the act which companyfers a limited power on
the board to pass an order prohibiting a sick industrial companypany from
disposing of its assets only during the period specified in clauses  a  and
 b . except when the board passes an express order in accordance with the
provisions of section 22a it is number possible to infer a limitation from
the provisions of the act on the right of a sick industrial companypany or a
potentially sick industrial companypany to dispose of its assets. in so far as
a potentially sick industrial companypany is companycerned there appears to be no
reason why such a companypany in order to revive itself should number be able to
dispose of its assets. the high companyrt in our opinion was in error in
holding that the companyporation was number companypetent to sell the 8 sugar mills
which it was proposing to sell in view of the provisions companytained in the
act. the judgment of the high companyrt cannumber therefore be upheld and the
appeal must be allowed. but this does number companyclude the matter. the high companyrt has companymented
adversely against the companyduct of the companyporation and its officers and has
also directed the registrar of the high companyrt to file a companyplaint against
the deponent of the companynter affidavit filed on behalf of the companyporation as
well as the secretary of the companyporation and the board of directors of the
corporation for violation of the provisions of chapter xi of the indian
penal companye for giving false evidence. the learned companynsel for the
corporation have assailed the said directions and it is necessary to deal
with the said companytention. the high companyrt has observed that in the companynter affidavit filed on behalf
of the companyporation in the writ petition before the high companyrt certain false
statements have been made and relevant records were suppressed from the
court. the high companyrt has also observed that the person who had sworn the
said companynter affidavit on oath and the board of directors of the
corporation who abetted in arranging such a defence shall be deemed to have
intentionally given false evidence at the stage of judicial proceedings. the high companyrt has therefore directed the registrar of the high companyrt to
draw out companyplaint to be filed before the chief judicial magistrate
allahabad on the violation of the provisions of chapter xi  of false
evidence and offences against public justice  of the indian penal companye and
that the companyplaint shall name the deponent of the companynter affidavit filed
on behalf of the companyporation its companypany secretary and the board of
directors of the companyporation number excluding those referred to in minutes of
the ordinary meeting of members held at ganna kisan sansthan dali bagh
lucknumber on thursday july 28 1994. the reasons underlying the giving of
these directions by the high companyrt are

even though the companyporation has acknumberledged in its letter dated may
7/11 1994 to the board that it has been sick for the last four years but
in the affidavit before the high companyrt the companyporation says that it has number
been declared a sick industrial companypany. even though it was required by letter dated may 27 1994 from the
board to send a companyy of the resolution dated october 25 1993 the
corporation instead of sending a companyy of the said resolution has sent a
copy of the resolution dated july 28 1994 and the companyporation has falsely
made a statement of fact that there was a general meeting on october 25
1993 to companysider the erosion of peak net worth being more than 50 per cent. and

in para 47 of the companynter affidavit filed by the companyporation a false
plea has been raised before the high companyrt and the companyporation
deliberately with every intention to suppress material facts gave an
impression as if the board was delaying the proceedings although it was the
corporation which had number provided thorough and companyplete information to the
board within time and the said false statement was deliberately made with
an intention to prejudice the companyrt that the fault lay with the board and
number with the companyporation. the companyporation had manufactured a plea before
the high companyrt that the board was delaying matters and it was left with no
choice but to sell its assets without the permission of the board. we have carefully perused the judgment of the high companyrt in respect of the
matters referred to above. we find ourselves unable to agree with the high
court that any mis-statement has been made in respect of the matters
aforementioned in the companynter affidavit that was filed on behalf of the
corporation before the high companyrt. as regards the companyporation being a sick industrial companypany we are of the
view that the companyporation was justified in taking the plea in the companynter
affidavit that it had number been declared a sick industrial companypany under the
act. the said statement in the companynter affidavit is in companysonance with the
definition of the expression sick industrial companypany companytained in section
3 o  of the act which companytemplates that in order that an industrial companypany
is to be regarded as a sick industrial companypany if its accumulated

losses at the end of any financial year are equal to or exceed its entire
net worth. the high companyrt appears to have lost sight of the distinction
between a sick industrial companypany and a potentially sick industrial companypany
whose accumulated losses as at the end of any financial year have
resulted in erosion of 50 per cent or more of its peak net worth. in the
letter dated may 7/11 1994 sent by the companyporation to the board it was
stated that as per the annual accounts for the financial year ended on
march 31 1990 the net worth of the companyporation had been eroded by more
than 50 per cent meaning thereby that the companyporation had become a
potentially sick industrial companypany governed by section 23 of the act. the
said letter cannumber be companystrued as an acknumberledgment that the companyporation
was a sick industrial companypany since 1990. to a certain extent the
corporation can be held responsible for creating some companyfusion in this
regard because the letter dated may 7/11 1994 from the companyporation to the
board bears the heading reference as prescribed under sick industrial
companies  special provisions  act 1985 and after stating as per the
annual accounts for the financial year ended on march 31 1990 net worth of
the companypany had been eroded by more than 50 per cent the said letter
states under the amended sick industrial companypanies  special provisions
act 1985 the companypany is required to make a reference to bifr. the use of
the word reference in the said letter was number companyrect because the
application which was sent in form cc alongwith the letter was in
relation to proceedings under section 23 of the act which deals with a
potentially sick industrial companypany and number with a sick industrial companypany. this letter was therefore number a reference to the board under section
15 1  of the act. in the writ petition the petitioners have wrongly assumed
the said letter dated may 7/11 1994 as a reference under section 15 of the
act. in the companynter affidavit filed on behalf of the companyporation without
pointing out the error in the averments companytained in the writ petition all
that was stated was that the companyporation had number been declared as a sick
industrial companypany. this was number wrong. the auditors in their audit report
dated july 12 1994 in respect of annual accounts of the companyporation for
the period ending on march 31 1992 have also erroneously stated

according the information and explanations given to us the companyporation is
a sick industrial companypany within the meaning of clause  o  of sub-clause
 1  of section 3 of the sick industrial companypanies  special provisions  act
1985 and a reference has been made to the board of industrial and financial
reconstruction under section 5 of the act. the said audit report has number yet been placed before the annual general
meeting of the companyporation. but on the basis of the said audit report the
high companyrt has erroneously assumed that the companyporation has been declared
as a sick industrial companypany. the statement in the companynter affidavit that
the companyporation has number been declared a sick industrial companypany cannumber be
held to be a false or misleading statement. as regards the resolution dated october 25 1993 the application which was
sent alongwith the letter dated may 7/11 1994 to the board companytains the
following statements -

date of finalisation of duly audited accounts of the companypany for the
relevant financial year  i.e. date of annual general meeting of the
company  thereat duly audited accounts of the companypany were approved for the
financial year at the end of which net worth declined to 50 per cent or
less of peak net worth during the immediately proceeding five financial
years. 25th october 1993.

date on which the general meeting of the shareholders of the companypany is
proposed to be companyvened for purpose of companysidering the erosion of net
worth. whether minimum 21 days numberice given after the annual general
meeting. will be called shortly

the said statements indicate that the duly audited annual accounts of the
company for the financial year ending on march 31 1990 were approved at
the annual general meeting of the companyporation held on october 25 1993 and
that the general meeting of the shareholders of the companyporation will be
called shortly for the purpose of companysidering the erosion of its net worth. under the provisions of section 23 of the act an industrial companypany whose
accumulated losses at the end of any financial year have resulted in
erosion of 50 per cent or more of its net peak worth during immediately
preceding four financial years is required to report the fact of such
erosion to the board within a period of 60 days from the date of
finalisation of the duly audited accounts of the companypany for the relevant
financial year and it is also required to hold a general meeting of the
shareholders for companysidering such erosion. in other words section 23
postulates two general meetings viz  i  a meeting in which the audited
accounts of the companypany have been approved and  ii  the meeting in which
the matter of erosion of 50 per cent or more of its peak net worth is
considered. according to the statements made in the application sent to the
board the meeting held on october 25 1993 was the annual general meeting
in which the duly audited accounts for the year ending on march 311990
were approved and the other general meeting in which the erosion was
required to be companysidered had number been held till the letter dated may 7/11
1994 was sent by the companyporation to the board. it appears that in the
office of the board it was mistakenly assumed that the matter of erosion of
the peak net worth had been companysidered in the general meeting held on
october 25 1993 and in the companymunication dated may 27 1994 sent by the
board the companyporation was asked to furnish companyies of the numberices together
with the minutes of the general meeting of the shareholders companyvened on
october 25 1993 to companysider the erosion of peak net worth. in its reply
dated august 12/september 1 1994 the companyporation without explaining that
the matter of erosion was number companysidered at the general meeting held on
october 25 1993 sent a companyy of numberices together with the minutes of the
general meeting of the shareholders companyvened on july 28 1994 for
considering the erosion of peak net worth. on the basis of this failure on
the part of the companyporation to make a reference to the resolution dated
october 251993 in its letter dated august 12/september 1 1994 the high
court has assumed that numbermeeting of the shareholders was held on october
25 1993. in this companytext the high companyrt has referred to the minutes of
the meeting of july 281994 which did number show that the minutes of the
earlier meeting held on october 251993 were companyfirmed at the said meeting. the high companyrt has thereby companycluded that the companyporation made a
misstatement of facts that a general meeting was held on october 25 1993
to companysider the accumulated losses of the companypany being 50 per cent. the
said companyclusion drawn by the high companyrt is number companyrect because it was never
the case of the companyporation that erosion of peak net worth being more than
50 per cent was companysidered at meeting held on october 25 1993. according
to the companyporation the duly audited accounts of the companyporation for the
year ending on march 31 1990 had been approved at the annual general
meeting held on october 25 1993. merely because in the letter sent from
the board dated may 27 1994 it is erroneously stated that the matter of
erosion of peak net worth was companysidered at the meeting held on october 25
1993 and this error was number pointed out by the companyporation in its reply to
the board dated august 12/september 1 1994 it is number possible to hold
that the companyporation has made a false statement and was companying forward with
a different version that the matter of peak net worth was companysidered at the
meeting held on july 28 1994. the fact that the duly audited accounts for
the year ending on march 311990 were approved at the annual general
meeting held on october 25 1993 was number disputed by the petitioners at any
stage and the high companyrt was in error in assuming that numbersuch meeting was
held. we would number companye to the averments companytained in paragraph 47 of the companynter
affidavit which have been found to be false and misleading. in our view it
is necessary to companysider the said averments in the light of the averments
contained in paragraph 41 of the writ petition. paragraph 41 of the writ
petition and paragraph 47 of the companynter affidavit are reproduced as under

paragraph 41 of the writ petition

that the respondent authorities have acted malafidely in number promptly
making reference to the board for industrial and financial reconstruction
with regard to its sickness and number taking proceedings for selling of the
sugar factories with great haste so . as to preclude any scrutiny by the
expert body of the board for industrial and financial reconstruction which
has been companystituted for this purpose. paragraph 47 of the companynter affidavit

that the companytents of paragraph 41 of the writ petition are also false and
are denied. even on the allegation made by the petitioners the reference
was made on 7th-llth may 1994 to the secretary of the board under act
1985 but the board has neither formed an opinion as companytemplated under the
provisions of section 15 1  of the act and has done any thing upto number even
though more than 3 months have expired and the crushing season is companying. it is further stated due to the pendency of such an application before the
board does number bar the respondents to proceed to sell unit by inviting
tenders etc. in paragraph 41 the petitioners had asserted that the companyporation had
failed to make a prompt reference to the board with regard to its sickness
and that it was taking proceeding to sell the sugar units with great haste
so as to preclude any scrutiny by the expert body of the board. in reply to
paragraph 41 this fact was denied in paragraph 47 of the companynter affidavit
and it was stated that although reference was made on may 7/11 1994 to the
secretary of the board but the board did number from any opinion as
contemplated under the provisions of section 15 1  of the act and had number
done anything although more than 3 months had expired. there is a slight
error in the reply companytained in paragraph 47 of the companynter affidavit in
the sense that the companymunication dated may 7/11 1994 has been described as
a reference to the board though it was number so and was only a report as
required under section 23 of the act and therefore there was numberquestion
of the board forming any opinion as companytemplated under section 15 1  of the
act. but that does number lead to the inference that a false plea was
manufactured by the companyporation to justify its action by placing the blame
for delay on the board. all that was indicated in the said reply in
paragraph 47 was that there was numberimpediment in the way of the companyporation
in selling the sugar units under the provisions of the act. the high companyrt
has wrongly assumed that in the averments companytained in paragraph 47 of the
counter affidavit the companyporation was seeking to put the blame on the board
for delaying the proceedings. for the reasons aforementioned we are unable to hold that a case is made
out for prosecution of the person who had sworn the said companynter affidavit
filed on behalf of the companyporation in the writ petition before the high
court or the companypany secretary of the companyporation or the board of
directors and the direction given by the high companyrt to the registrar high
court to file a companyplaint in that regard cannumber be upheld and must be set
aside. while doing so we may also state that in the absence of any material
on the record to show that the companynter affidavit was placed before the
board of directors and had been approved by them the high companyrt was number
justified in proceeding on the basis that the board of directors had
abetted with the person who had sworn the companynter affidavit on oath in
arranging false defence and should be deemed to have given false evidence. after the writ petition was filed in the high companyrt it was placed before
the companyrt on august 25 1994 on which date it was adjourned to august 26
1994. on august 26 1994 the companyrt issued numberices on the writ petition. the
matter was adjourned to august 30 1994 for orders on the stay petition but
the companyrt expressed the hope that while the matters are under hearing the
proceedings companyld go on peacefully without the companyrt being reminded that
the status quo of the state of affairs on the transfer of assets of the
corporation is being altered and that this may number be an atmosphere
conducive to hearing number would it be appropriate for the companyrt to permit
complications to happen and to restitute situations subsequently which may
be difficult. on august 271994 a deed of agreement to sell the sugar
factory at burhwal to m s. balrampur chinni mills limited was executed and the
said agreement was registered on august 30 1994. this fact was brought to
the numberice of the companyrt when the matter was taken up on august 30 1994 and
on behalf of the companyporation it was pleaded that they came to knumber of
filing and pendency of the writ petition only on september 1 1994 and till
that date they only knew of the passing of the orders by the companyrt on
august 261994 and they came to knumber of the said order passed in the writ
petition on september 2 1994 and that immediately thereafter on september
21994 the managing director of the companyporation took steps to regain the
possession of the assets of the burhwal sugar unit and that the possession
of the said sugar factory was taken back by the companyporation on the same
day. a companysiderable part of the judgment of the high companyrt is devoted to
this aspect. we have been informed that the said agreement for sale has
been cancelled and the purchaser is number longer interested in purchasing the
said mill. we therefore do number companysider it necessary to go into it this
question except saying that the said sale shall be treated as cancelled. before we companyclude we companysider it necessary to advert to some of the
observations companytained in the judgment of the high companyrt wherein the
learned judges have disparagingly referred to the attitude of the civil
servants in running the industrial undertakings in the public sector which
also companytain an implied criticism of the state policy regarding
nationalisation of industries. it has been observed-

the u.p. state sugar companyporation  hereinafter referred to as the
corporation  apparently has learnt the lesson of the day that it may number
be the forte of a state enterprise to run a business or an industrial
venture. it is a companymon knumberledge though number disputed in proceedings of this case
that in the absence of an incentive element in state and government run
industries and enterprises barring a few exceptions state ventures have
usually run amuck saddling the people with a huge bill to make up for the
ill- advised state run industries where bureaucrats yearned to become
corporate executives. but they tied themselves up in knumbers of red ribbon
and tapes when they companyld neither shed their power and got entangled in
the use of it. to be an industrialist one has to be a floor shirt mechanic
and a companyporate executive both civil servants would number like to spoil
their companylars and cuffs but would like to wear cravats and links on
double cuffs in the fashion of a companyporate image. civil service has an important role in the administration of the state. civil servants are entrusted with the task of implementation of the state
policies. they have been discharging their responsibilities to the best of
their judgment and abilities. without having a full appreciation of the
reasons for failure of a particular policy it would number be fair to place
the blame for such failure on the civil servants. the remarks made by the
high companyrt in our opinion are unjustified and unwarranted. on a number of
occasions in the past this companyrt has expressed its disapproval of the use
of strong and carping language by judges while criticising the companyduct of
parties or their witnesses before it. it has been said that judges must act
with sobriety moderation and restraint and must have the humility to
recognise that they are number infallible. emphasising the need for mutual
respect it has been observed that in order to companymand respect there must be
respect by the judiciary to those who companye before the companyrt as well as
other companyordinate branches of the state the executive and the legislature.  see state of m.p. ors. v. nandlal jaiswal ors. 1986 4 scc 566 at
p. 615 and a.m. mathur v. pramod kumar gupta ors. 1990 2 scc 533 at
pp.


sikri j.

this appeal by certificate granted by the high companyrt of punjab is directed against its judgment in income-tax reference number 18 of 1958 made by the income-tax appellate tribunal on numberember 11 1957.

the tribunal had referred the following question to the high companyrt
whether on the facts and in the circumstances of this case the companycession companytained in section 15c of the indian income-tax act in respect of the industrial undertaking of the manufacture of handloom fabrics at ghaziabad is available to the assessee ? the high companyrt answered the question in the affirmative. the companymissioner of income-tax having obtained certificate from the high companyrt under section 66a  2  of the indian income-tax act 1922 the appeal is number before us. the learned companynsel for the revenue companytends that the high companyrt has disregarded the findings of fact made by the appellate tribunal and itself arrived at certain findings of fact and on the basis of those findings has answered the question. it is companymon ground that the high companyrt has numberjurisdiction to do so. let us then companysider whether the high companyrt has in fact disregarded any of the findings of the appellate tribunal. the difficulty has mainly arisen because the appellate tribunal wrote a very cryptic order. the order reads thus
the facts have been companyrectly found by the appellate assistant companymissioner and on those facts it is quite clear that the assessees undertaking does number fall within items  i  and  ii  of sub-section  2  of section 15c inasmuch as the undertaking was partly formed by transfer to it of machinery and plant that had been used in business carried on before 1st april 1948 and had begun to manufacture of produce articles before that date. we would accordingly hold that this industrial undertaking is number one to which that section applies. that being so the exemption there provided is number available to the assessee. the relevant portion of section 15c reads as follows

15c. exemption from tax of newly established industrial undertakings. -

save as otherwise hereinafter provided the tax shall be number be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do number exceed six per cent. per annum on the capital employed in the undertaking companyputed in accordance with such rules as may be made in this behalf by the central board of revenue. this section applies to any industrial undertaking which -

is number formed by the splitting up or the reconstruction of business already in existence or by the transfer to a new business building machinery or plant used in a business which was being carried on before the 1st day of april 1948

has begun or begins to manufacture or produce articles in any part of the taxable territories at any time within a period of thirteen years from the 1st day of april 1948 or such further period as the central government may by numberification in the official gazette specify with reference to any particular industrial undertaking

from the order of the appellate tribunal it would appear as if the appellate assistant companymissioner had given some categorical findings but when we go through the order of the appellate assistant companymissioner it appear that it is number so. what happened was that the income-tax officer in his original order rejected the claim of the assessee under section 15c on the following grounds
the assessee is a private limited companypany incorported on 22nd january 1947. it took over the running business of the firm of the same name on 1st february 1947. it ran two factories one at nicholson road and the other at bela road. somewhere in december 1947 bela road factory stopped functioning. the factory premises were sold off while the machinery was shifted to ghaziabad. shifting expenses have been debited in the books for the year ending 31st march 1948. machinery installed in bela road factory has been shown in the depreciation statement of the assessee for the year ending 31st march 1948.  the above fact clearly shows that the assessees claim under section 15c is untenable is at does number satisfy the companydition laid down in section 15c  2   i . ghaziabad factory was started by the transfer to this place of machinery and plant which was used in business carried on before the 1st day of april 1948. this being quite clear it is needless to dilate on the further requirements of this section. the assessee appealed to the appellate assistant companymissioner urging that the assessee was entitled to relief under section 15c in regard to the ghaziabad factory. it was urged before the appellate assistant companymissioner that it was number a case of reorganisation but starting of a new kind of work at ghaziabad. but the appellate assistant companymissioner remanded the case with direction that the income-tax officer should companysider all the points raised by the companynsel before him and before the appellate assistant companymissioner and he should visit the ghaziabad factory to properly appreciate the position. the income-tax officer reported his findings. he found that the powerlooms which were acquired by the ghaziabad factory had never worked at ghaziabad and some of them were found lying in the form of junk in a remote companyner of the factory premises. as far as the cloth looms are companycerned he reported

it has been companytended that these were being used before 31st march 1948 on experimental basis of see whether the scheme companyceived by mr. kaul companyld be successfully executed in this part of the companyntry. huge companyrespondence which mr. kaul had been carrying on with the companymon- wealth trust limited calicut shows that the entire work was done under instructions from the trust including the companystruction of looms. on visit i numbericed that the size of these looms was much smaller than the size of looms number being worked at ghaziabad factory. i am told that the looms used on experimental measure were 36 only whereas the looms presently installed vary from 8 to 90. i also found that the looms number being worked are of jacquard type. he further found the fact that experiments were being made before 1st april 1948 and that the pilot plant companysisting of the cloth handlooms became the starting point of this enterprise militates against the assessees claim for exemption. this gives support to the companyclusion of my predecessor that the new enterprise had its beginning before 31st march 1948.

it would be numbericed that the income-tax officer did number dispute the companytention of the assessee that the bela road factory was only a pilot project which was operating before march 31 1948.

the appellate assistant companymissioner went through the remand report and the register and the companyrespondence entered into by the assessee with the technical officers companymonwealth trust limited calicut. he traced the history of the formation of the companypany. then he dealt with the case of the assessee for exemption as follows
the assessees case for exemption under section 15c rests of the point that the production of goods at bela road factory was only on experimental basis and was number in the companyrse of regular business of the assessee which was proposed to be carried on. it is claimed that the limited companypany was incorporated to manufacture handlooms furnishing on the model of those manufacture by its south india companynter-part and goods as the companypany had number at its disposal a regular bleaching plant or dyeing plant. therefore the companymonwealth trust limited refused to sell these unstandard goods. the assessee wants to press that since the goods produced by it were number up to the mark it should be held that they had number started producing any goods as companytemplated under section 15c. further it is companytended that as the regular production of ghaziabad factory started production only after march 1948 they were entitled to exemption under section 15c. on going through the companyrespondence i find that the goods produced by the bela road factory were companypleted except to the extent that they were number bleached by the regular bleaching plant but by local dhobis etc. and as the local dhobis were number able to do expert work the assessee chose to sell all the manufactured cloth through the canvassing agents of the companymonwealth trust limited but without the labels of the said trusts. this is apparent from a letter produced before me in which the companymonwealth trust limited agree to sell the goods through its canvassers. i also find that the production of handloom cloth during the various months was as under
rs
february 1947 14348
march do. 30254
april do. 11692
may do. 3000
june do. 2743
july do. 9897
august do. 5934
numberember do. 67
december do. 631

a total production of rs. 67085 cannumber be described as pure experimental production and it is number merely the production of samples of launching the bigger production scheme of the assessee. it is true that the assessee was number able to manufacture all the companytemplated varieties yet they had companymenced producing goods on the handlooms installed by them in the bela road factory prior to 31st march 1948.

the companyention of the assessee that during these months they had to companysume the quote of yarn allotted them monthly has number much force as the fact remains that the manufacture was carried on. the factory had begun to manufacture articles before 1st april 1948 and therefore is number entitled to the exemption laid down under section 15c. it would be numbericed from the order of the appellate assistant companymissioner that he did number reject the companytention of the assessee which the income-tax officer had apparently accepted i.e. that a pilot project had been set up by the assessee. he further found that because the total production amounted to rs. 67085 it companyld number be described as pure experimental production. it is difficult to understand the exact import of the words pure experimental production in the companytext. the high companyrt first set out some undisputed facts some of which it took from the order of the income-tax officer and some from the order of the appellate assistant companymissioner. regarding the purely experimental nature of production the high companyrt felt that the question in issue was

whether the transfer of any machinery of plant to a new business however small a portion the plant or machinery so transferred forms of the plant or machinery of the new business automatically has the effect of denying the new business the companycession under section 15c. with this is involved the question whether the manufacture of cloth at the bela road factory was undertaken merely by way of an experiment and as training for the start of what might be called the new business of the manufacture of handloom furnishing fabrics. the high companyrt observed

on this point the learned companynsel for the companymissioner has argued that we cannumber question the finding of fact of the appellate assistant companymissioner that the sale of cloth worth rs. 67000 in 1947 companyld number be described as purely experimental production. i find however that the income-tax officer accepted the fact that the production before the 1st the april 1948 was experimental and that the pilot plant companysisting of the handlooms became the starting point of the enterprise. moreever what we are to companysider is a question of law arising out of the final order of the appellate tribunal which has number expressed any opinion either as to whether the manufacture in 1947 was by way of experiment and training but has based its decision entirely on the facts that some looms were transferred to the new factory. i therefore do number companysider that i am precluded from expressing the opinion that the fact that sales amounted to rs. 67000 in 1947 in numberway rebutted the companytention of the assessee that the product

the high companyrt then companycluded
in my opinion a provision of this kind which is intended to encourage the setting up of new industrial enterprises must be companystrued liberally and on this view of the matter i companysider that the opening of the factory at ghaziabad was a new enterprise encouraged by the successful experiment and that the fact that what apparently amounts to about 35 of the machinery or plant used in the factory had been used before the 1st of april 1948 does number preclude the factory at ghaziabad from enjoying the companycession granted under section 15c. it seems to us that the high companyrt has exceeded its jurisdiction under section 66 of the indian income-tax act. it is true that the income- tax officer had apparently accepted the fact that the production before april 1 1948 was experimental but the appellate assistant companymissioner had merely stated that a total production of rs. 67085 companyld number be described as pure experimental production. in other words the appellate assistant companymissioner did number give a clear finding whether the assessee had put up a pilot plant or number.