HIGH COURT OF
Echjay Industries (P.)
Ltd.
v.
Echjay Forgings (P.) Ltd.
D.K. DESHMUKH AND J.H. BHATIA, JJ.
APPEAL NOS. 532 AND 662 OF 2001
COMPANY APPLICATION NO. 332 OF 1988
COMPANY PETITION NO. 271 OF 1985
October 16, 2007
Section 391 of the Companies Act,
1956 - Compromise and arrangement - Appellant - company, owned by ‘D’ family,
besides other properties had factories named as ‘Kanjur division’ and ‘Rajkot
division’ - Pursuant to a family arrangement it was decided to spin off ‘Kanjur
division’ from appellant and to give control of same to ‘M’ group -
Respondent-company came into existence as a result of that arrangement - Scheme
of arrangement prepared for that purpose was sanctioned by Court - Prior to
sanction of scheme, appellant had made a general reserve - II for Rs. 3.25
crore, allegedly, for purpose of meeting liability in respect of workers, who
were terminated from ‘Kanjur division’ in 1973 and whose case was pending
before Industrial Tribunal - In application for implementation of scheme
respondent contended that when it had paid an amount of Rs. 23.47 lakhs from
its own funds towards claim of workmen appellant had no right to retain the
general reserve No. II and said reserve should have been transferred to it when
‘Kanjur division’ was spun off from appellant - Single Judge rejected
respondent’s claim regarding transfer of said reserve, but directed appellant
to pay amount of Rs. 23.47 lakhs to respondent - On appeal, appellant contended
that amount paid by respondent to workers had actually been adjusted in
differential which was required to be paid by ‘M’ group and after adjustment of
tax benefits taken by respondent, amount of Rs. 8.68 lakhs net of tax was
adjusted in differential - Respondent also filed appeal claiming amount of said
reserve - Facts revealed that said reserve was created from profit of
appellant-company as a whole and not out of profit exclusively of ‘Kanjur
division’ and as said reserve was appropriation of profits, tax was levied
thereon which was borne by appellant -Whether on facts, Single Judge was
justified in holding that respondent could not claim whole amount of general
reserve No. II - Held, yes - Whether, however, since on facts, it appeared that
payment of Rs. 23.47 lakhs towards liability of erstwhile workers was infact
adjusted by deduction of Rs. 8.68 lakhs net of tax from differentials and
remaining amount was settled as respondent got rebate in the income-tax for
payment of Rs. 23.47 lakhs towards workers liability, order of Single Judge
could not be upheld in that respect - Held, yes
The appellant-company was commenced and controlled by ‘D’ family. It had
two factories named as ‘Kanjur division’ and ‘
While the respondent filed appeal contending that when the liability of making payment to the workers was fulfilled by it naturally it was also entitled to the General Reserve No. II, which was created as a provision to meet that liability. The appellant filed appeal against the holding of the Single Judge that it was liable to pay an amount of Rs. 23.47 lakhs to the respondent on account of payment of the compensation to the workers. The respondent contended that the amount of Rs. 23.47 lakhs was actually adjusted in the differential, which was required to be paid by ‘M’ Group and after adjustment of tax benefit taken by the respondent, amount of Rs. 8.68 lakhs net of tax was adjusted in the differential.
As per the family settlement, ‘M’ group was to take over individual
control and management of Kanjur division, and two other units. It was also provided that ‘M’ group would
transfer their interest in the remaining units belonging to the family. As there were five brothers, ‘M’ group was
entitled to 20 per cent of the total value of the property and the interest
belonging to ‘D’ family. Admittedly, in
the appellant, ‘D’ family had interest to the extent of 69.25 per cent, while
outsiders had shares to the extent of 30.75 per cent There was provision for computation of
differential to be paid to ‘M’ group in case the property taken over by it
would be more than its 20 per cent share
and vice versa if the property to be allotted to ‘M’ group would be less than
its 20 per cent shares. [
Before the scheme was sanctioned by the Court, the family had made a
reference to chartered accountants to assess the value of Kanjur Division and
to suggest the ratio of allotment of shares in the respondent in consideration
of the shares held in appellant. The report of chartered accountants showed
that general reserve No. II of the appellant was not taken into consideration
for the purpose of making valuation of the assets of Kanjur division. It was also material to note that there was
nothing on record to show that general reserve No. II amounting to Rs. 3.25
crores was ever shown in the balance-sheet of Kanjur division. [
It was material to note that while general reserve No. II for an amount
of Rs. 2,20,00,000 was created by resolution passed by the board of directors
on 3-7-1981 and additional amount of Rs. 37,00,000 was put in the said reserve
on 20-7-1982. Third addition of Rs.
68,54,732 was made in the said reserve by a resolution dated 28-6-1983 taking
the total of general reserve No. II to the tune of Rs. 3,25,54,732. Admittedly, on 10-1-1983, the settlement had
taken place with the said workers and as per that settlement, total amount to be paid to the workers was
Rs. 23,47,000 and the payment of the said amount was actually made from
14-1-1983 to August, 1983. If the total
liability towards the workers was finally settled at Rs. 23,47,000 on
10-1-1983, there could be no reason or justification to make additional reserve
of Rs. 68,54,732 on 28-6-1983 particularly when a huge amount of Rs.
2,57,00,000 was already in general Reserve No. II. That clearly revealed that the general
reserve No. II was not created to meet liability towards the workmen. [
Amount of Rs. 3.25 crores was shown as reserve in the Balance-sheet of
the appellant. The General Reserve No. II was created from the profits of the
company as a whole, and not out of profits exclusively of the Kanjur Division.
As the reserves were appropriations of profits to be placed alongwith the
capital in the balance-sheet, it was not a provision for any anticipated
liability. Therefore, that amount was also liable to payment of tax. Tax
payable on the General Reserve No. II was borne and paid by the appellant. The
question whether the appellant was liable to pay the tax on the accumulated
reserves was taken to the Tribunal and the Tribunal, by its judgment, rejected
the claim of the appellant that tax was not payable. The Tribunal held that all the facts would
indicate that the amount was infact appropriation out of the profits and it was
never intended as provision for liability and was never utilized as such in
subsequent years. The Single Judge
rightly noted that the excess of Rs. 3.25 crores over Rs. 23.47 lakhs would be
a reserve and not a liability and, therefore, the respondent could not claim
whole of the amount of said general reserve. [
In the company petitions filed by both the parties, scheme was sanctioned
by the Court on 3-9-1986. After that on 22-10-1986, the respondent forwarded a
debit note with a covering letter to the appellant claiming the amount paid by
it to the workers with interest at the rate of 15 per cent per annum. Said
debit note included amount of Rs. 23.47 lakhs which was paid to the workers of
the Kanjur division from the accounts of the Kanjur division. In that letter or
debit note, there was no reference to the claim on the entire amount of general
reserve being Rs. 3.25 crores. [
Further in a case filed
against company ‘E’, which was allotted
to ‘M’ group under the family arrangement, a consent order was passed whereby
the directors of the respondent agreed to pay an amount of Rs. 45.58 lakhs to
the appellant. That consent order was
significant, because if the respondent was really entitled to claim amount of
3.25 crores under the general reserve No. II, it would not have agreed to pay
amount of Rs. 45.58 lakhs to the appellant. [
The Single Judge also noted that a letter dated 1-9-1987 was addressed by
attorney of company ‘E’ about
computation of differential, which was payable by the ‘M’ group. The statement of attorney was accepted as per
the admitted minutes of meeting.
There also, there was no
reference to the claim over the amount of Rs. 3.25 crores being general reserve
No. II of the appellant. [
The Single Judge had considered all those aspects and several other
aspects minutely before coming to conclusion that the respondent had no right
or claim over the general reserve No. II of Rs. 3.25 crores shown in the
balance-sheet of appellant. There was no
valid reason to disagree with those findings. [
So far as the liability to pay amount of Rs. 23.47 lakhs in respect of
payments made to the workers was concerned, on careful perusal of the
sub-clause b (i) of the sanctioned scheme, it was clear that the
respondent had taken over responsibility only in respect of the employees of
the Kanjur division, who were in service on the day immediately preceding the
effective date, which was 31-12-1982.
Not only that, the second part of that clause provided a protection to
such employees of continuation of service without any interruption and the
guarantee that terms of their service would not be less favourable to them than
the terms, which were applicable to them on the day immediately preceding the
effective date. Taking into
consideration the second part of sub-clause b (i), there remained no doubt that
the responsibility was only in respect of employees, who were in actual service
because there could not be any protection of uninterrupted service and the
guarantee against any terms of service less favourable than those which were
applicable prior to the effective date in respect of the workers, who were not
in the employment on the effective date.
Such guarantee could be given only to the employees, who were in actual
employment on that day. It was nobody’s
case that 356 employees, whose claims were pending in the industrial disputes,
were in the employment on the effective date or immediately preceding the
effective date. It was material to
note that even though the effective date was 31-12-1982, the scheme was sanctioned by the Court on
3-9-1986. The dispute with those workmen
was already settled on 10-1-1983 and the payment of their claims amounting to
Rs. 23.47 lakhs was already paid by August, 1983. Therefore, when the scheme was sanctioned,
there was no reason to cover those employees.
If those employees would have been covered under the scheme, the
valuation of Kanjur division would have certainly taken note of that liability
but, admittedly, there was no reference of that liability in the valuation made
by the chartered accountants in 1984.
Taking into consideration the terms of the scheme, there was no doubt that
the respondent had not taken the responsibility of paying any compensation to
the workmen, whose services were terminated in the year 1973 though they were
the workers of Kanjur division.
Therefore, it was responsibility of the appellant. [
The question whether the responsibility of the liability towards those
workmen was taken over by the appellant or by the respondent infact, became
immaterial because admittedly the payment of that liability was made from the
account of the respondent during the year 1983 and, admittedly, no provision
was made for that payment in the scheme nor it was provided for in the
evaluation report of the Kanjur division.
Therefore, in either case after having made a payment of said Rs. 23.47
lakhs, the respondent would be entitled to be compensated for that amount by
the appellant. [
However so far as appellant’s contention that said amount had been
adjusted in differential, which was required to be paid by ‘M’ Group was
concerned, taking into consideration the rights and shares of ‘M’ Group in the
whole property and the property actually received by the said group, ‘M’ group was found liable to pay amount of
Rs. 62.39 lakhs towards the differential.
There was no dispute that a meeting had taken place on 29-8-1984. As per the minutes of the said meeting, ‘M’
group was to pay total amount of Rs. 119.20 lakhs, which included payment of
Rs. 67 lakhs towards the outsiders towards their share in the fixed assets and
the current assets. As far as payment of
differential to the group of remaining brothers was concerned, it showed that
from the total amount of Rs. 62.39 lakhs, amount of Rs. 13.07 lakhs was agreed
to be deducted and on two different counts, there was addition of 4.50 lakhs
and 0.30 lakhs and thus, he was finally required to pay Rs. 54.20 lakhs to the
remaining brothers. In the minutes dated
29-8-1984, there were no details about those three items, i.e., one
about deduction and two about additions. It was noted that ‘MG’, who was one of
the remaining four brothers, who had taken over the appellant, explained that a
meeting had taken place on 6-8-1984 and in the minutes of that meeting, details
of deductions of Rs. 13.07 lakhs were given.
As the amount of Rs. 23.47 lakhs was paid to the workers, the respondent
could claim tax benefit at the rate of 63 per cent, which was tax rate
applicable during that period and the amount of Rs.8.68 lakhs net of tax was
deducted from the total amount of Rs. 62.39 , being the differential payable by
the ‘M’ group. The deductions of Rs.
13.07 lakhs included deduction of Rs. 8.68 lakhs being net of tax towards the
payment of liability towards the workers.
[
However, the Single Judge held that evidence of ‘MG’ was not reliable,
and since the original minutes of the meeting dated 6-8-1984 were not placed on
record those minutes could not be taken into consideration. With those observations, the Single Judge
came to conclusion that the appellant had failed to prove that the amount of
Rs. 23.47 lakhs was adjusted against the differential. [
After careful scrutiny of the record, it was difficult to uphold the view
taken by the Single Judge. Admittedly,
there was deduction of 13.07 lakhs from the differential of Rs. 62.39 lakhs
which was required to be paid by ‘M’ group to the remaining brothers. ‘MG’ explained what that deduction was, but
there was no acceptable or plausible explanation from ‘M’ group about that
deduction. ‘M’ group tried to contend that said differential was towards the
depreciation of machinery. That could
not be accepted for the reason that valuation of the fixed assets, machinery,
etc., was already made by chartered accountants and after that valuation,
differential of Rs. 62.39 lakhs was found payable by ‘M’ group. Taking into consideration those aspects, it
appeared that payment of Rs. 23.47 lakhs towards the liability of erstwhile
workers was infact adjusted by deduction of Rs. 8.68 lakhs net of tax from the
differentials and the remaining amount was settled as the respondent got rebate
in the income-tax for the payment of Rs. 23.47 lakhs towards the workers
liability. Taking into consideration
overall view of the facts and circumstances, it was not possible to agree with
the Single Judge on that count. Said
claim of the respondent was already satisfied in the differential payable by it
to the appellant as per the minutes of the meeting dated 29-8-1984. Therefore, the decree passed by the Single
Judge in favour of the respondent in that respect would not be sustained. [
Therefore, appeal filed by the respondent was liable to be dismissed,
while the appeal filed by the appellant deserved to be allowed. [