Kerala State Electricity Board, Etc. v. S.N Govinda Prabhu & Brothers and Others Etc.

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1639 r~~l985 etc. From the Judgment and Order 15.1.1985 of the Kerala High Court in O.P. 760 of 1981 M.M. Abdul Khader, G. Viswa Natha Iyer, M.A. Firoz, C.S. Vaidyanathan, P. Chowdhary,_S.R. Setia and K.D. Namboodiry for the Appellant. I . P. Subramanium Poti, F.S. Nariman, S.B. Saharya, V.B. Saharya, Vi)ay Bahuguna, M.L. Lahoty; S.P. Singh, Rakesh Dwivedi, Raj Kumar Singh·» Miss Helen Marc, V.B. Joshi,' K.R. Narnbiar, · vinoo Bhagat, K.R. Kunip, K. Dileep Kumar, Ramesh C. Kohli, G.N. Rao, A..S. Nambiar, P. Kesava Pillai, T. Sridharan, N. Sudhaka· ran, E.M.S. Anam and T;G.N. Nair for the Respondents. The Judgment of the Court was delivered by I--)_ CHINN APP A REDDY, J. These appeals preferred by the Kerala State Electricity Board raise the question of the extent of the authority · \ . of theJloard io increase the Electricity Tariff under the Electricity Sup- . -( ply Act~· The upward revision of tariff made by the Board iri 1980, 1982 and 1984 was successfully challenged in the Kerala High Court.

The first two revisions were struck qown by 'a Full Bench of three judges by ·a majority of two to one and, later, all three revisions were struck down by a Full Bench of Five judges by m~jority of four to·one. The principal ground of challenge and that which was accepted by the High Court was that the Kerilla State Electricity Board acted outside its ·statutory authority ty formulating a price structure intended to yield sufficient revenue to off set not merely the expenditure properly .. chargeable to the revenue account for the year as contemplated by s. 59 of the Act but also expenditure not so properly chargeable. Had s. { 1986] 3 S.C. R. 59 been strictly followed an~ had items of expenditure not chargeable ... to the revenue account for the year been excluded, the. revised tariff would have resulted in the· generation of a surplus far beyond the contemplation of s. 59 of the Act.

According to the High Court, in the absence of a· specification by the Government the Board was not en- · ., titled to generate a surplus at all and it acted entirely outside its authority in generating a surplus to be adjusted against items of expenditure not authorised to be met from the revenue receipts. The notificalions prescribing revised tariffs were therefore, struck down. The view of the High Court,. as might be seen; was based primarily on thei~· _ construction of s, 59 of the Electricity Supply Act. Jn order to understand the questions at issue; it is necessary to set out s. 59 as it stood prior to 1978, as amended by Act No. 23 of · 1973~ _and finally as amended by Act No. 16 of 1983: Section 59 prior . to 1978 (1) Section 59 as amended by Act , No. 23 of 1978 (2) Section 59 as further amended by Act No. 16 of 1983 (3)

General principles for Board's flllllnce- The Board shall not, as far as practicable ·· and after taking General principles General Principles . for Board's financefor Board'sfinance- (1) The Board shall (1) The Board shall after taking credit ·after taking credit for any subvention for any subvention credit for any , ·F"· subventions from the from the State Governfrom the Statt ment unders: 63, carry Government under 'State Government under s. 63, carry on .its_ operations under this Act at a loss. and shall adjust its charges accordingly from time to time .. Provided that i where necessary any / amounts due for · · meeting ·the operating, . maintenance and on its operations under s.

63, carry on its this Act and adjust its operations under this tariffs so'as to ensure Act and adjust its that the total revenues tariffs so as to ensure in any year o(account that the total revenues shall, after meeting in any year of account. . . all expenses properly shall, after meeting all chargeable to revenues, expenses properly including operating, chargeable to maintenance and · revenues, including management expenses. ·operating, · taxes {if any on in- . maintenance and I KER. STATE E.B. v. PRABHU [REDDY,J.l management expenses come and profits, management exof the Board or for depreciation and inpenses. taxes (if any) on the purposes of terest payable on all income and profits, clauses (i) and (ii) debentures, bonds and depreciation and of s.

67 may, to such loans. leave such interest payable on all extent as may be sanesurplus as the State debentures, bonds tioned by the State Government may, from and loans leave such Government, be paid time to time, specify. surplus as is not less out of capital. (2) In specifying the than three per cent or surplus under subsuch higher percen-· section (1), the State tage, as the State Government shall have Government may by due regard to the notification in the availability of amounts official Gazette, accrued by way of specify in this behalf, depreciation and the of the value of the liability for loan fixed assets of the amoftization and leave- Board in service at the (a) a reasonable sum beginning of such to contribute towards years. the cost of capital Explanation:-For works; and (b) where the purposes of this in respect of the sub-section, "Value Board, a notification of the fixed assets has been issued under of the Board in sub-section(l) of service at the s.

12A, a reasonable beginning ofthe sum by way of return year" means the l on the capital original cost of such provided by the State · fixed assets as re- I Government under duced by the aggresub-section(3) of that gate of the cumulative section and the amount depreciation in resof the loans (if any) pect of such assets converted by the calculated in accor- State Government into dance with the procapital under subvisions of thi> Act and section(J) of consllmers' consection 66A. trihutions for service lines. (2) In specifying any higher percentage under sub-section(l), the State Govern'- ment shall have due· regard to the availability of amounts accrued by way of depreciation and the liability for Joan amortization and leave- (a) a reasonable sum to.contribute towards the cost of capital works; and (b) where in respect of the Board, a notification has been issued under sub-sec.(l) of s.

12A, a reasonable sum by way of return on the c(lpital provided by the State Government under sub-sec.(3) of that section and the amount of the loans (if any) converted by the State Government into capital under sub-section( 1) of section 66A. We may mention here that we are not really concerned with s. 59 as amended by Act No. 16 of 1983 since that came into effect from April l, 1985 only. We have, however, extracted that provision also for a better understanding of s. 59 as it stood before the 1983 amendment. We consider that for the purpose of understanding and construing s. 59, as it stood before the 1983 amendment, we are entitled to take int'? consideration the Parliamentary exposition contained in the 1983 amendment. (See we will come back to the question of proper construction of s. 59 Jater). KER. STATE E.B. v. PRABHU [REDDY, J.J We think that it is necessary at this stage itself to refer to some of the other important provisions of the Electricity Supply Act.

Section 18 prescribes the general duties of the Board and, it is as follows: "18. General Duties of the Board-Subject to the provisions of this Act, the Board shall be charged with the following general duties, namely: (a) to arrange, in co-ordination with the Generating Company or Generating Companies, if any, operating in the State, for the supply of electricity that may be required within the State and for the transmission and distribution of the same, in the most efficient and economical manner with particular reference to those areas which are not for the time being suppiied or adequately supplied with electricity; (b) to supply electricity as soon as practicable to a lincensee or other person requiring such supply if the Board is competent under this Act so to do; (c) to exercise such control in relation to the generation, distribution and utilisatio_n of electricity within the State as is provided for by or under this Act;

(d) to collect data on the demand for, and the use of, electricity and to formulate perspective plans in co-ordination with the Generating Company or Generating Companies, if any, operating in the State, for the generation, transmission and supply of electricity within the State; (e) to prepare and carry out schemes for transmission, distribution and generally for promoting the use of electricity within the State; and (f) to operate the generating stations under its control in co--0rdination with the Generating Company or Generating Companies, if any, operating in the State and with the Government or any other Board or agency having control over a powet syste·m." Section 49 was not amended either in 1978 or in 1983 and it is as follows: 640, "49. Provision for the sale of electricity by the Board to persons other than licensees-(1)

Subject to the provisions of this Act and of regulation, if any. made in this behalf, the Board may supply electricity to any person not being a licensee upon such terms and conditions as the Board thinks fit and may for the purposes of such supply frame uniform tariffs. (2) In fixing the uniform tariffs, the Board shall have re- . gard to all or any of the following factors, namely- ( a) the nat~re of the supply and the purposes for which it is required; (b) the co"Ordinated development of the supply and distribution of electricity within the State in the most efficient and economical manner, with particular reference to such development in areas not for the time being served or adequately served by the licensee; (c) the simplification and standardization of methods and rates of charges for such supplies; ( d) the extension and cheapening of supplies of electricity to sparsely developed areas. (3)

Nothing in the foregoing provisions of this section shall derogate from the power of the Board, if it considers it necessary or expedient to fix different tariffs for the supply of electricity to any person not being a licensee, having regard to the geographical position of any area, the nature · of the supply and purpose for which supply is required and any other relevant factors. /4) In fixing the tariff and terms and conditions for the ~upply of electricity, the Board shall not show undue pre- ~erence to any person." Section 63 enables the State Government, with the approval of the State l .cgislature, to make subventions to the Board for the purposes of tli,· act. Section 64 empowers the State Government to advance loans l<> the Board and Section 65 empowers the Board, with the KER. STATE E.B. v. PRABHU !REDDY, J.J previous sanction of the State Government. to borrow any sum required for the purposes of the Act by the issue of debentures or bonds or otherwise.

Section 66 empowers the government to guarantee the loans proposed to be raised by the Board Section 66A authorises the State Government to convert any loan obtained from the Government by the Board capital provided by the Board. Section 67 was amended in 1978 and again 1983. It is useful to set out the section as it stood originally and as amended by the two , amendments of 1978 and 19W<: t Section 67 prior Section 67 as amen- Section 67 as further to 1978 ded by Act No. 23 amended by Act of 1978 No. 16of 1983 (1) (2) (3) Priority of lia- Priority of liabi- Priority of liabilibilities of the lilies of Boardties of the Board- Board,.-The revenues ( 1) If in any year, The Board shall disof the Board shall, the revenue receipts tribute the surplus, after·meeting its are not adequate referred to in suboperating, mainteto enable compliance section( 1) of s. 59 nance and managewith the requirements to the extent available ment expenses and of s.

59, the Board in a particular year after provision shall, after meeting in the following has been made for its op~rating, mainorder, namely: the payment of tenance and manage- (i) repayment of printaxes on its ment expenses and cipal of any loan income and profits after provision has raised (including be distributed as been made for the redemption of debenfar as they are payment of taxes (if lures or bonds issued) available in the any) on income and under s. 65 which following order, profits, distribute becomes due for namely: the revenue receipts, payment in the year (i) interest on as far as they are or which became due bonds not guaranavailable, in the for payment in any teed under s. 66; following order, previous year and (ii) interest on namely: has remained unpaid; stock not so (i) payment of (ii) repayment of guaranteed; interest on loans principal of any . (iii) credits to not guaranteed under loan advanced to the 11986) 3 S.C.R. depreciation s 66;

Board by the State reserve under s. 68. (ii) repayment of Government under (iv) interest on bonds principal of any s. 64 which becomes guaranteed under loan raised (includue for payment in the s. 66; ding redemption of year or which became ( v) interest on stock debentures or bonds due for payment in any so guaranteed; issued) under s. 65 previous year and (vi) interest on sums which become due for remained unpaid; paid by the State payment in the years; (iii) payment for Governmen.t under (iii) payment of purposes specified guarantees under interest on loans in sub-section (2) section 66; guaranteed under of s. 59 in such manner (vii) the write-down of s. 66; as the Board may amounts paid from (iv) payment of indecide." capital under the terest on sums paid by proviso to section 59; the State Government (viia) the write-down in pursuance of of amounts in resguarantees under pect of intangible s.

66; assets to the extent (v) payment of into which they are terest on loans actually appropriaadvanced to the ted in any year for the Board by the State for the plirpOse in Government under the books of the s. 64 or deemed to be Board; advanced under sub- (viii) contribution to section(2) of general reserve of an section 60; amount not exceeding (vi) repayment of one half of one per prilicipal of any loan centum pet annum of guaranteed by the the original cost of State Government fixed assets employed under s. 66 which beby the Board so howcome due for payment ever that the total in the year or which bestanding to the credit came due for payment of such reserve shall in any previous year not exceed fifteen per and has remained centum of the unpaid; original cost of (vii) repayment of such fixed assets; principal of any loan (ix) interest on loans advanced to the Board KER. STATE E.B. v. PRABHU [REDDY, J.I , advanced or deemed to he advanced to the Board under s, 64, including arrears of such in~erest;

(x) the balance to be ·appropriated to a fund to be called the Development Fund to be utilised for- ( a) purposes bene- . ficial, in the opinion of the Board, to electrical development in the State; (b) repayment of loans advanced to the Board under s. 64 and required to be repaid; Provjded that where no such loan is outstanding, one-halfofthe balance aforesaid shall be credited to the Consolidated - Fund of the State. under s. 64 which becomes due for payment in the year or which became due for payment in any previous year and has remained unpaid; and if any balance amount is left thereafter, the same shail be utilised for the other purposes specified ins. 59 in such manner as the Board inay decide. ( 2)

If for any reason beyond the control of the Board, the revenue receipts in any year · are not adequate to meet its operating, maintenance and 1nanagement expc;(J.ses, taxes (if any) on incomes and profits and the liabilities referred to in clauses (i) and (ii) of sub-section(!), the shortfall shall, with the previous ;anction of the State Government, be paid out of its capital receipts. Section 67B which was introduced by Act 16 of 1983 defers payment of interest on loans advanced by the Stat,e Government until · after all other expenses are met. It is in th¢ following terms: "67 A Interest on loans advanced by State Govt. to be paid only after other Expenses. Any ji)terest which is payable on loans advanced under section 64 or deemed to have been advanced under section 60 to the !Joarcl by the State Government and which is ch11rged to revenues in ;iny year may If II \ 19861 3 S.C. R. be paid only out of the balance of the revenues. if any. of that year which is left after meeting all the other expenses referred to in sub-section (1) of section 59 and so much of such interest as is not paid in any year by reason of the provisions of this section shall be deemed to be deferred liability and shall be discharged in accordance with the provisions of this section in the subsequent year or years, as the case may be."

Now, a State Electricity Board created under the provisions of the Electricity Supply Act is an instrumentality of the State subject to the same constitutional'and public law limitations as are applicable to the government including the Principle of law which inhibits arbitrary action by the Government. (see Rohtas Industries v. Bihar State Electricity Board, [1984] 3 SCR 59). It is a public utility monopoly undertaking which may not be driven by pure profit motive not that profit is 4 to be shunned but that service and not profit should inform its actions. 1 t is not the function of the Board to so manage its affairs as to earn the maximum profit even as a private corporate body may be inspired to earn huge profits with a view to paying large dividends to its sharehclders.

But it does not follow that the Board may not and need not earn profits for the purpose of performing its duties and discharging its obligations under the statute, It stands to common sense that the Board must manage its affairs on sound economic principle:s. Having ventured into the field of Commerce, no public service undertaking can afford to say it will ignore business principles which are as essential to public service undertakings as to Commercial ventures. (see Lord Scarman in Bromely v. Greater London Council, [1982] 1 ALL ER 129). If the Board borrows sums either from the Government or from other sources or by the issue of debentures and bonds, surely the Board must of necessity make provision year after year for the payment of interest on the loans taken by it and for the repayment of the capital amounts of the loans.

If the Board is unable to pay interest in any year for want of sufficient reveiiue·receipts, the Board must make provision for payment of such arrear of interest in succeeding years. The Board is not expected to run on a bare year-to-year survival basis. It must have its feet firmly planted on the earth. It must be able to pay the interest on the loans taken by it; it must be a~le to discharge its debts; it must be able to give efficient and economic service; it must be able to continue the due performance of its services by providing for depreciation etc; it must provide for the expansion of its services, for no one can pretend the country is already well supplied with electricity. Sufficient surplus has to be generated for this purpose. That we t KER. STATE E.B. '· PRABHU [REDDY.J.l 64'i take it is what the Board would necessarily do if it was an ordinary commercial undertaking properly and prudently managed on sound commercial lines.

Is the position any different because the Board is a public utility undertaking or because of the provisions of the Electricity Supply Act? We -do n~t think that either the character of Electricity Board as a Public Utility· Undertaking or the provisions of the Electricity Supply Act preclude the Board from managing its affairs on sound commercial lines though not with a profit-thirst. It may be noticed here that s. 18(a) prescribes it as one of the duties of the Board to arrange for the supply of electricity that .may be required within the State and for the transmission and distributionof the same, in the most efficient and economical manner ands. 49(2) (b) requires the Board to have regard, in fixing uniform tariffs, the coordinated development of the supply and distribution of electricity within the State in the most efficient and economical manner, both with particular .reference to those areas which are not for the time being served or adequately supplied with electricity.

The principles of efficiency and economy are, therefore, not forsaken but resolutely emphasised. Now if we tum to s. 'i9. what do we find? Though at one time it appears to have been thought that it was enough if the Board did not carry on its operations at a loss it was realised that the statutory admonition to the Board should be positive and not negative and that the Board should be given an affirmative and self-assuring direction. So s. 59 was amended in 1978. The Statement of Objects and Reasons says. "3. Section 59 of the Electricity (Supply) Act is proposed to be amended by clause 8 of the Bill to give a positive direction to the Electricity Boards that after meeting all their expenses, there should be provision for a surplus for contribution towards immediate investment needs. A similar amendment is also proposed to be made in regard to the Generating Companies by inserting a new sub-section (3A) in section 75A by clause 18 of the Bill."

It was found that the 1978 amendment did not effectively improve matters as many State Government did not specify the quantum of surplus. Parliament had, therefore, to intervene once again to fix a statutory minimum surplus. The Statement of Objects and Reasons relating to the 1983 amendment may also be extracted and it is as follows: "Though section 59 of the Act, as amended in· 1978, casr.1 an obligation on the State Government has so far specified the quantum of any surplus. At present there is no unil 1986] 3 S.C. R. fonnity in the manner of classification and presentation of acoounts of the Boards and this renders inter-Board comparison of financial performance difficult. It is also considered necessary to re-arrange the priorities with regard to distribution revenues of the Boards .

It is, therefore, proposed to amend the Act- (a) to provide that each Board shall have a surplus which shall not be less than three per cent, or such higher percentage as the State Government may specify , of the value of the fixed assets of the Board in service at the beginning oftheyear; · (b) to re-arrange the priorities for distribution of revenues of the Boards; (c) ·to bring the financial reporting system of the Boards in line with commercial accounting practice; and (d) to empower with a view to securing uniformity in the manner of classification and presentation of accounts, the Central Government to prescribe the fonns in which the accounts of the Board and other records in relation thereto may be maintained." A plain reading of sec. 59 (as amended in 1978) plainly indicates that it is the mandate of Parliament that the Board should adjust its tariffs so that after meeting the various expenses properly required to be met a surplus is left.

The original negative approach of functioning so as not to suffer a loss is replaced by the positiv~ approach of requiring a surplus to be created. The quantum of surplus is to be specified by the State Government. What the State Government is to specify is J the minimum surplus. This is made clear by the 1983 amendment which stipulates a minimum of 3 per cent surplus in the absence of specification by the State Government which has the liberty to specify a higher percentage than three. That s. 59, as it stood before 1983 contemplated a minimum surplus was also the view expressed by this court in Rohtas Industries v. Bihar State Electricity Board (supra). where it was said, "Under the above provisions, the Board is under a statutory obligation to carry on its operations and ad just its KER. STATE E.B. v. PRABHU [REDDY,J.[ tariffs in such a way to ensure that the total revenues earned in any year of account shail after meeting all expenses chargeable to revenue, leave such surplus as the State Government may, from time to time, specify.

The tariff fixation has, therefore, to be so made··as to raise sufficient revenue which will not merely avoid any net loss being incurred during the financial year but will ensure a profit being earned, the rate of minimum profit to be earned being such as may be specified by the State Government." Shri Potti, learned Counsel for the consumers placed great reliance on the observations of this Court in Kera/a State Electricity Board v .. Indian Aluminium Co., [1976] 1SCR5'i2; Bihar State Electricity Board v. Workmen, [1976] 2 SCR 42 and Dr. P. Na/la Thamby Thera vc Union of India & Ors.,. (1984 I 1 SCR 709 to contend that the Electricity Board ·was barred from conducting its operations on com~ mercial lines so as to earn a profit. In the first case, the· observations relied upon were. "Furthermore, Electricity Boards are not trading corporations. They are public service corporations. They have to function without any profit motive.

Their duty is to promote co-ordinated development of the generation, supply and distribution of electricity in the most efficient and economical manner with particular reference to such development in areas not for the time being served or adequately served by any licensee (section 18). The only injunction is that .as far as practicable they shall not carry on their operations at a loss (section 59). They get subventions from the State Governments (Section 63). In the discharge of their functions they are guided by directions on questions of policy given by the State Governments (Section 78A). There are no shareholders and.there is no distribution of profits." In the second case the court observed, "The Electriciiy Board is not an ordinary oommercial concern. It is a public service institution. It is not expected to make any profit.

It is expected to extend the supply of electricity to unseIVed areas without reference to considerations of loss that might be incurred as a result of such extensio11." IL I In the third case. where the court was considering the position of the Indian Railways it was observed, "The Indian Railways are a socialised public utility undertaking: There is at present a general agreement among writers of repute that the price policy of such a Public Corporation should neither make a loss nor a profit after meeting all capital charges and this is expressed by covering all costs or breaking even; and secondly, the price it charges for the services should correspond to relative costs. Keeping the history of the growth of the Railways and their functioning in view, tlie commendable view to accept may be that the rates and fares should cover the total cost of service which would be equal to operational expenses, interest on investment, depreciation and payment of public obligations, if any.

We need not, however, express any opinion about it." "We have said earlier that the Railways are a public utility service run on monopoly basis. Since it is a public utility, l there is no justification to run it merely as a commercial venture with a view to making profits. We do not knowat any rate it does not fall for consideration here-if a monopoly based public utility should ever be .a commercial venture geared to support the general revenue of the State but there is not an iota of hestitation in us to say that the common man's mode of transport closely connected with the free play of this fundamental right should not be. We agree that the Union Government should be free to collect the entire operational cost which would include the interest on the capital outlay out of the national exchequer. Small marginal profits cannot be ruled out. The. massive operation 'will reqttire a margin of adjustment and, therefore, marginal profits should be admissible."

We do not think that any of these observations is in conflict with what we have said. Pure profit motive, unjustifiable according to us even in the case of a private trading concern, can never be the sole guiding factor in the case of a public enterprise. If profit is made not for , -t' KER. STATEE.B. v. PRABHU [REDDY,J.] profit's sake but for the 'purpose of fulfilling, better and more extensively, the obligation of the services expected of it, it cannot be said that the public enterprise acted beyond its authority. The observations in the. first case which were referred to us merely emphasised the fact that the Electricity Board is not an ordinary trading Corporation and that as 'a public utility undertaking its emphasis should be on service and not profit.

In the second case, for example, the court said that it is not expected to make any profit and proceeded to explain why it is not expected to make a profit by saying that it is expected to extend the - supply of Electricity to unserved areas without reference to considerations of loss. It is of interest that in the second case, dealing with the question whether interest cannot be taken into account in working out profits, the court observed, 'TheJacile assumption by the Tribunal that the interest should not be taken into account in working out the profits is not borne out by the provisions of the statute." In the third case, the court appeared to take the view that the railway rates and fares should cover operational expenses, interest on invest- . ment, depreciation and payment. of public obligations. It was' stated more than once that the total operational cost would include the interest on the capital oµtlay out of the national. exchequer.

While the court expressed the view that there was no justification to run a public utility monopoly service undertaking merely as a commercial venture with a view to make ·profits, the court did not rule out but refrained from expressing any opinion on the question whether a public utility monopoly service undertaking should ever be geared to earn profits to support the general revenue of the State .. One·of the submissions which found favour with the High Court and which was seriously pressed before us was that in the absence of specification by the State Government the position would be as it was before the 1978 amendment, that is, the Board was carry on its affairs and adjust the tariffs in such a manner as not to incur a loss and no more. We do not agree with the submission for the reasons already mentioned. We may also refer here to the decision of the Privy Council in Madras and Southern Mahratta Railway Company Ltd. v. Bezwada Municipality, AIR 1944 PC 71 which affirmed the Judgment of the Madras High Court in Madras and Southern Maharatta Railway Com- KER.

STAIB E.B. v. PRABHU (REDDY,J.] heights as to lead to the inevitable conclusion that the Board has shed its public utility character. When that happens the Court may strike down the revision of tariffs as plainly arbitrary. But not until then. Not, merely because a surplus has been generated, a surplus which can by no means be said to be extravagant. The court will then refrain from touching the tariffs. After all, as has been said by this court often enough 'price fixation' is neither the forte nor the function of the court. The occasional excursions that have been made into that field were at the request and by the agreement of the parties. This was made dear· by a Constitution Bench of seven judges of this Court in Prag Ice· and Oil Mil/sv. Union of India, [1978] 3 SCR 293 where it was said, "It is customary in price fixation cases to cite the oftquoted decision in Premier Automobilies Ltd. & Anr. etc. vs. Union of India which concerned the fixation of price of motor cars.

It is time that it was realized that the decision constitutes no precedent in matters of price fixation and was rendered for reasons peculiar to the particular case. At page 535 of the Report Grover, J., who spoke for the Court, stated at the outset of the judgment. -''Counsel for all the parties and the learned Attorney General are agreed that irrespective of the technical or legal points that may be involved, we should base our judgment on examination of correct and rational principles and should direct deviation from the report of the Commission which was an expert body presided over by a former judge of a High Court only when it is shown that there has been a departure from· established principles or the conclusions of the Commission are shown to be demonstrably wrong or erroneous." By an agreement of parties the court was thus converted into a Tribunal for considering ~very minute detail relating to price fixation of motor cars.

Secondly, as regards the escalation clause the Court recorded at page 543 that it was not disputed on behalf of the Government and the Attorney General accepted the position, that a proper method should be devised for escalation or de-escalation. Tillrdly, it is clear from page 544 of the Report that the Learned Attorney-General also agreed that a reasonable return must be allowed to the manufacturers on their investliieni. The decision thus proceeded partly on an agreement bet" [1986[ 3 S.C. R. ween the parties and partly on concessions made at the Bar. That is the person why the judgment in Premier Automobiles (supra) cannot be treated as a precedent and cannot afford any appreciable assistance in the decision of price fixation cases." The position was again clarified in Rohtas Industries v. Bihar State Electricity Board (supra) : "As pointed out by this Court in Prag Ice & Oil Mills and another vs. Union of India, in the ultimate analysis, t.he mechanics of price fixation is necessarily to be left to the judgment of the executive and unless it is patent that there is hostile discrimination against a class of person, the processual basis of price fixation is to be· accepted in the generality of cases as valid."

On the question of appropriate pricing policy we may conveniently refer, at this juncture to what the Planning Commission had to say in the Seventh Five Year Plan. At page 128 of Vol. II in para 6.31 it was said, "6.31 The Sixth Plan had emphasised the need to give high priority to the evolution of a structure of enerb'Y prices which reflect true costs, curb excessive energy use and promote conservation of scarce fuels. Except in the case of oil, timely adjustments have not been made in the prices of coal and electricity to reflect the real costs. Energy pricing has not promoted, to the desired extent, inter-fud su bstirution. Energy users have generally not .adopted conservation measures already identified.

While action is being taken to promote technologically energy-efficient equipment and processes, on the one hand, appropriate energy pricing policy would have to be followed, on the other hand, in order to induce economics in the use of energy in all sectors and encourage desired forms of inter-fuel substirution, including renewable energy wherever viable. The pricing of energy should not only reflect the true costs to the economy but also help to ensure the financial viability of the energy industries. This is particularly relevant in respect of coal and power industry. As we have said in the past, it is wrong to think that an adjustment in the prices of KER. STATE E.B. v. PRABHU [REDDY.).[ a basic input like energy would aggrevate the inflationary situation; the costs to the economy are not reduced by not reflecting them in proper pricing. Indeed the continuance of .wrong pricing policy has a far more deleterious effect on the health of the economy than is often realised.

The formulation of an integrated energy pricing structure on the above lines should receive the highest prioriiy in the beginning of the Plan period."" Turning back to sec. 59.a_nd reading it along with sections 49, 67, 67 A etc. we notice that the Electricity Supply Act requires the Electricity Board to follow a particular method of accounting and·it is on the basis of that method of accounting that the Board is required to generate a surplus. Broadly, sec. 59 requires that a surplus should be left. from the total revenues, in any year of accoun_t, after meeting all expenses properly chargeable to revenues. It has to be remembered that apart from subventions which may be received from the State Government, which depend entirely on the bounty. of the Government, the only revenues available to the Board are the charges leviable by it from consumers. Bearing this in mind, we may now consider what expenses are properly chargeable to revenues under the Electricity Supply Act.

For this purpose, we may not be justified in having recourse to the principles of corporate accounting or the rules which determine what is revenue expenditure under the Indian Income-tax Act. It appears to us that the Electricity Supply Act prescribes its own special principles of accounting to be followed by the Board. To begin with s. 59(1) specifies 'operating maintenance and management expenses' 'taxes (if any) on income and profits', 'depreciation and interest payable on all debentures, bonds and loans',, as included in 'expenses properly· chargeable to revenues'. Section 59(2) further stipulates that in specifying the surplus, the Government shall have due regard to the availability of amounts accrued by way of depreciation and the liability for loan amortization. It also stipulates that a reasonable sum to contribute towards the cost of capital works and a reasonable sum by way of return on the capital provided by the State Government should be left in the surplus.

This sub-section, therefore makes it clear that the Board is to provide for (1) !ban amortization (2) contribution towards the cost of capital works; (3) return on the capital. We may now turn to s. 67 which prescribes the priority to be· -Observed by the Boatd in the matter of discharging the liabilities enumerated therein out of its .revenues. First the operating•maintenance and management expenses have to be met, next provision has to be 11986] 3 S.C.R. made for payment of taxes on Income and Profits and thereafter various items of expenditure are mentioned in order of priority. If any amount is left after the discharge of the liabilities en\imerated ins. 67 it is further provided that the balance shall be utilised for the other purposes specified in s. 59 in such manner as the Board may decide. Payment of interest is expressely mentioned among the liabilities to be discharged, as also repayment of principal of loans becoming due for payment in the year.

Clause (vi) of sub-section (1) of sec. 67 makes it clear that repayment of principal of any loan guaranteed by the State Government will include loans which became due for payment in the year as well as loans which became due for payment in any previous year and had remained unpaid. The submission strenuously urged on behalf of the consumers before the High Court and before us was that while interest which accrued during the year might be properly considered to be reve!'ue expenditure, arrears of interest which accrued during the previous years and had not been paid could not be so considered. We fail to see why that should be so. Under the scheme of the Act principal amount falling due in any year has to be met from the revenue receipts of the year. It is difficult to understand how any payment towards principal could be made or accepted. If interest of previous years continued to be outstanding.

The very provision for . repayment of capital necessarily implies payment of all interest accrued upto the date of repayment of the capital. If as argued on behalf of the consumers arrears of interest cannot be paid from revenue receipts, how then may such arrears be paid? Not from the capital receipts. What may be paid out of capital receipts and the circumstances under which the payment may be made are expressly provided in s. 67(2) which says that if for any reason beyond the control of the Board the revenue receipts in any year are not adequate to meet the operating, maintenance and management expenses, taxes on income and profits, and the liabilities referred to in clauses (i) and (ii) of s. 67(1), then the shortfall shall be paid out of its capital receipts with the sanction of the State Government.

We do not therefore, have any doubt that arrears· of interest are, under the scheme of accounting contemplated by the Act, required to be paid out of revenue receipts of the Board and are expense properly chargeable ti:> revenues within the meaning of that expression in s. 59 of the Act. The Legislature has presently clarified the position by the amending Act 16 of 1983 which came into force from April 1, 1985. By this Act a separate section, s. 67 A has been introduced along with a consequential amendment of s. 67 providirig that interest on loans advanced under s. 64 or deemed to have been advanced under s. 60, which is charged to revenues in any KER. STATE E.B. r. PRABHU I REDDY, J.I year may be paid out of revenue receipts of a year only after all other expenses referred to ins. 59(1) are met and further providing that so much of interest as is not paid in any year by reason of the priority mentioned in s.

67 A shall be deemed to be a deferred liability to be discharged in accordance with provision of s. 67 A in the subsequent year or years. In our view these provisions show beyond doubt that payment of arrears of interest is an expense properly chargeable to the revenues under the scheme of the Act. We may now assess the factual situation, Shri Abdu!Khader, learned counsel for the Kerala State Electricity Board has placed before us statements containing details of interest payable in each year of· accounting, the arrears of interest due and payable, the total revenue receipts and some other relevant particulars. The statements have I been prepared, taking the figures from the published annual accounts of the Kerala State Electricity Board. In the year of account 1978-79, the total revenue _receipts were Rs.8421.75 lakhs out of which the revenue earned by sale of energy to neighbouring States was Rs.2926. 73 Iakhs.

After meeting operation amd maintenance expenses and depreciation the balance of revenue receipts was Rs.4161.60 lakhs. The amount of interest payable in the year of account was Rs. 1946.37 lakhs. The revenue surplus left after payment of interest in the year of account was therefore, Rs.2215.23 lakhs. The arrears of interest accrued in previous years and not paid was Rs.4270.58 lakhs, since the revenue surplus available after meeting the current interest was Rs.2215.23. lakhs only there was a deficit of Rs.2055.35 lakhs. In the year of account 1979-80 the total revenue receipts were Rs.9124.90 lakhs which included revenue of Rs.3856. 15 lakhs from sale of energy to neighbouring States. After meeting operation and maintenance ex- /"· penses and depreciation the revenue surplus left was Rs.3253.94 lakhs. The interest which became payable in the year of account was --.4.. Rs.2107.85 lakhs and after meeting it, the revenue surplus left was Rs.1146.09 lakhs.

The old arrears of interest which could not be met fully in the ptevious year was Rs.2055.35 lakhs , Thus in the year of account year 1979-80, there was a deficit of Rs.909.27 lakhs. In the year of account 1980-81 the total revenue receipts were Rs. J0,686.54 lakhs •and this included a sum of Rs.4326.92 lakhs earned by sale of energy to neighbouring States. After meeting the operation and maintenance expenses and depreciation the revenue surplus left was Rs.3615.90 lakhs and after meeting interest of Rs.2369 .42 lakhs which had become payable in the year of account a revenue surplus of Rs.1246.48 lakhs was left. The ,unpaid interest of previous years was Rs. 909 .27 lakhs [19861 3 S.C.R. and after meeting it we find for the first time a net surplus of Rs.337. 21 lakhs. In the year of account 1981-82 the total revenue receipts were Rs.12,144.02 lakhs which included revenue of Rs.4532.42 lakhs from sale of energy to neighbouring States.

After meeting operation and maintenance expenses and depreciation; there was a revenue surplus of Rs.3183.77 lakhs. The total interest payable in the year of account was Rs.3105.15 lakhs, this left a revenue surplus of Rs.78.62 lakhs and si~ce there was no arrears of interest what was payaOle the net revenue surplus was 78. 62. lakhs. In the year of account 1982-83 the total revenue receipts were Rs.11,228.40 lakhs which included revenue of Rs.1948.63 lakhs from sale of energy to neighbouring States. After meeting operation and maintenance expenses and depreciation the revenue surplus left was Rs.2810.60 lakhs. The interest which was payable in the year of account was Rs.3187 .62 lakhs and thus left a net revenue deficit of Rs.376.76 lakhs. In.the year of account 1983-84, the total revenue receipts were Rs.10,518.35 lakhs including revenue of Rs.175. 76 lakhs from sale of energy to neighbouring States.

The revenue surplus after meeting operation maintenance expenses and depreciation was Rs.2246.30 lakhs. The amount of interest which had . . become payable was Rs.3426.53 lakhs, the arrears of interest was Rs.376.76 lakhs leaving a total deficit of Rs.1556.99 lakhs. We may mention here that the annual account for the year 1978-79 to 1983-84 have been certified by the Accountant General and the annual accounts for the year 1984-85 are awaiting certification. The accounts awaiting certification show that in the year of account 1984-85, the revenue receipts after meeting operation and maintenance expenses and depreciation were 4692.92 lakhs, while the interest which had become payable during the year was Rs.3719 and the interest of the previous year Rs.1556.99 lakhs this left a deficit of Rs.584.00 lakhs. The revised estimates for the year 1985-86 show a revenue surplus of Rs.5567 .00 lakhs after meeting operation and maintenance expenses and depreciation.

The interest payable during the year was Rs.4574.80 lakhs and the interest of previous year was Rs.584 lakhs. The left a surplus of Rs.409.00 lakhs. These figures show that 1978-79, 1979-80, 1980-81 & 1981-82 were extraordinary years when there was a boom in the sale of energy to neighbouring States consequent on the conditions prevailing there. In those years also it would be seen from the accounts that but for the boom in the siile of energy to neighbouring States there would have been a serious deficit in every one of those years. It is clear that the· Electricity Board has not been earning huge profits and generating large surpluses, as suggested by the consumers. Once we arriv.e at this position that there is hardly any revenue surplus left after 1 l KER. STATE E.B. v. PRABHU IRED DY. J.I meeting the expenses required to be met bys.

59, the complaint of the consumers that there was no justification for the tariff increase because of large surpluses earned by the Board loses all force. We have examined the two reports of the Tariff Committees of the years 1980 and 1982 and the revised tariffs based on those reports in the light of the legal and factual position explained by us. Before the 1980 revision, the prevailing rates were, Extra High Tension: 8.81 ps per unit, High Tension Industrial: 14.98 ps per unit, Low Tension Domestic: 38 ps per unit, Low Tension Industrial: 14.15 ps per unit, Low Tension Commercial: 38 ps per unit, Low Tension Agricultural 14.15 ps per unit, Low Tension Commercial worked out the cost per unit at 10.9, 18.6, 57.5, 43.5, 56.5 and 53.5 ps per unit respectively in I that order, but recommended, in the same order, 11.55, 21.4, 38, 27.,5, 74 and 18 ps per unit respectively.

However, the actual tariff rates as introduced in 1980 were 10.8, 18.24, 38, 24.5, 66 and 15 ps per unit. r The 1982 Tariff Committee recommended rates of 24.5, 37.3, 47.5, 48, 55-70 and 34 ps per unit. The actual tariff introduced in 1982 was 17.65, 27.24, 42.5, 24.5, 50-70 and 15 ps per unit. We notice that in the case of Low Tension Domestic and Agricultural consumers, the change is minimal. In the case of Extra High Tension and High Tension Industrial Consumers, the change effected by the 1980 revision was minimal but on the higher side in 1982. In the case of Low Tension Industrial and Commercial Consumers, the change effected in 1980 was very steep but tended to come down in 1982. On the whole, it cannot possibly be said that the rates have been so fixed by the Electricity Board as to throw a heavy burden on any section of the consumers without regard to their ability to pay without regard to the nature of the supply and purpose for which the supply is required.

Now do we , find that the pri1_1ciple of uniformity of tariffs has in any way been sacrificed. But, as we mentioned a little earlier the Low Tension Industrial and Commercial 'tariff was subjected to a very steep rise in r 1980 and brought down again in 1982 apparently in recognition of the fact that the raise had been too steep in regard to them in 1980. In the case of Low Tension Industrial Consumers, the tariff was increased from 14.5 ps per unit to 24.5 ps per unit in 1980 an·d maintained at the rate of 24.5 ps per unit in 1982. In the case of Low Tension Commercial Consumers, the tariff was increased from 38 ps per unit to 66 ps per unit in 1980 but brought down again considerably in 1982 to 50. 70 ps per unit. The very circumstance that the tariff was either brought down or maintained at the same level in 1982 when compared with the 1980 tariff appears to be an indication that the increase in· !980 was ll [19861 3 S.C.R. thought by the Board itself to be rather steep.

We have already noticed that· 1980-81 and 1981-82 were the years when the accounts of the Electricity Board recorded a net surplus after meeting all expenses including interest charges. In the circumstances, we think that it is desirable that the Board may re-consider the 1980 tariff for Low Tension Commercial and Low Tension Industrial Consumers. Shri Potti submitted that the 1980 Committee took place consideration the anticipated augmentation of the generating capacity from · the proposed new power stations of Idukki, Saharigiri and ldamalyar, whereas these projects were not commissioned till 1984 and thus the cost-structure arrived at by the Committee was vitiated. We· do not think so. From the figures supplied to us we find that notwithstanding the failure to commission the new projects, there was no shortfall in the production of energy.

A large part of expenditure involved in the setting up .of the new projects had to be met in the several years preceding the actual commissioning of the projects. Therefore, it is not correct .to say that the cost structure arrived at by the Committee was in anx way affected by the non-commissioning of 'the new projects between 1980 and 1982. Another submission made by Sbri Potti was that the Committee erred in not taking into account the financial position of the Board as brought out by the year 1978-79 which showed that the Board had already turned the corner and that there was therefore no need for enhancing the rates. This submission is again without substance. As we mentioned earlier, the rise in revenue receipts in the year 1978-79 due to the unprecedented sale of energy to neighbouring states, a special situation which was the result of peculiar circumstances which prevailed that year and continued to prevail for a few years thereafter.

The sale of energy to neighbouring States was not to be taken as a permanent phenomenon to every year. Yet another submission of Shri Potti was that the 1980 Committee having taken as the basis the 1982 projected cost so as to maintain price stability for a period of five years, it was not proper to revise the tariff again in 1982. But we find that the actual cost of producing energy in 198)-82 and 1982-83 had risen much above the projected 1982 cost and therefore the 1982 Committee has no option but to again consider further revision of the tariff. We are not delving into more details as we are satisfied that it is not within our province to examine the price structure in minute detail if we are satisfied that the revision of tariff is not arbitrary and is not .the result of the application of any wrong principle. Relying upon the observation, "It would have been manifestly unjust and discriminatory that one consumer should benefit at KER. STATE E.B. v. PRABHU [REDDY, J.[ the cost of other consumers or general tax payers;" made in D.C. M. v. Rajasthan State Electricity Board, [1986]

2 SCC 431 it was argued by Shri Potti that it was not open to the Board to give favoured treatment to Low Tension Domestic and Agricultural Consumers at the cost of the rest of the consumers. We do not find any force in this submission. Section 49 (3) expressly reserves the power of the Board, · if it cc;msiders it necessary or expedient, to fix different tariff for the supply of electricity to any person having regard to the geographical position of any area, the nature of the supply and purpose for which supply is required and other relevant factor. Different tariffs for High and Low Tension Consumers and for different classes of consumers, such as, Industrial, Commercial, Agricultural and Domestic have been prescribed and the differention appears to us to be reasonable and far from arbitrary and to be based on intelligent and intelligible criteria.

In the result, we allow the appeals filed by the Ketala State Electricity Board, set aside the judgments of the High Court, uphold the validity of the notifications revising the tariffs and dismiss the writ petitions filed in the High Court, subject to direction that the Kerala State Electricity Board will reconsider the revised tariff introduced in 1980 in regard to Low Tension Industrial and Low Tension Commercial Consumers only, with liberty to fix separate rates, if necessary for the years 1980 and 1981. This direction will not affect the 1982 and 1984 tariff revisions. There-will be no order regarding costs. A.P.J. Appeals allowed.