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PETITIONER: KERALA STATE ELECTRICITY BOARD, ETC.

       Vs.

RESPONDENT: S.N. GOVINDA PRABHU & BROTHERS AND OTHERS ETC.

DATE OF JUDGMENT26/08/1986

BENCH: REDDY, O. CHINNAPPA (J) BENCH: REDDY, O. CHINNAPPA (J) DUTT, M.M. (J)

CITATION:  1986 AIR 1999            1986 SCR  (3) 628  1986 SCC  (4) 198        JT 1986   261  1986 SCALE  (2)313  CITATOR INFO :  E          1990 SC1851  (36)  R          1991 SC1473  (7,8A,22,27)

ACT:      Electricity  Supply  Act,  1948-Section  59-Electricity Board-Formulation  of  price  structure  intended  to  yield sufficient  revenue-Examination   of  by   Court-Electricity Tariff-Upward revision-Whether valid.

HEADNOTE:      The upward  revision of  Electricity Tariff made by the appellant Board in 1980, 1982 and 1984 was challenged in the High Court  by  the  respondents  on  the  ground  that  the Electricity Board  acted outside  its statutory authority by formulating a  price structure  intended to yield sufficient revenue  to  offset  not  merely  the  expenditure  properly chargeable  to   the  revenue   account  for   the  year  as contemplated by  s. 59  of the Electricity Supply Act, 1948, but also expenditure not so properly chargeable and that had s. 59  been strictly  followed and  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.      The Full Bench of the High Court struck down the tariff revisions holding  that in  the absence  of specification by the Government,  a Board  was not  entitled  to  generate  a surplus at  all  and  it  had  acted  entirely  outside  its authority in  generating a  surplus to  be adjusted  against items of  expenditure not  authorised to be met from revenue receipts. The  notifications  prescribing,  revised  tariffs were, therefore, struck down.      In appeal  to this  Court on behalf of the appellant it was contended,  that the  1978 Amendment  of the Electricity Supply Act  1948 did not effectively improve matters as many State Governments  did not  specify the  quantum of surplus. Parliament had,  therefore, to intervene once again and that was in  1983 to fix the statutory minimum surplus, which was made clear  by the 1983 Amendment which stipulated a minimum of 3 per cent surplus in the absence of specification by the 629

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State Government  which had  the liberty to specify a higher percentage  than   three.  It   was  further  contended,  by submitting statements, that in the years 1978-79 to 1981-82, which were extraordinary years, but for the boom in the sale of energy  to neighbouring  States, there  would have been a serious deficit  in every  one of these years and that it is clear that  the Electricity  Board has not been earning huge profits and  generating large  surpluses as suggested by the consumers, and  consequently  the  upward  revision  of  the electricity tariff was justified.      On behalf of respondent-consumers it was contended: (1) that the  Electricity Board  was barred  from conducting its operations on  commercial lines  so as to earn a profit; (2) that  in   the  absence   of  specifications  by  the  State Government the  position would  be as it was before the 1978 Amendment, i.e.  the Board  was to  carry on its affairs and adjust the  tariffs in such a manner as not to incur a loss; (3)  that   while  interest  which  accrued  to  be  revenue expenditure, arrears  of interest  which accrued  during the previous years  and had  not  been  paid  could  not  be  so considered;  (4)   that  the   1980  Committee   took   into consideration the anticipated augmentation of the generating capacity from  the proposed new power stations whereas these projects were  not commissioned  till 1984 and thus the cost structure arrived at by the Committee was vitiated: (5) that the Committee  did  not  take  into  account  the  financial position of  the Board  as brought  out by  the year 1978-79 which showed  that the  Board had  no need for enhancing the rates; (6) 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;  and (7)  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.      Allowing the appeals of the Electricity Board, ^      HELD: 1.  The judgments of the High Court are set aside and the  validity of  the notifications revising the tariffs upheld.  The   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. [659D-E]      2.  A   State  Electricity   Board  created  under  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. It  is a  public utility  monopoly  undertaking. Service and not profit 630 should inform  its actions and it must manage its affairs on sound economic principles. No public service undertaking can afford to  ignore business principles which are as essential to public service undertakings as to Commercial ventures. If the Board  borrows sums  either from  the Government or from other sources  or by  the issue of debentures and bonds, 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 revenue 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.

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[644B-G]      Rohtas Industries  v. Bihar  State  Electricity  Board, [1984] 3  SCR 59  and Bromely  v.  Greater  London  Council, [1982] 1 ALL ER 129, followed.      3. Section  18(a) prescribes that it is the duty of the Board to  arrange 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  and s.  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 foresaken  but  resolutely  emphasised. [645B-D]      4. Pure  profit motive,  unjustifiable even in the case of a  private trading concern, can never be the sole guiding factor in  the case  of public enterprise. If profit is made not for  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. [648G-H: 649A]      5.  The   total  operational  cost  would  include  the interest on the capital outlay out of the national exchequer and that  there was no justification to run a public utility monopoly service  undertaking merely as a commercial venture with a view to make profits. [649D-E]      6. A  reading of  s. 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 631 surplus  is   left.  The   original  negative   approach  of functioning so  as not  to suffer  a loss is replaced by the positive approach  of requiring a surplus to be created. The quantum of  minimum surplus  is to be specified by the State Government. Since many State Governments did not specify the quantum of  surplus, s.  59 was again amended in 1983, 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. [646E-G]      Rohtas Industries  v. Bihar  State  Electricity  Board, [1984] 3  SCR 59 followed, Kerala State Electricity Board v. Indian  Aluminium   Co.,  [1976]  I  SCR  552,  Bihar  State Electricity Board  v. Workmen,  [1976] 2  SCR 42  and  Dr.P. Nalla Thamby  Thera v.  Union of  India & Ors., [1984] I SCR 709, referred to.      7. The failure of the Government to specify the surplus which may be generated by the Board cannot prevent the Board from  generating   a  surplus  after  meeting  the  expenses required to be met. The Board may not allow its character as a public  utility undertaking  to be  changed into that of a profit motivated  private trading  or  manufacturing  house. Neither the tariffs nor the resulting surplus may reach such 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. [650G-H;651A]      Madras and  Southern Maharatta  Railway Company Ltd. v. Bezwada Municipality  AIR 1944 PC 71 and Madras and Southern

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Maharatta Railway  Company Limited  v. The Municipal Council Bezwada, ILR 1941 Madras 897, followed.      8. ’Price  fixation’  is  neither  the  forte  nor  the function of  the Court.  The occasional excursions into this field were  made at  the request and by the agreement of the parties. [651B]      Rohtas Industries  v. Bihar  State  Electricity  Board, [1984] 3  SCR 59  and Prag  Ice and  Oil Mills  v. Union  of India, [1978] 3 SCR 293. followed.      9. Reading  s. 59  alongwith ss. 49, 67, 67A etc. it is noticed that 632 the Electricity  Supply Act,  1948, 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, s. 59 requires that a surplus  should be  left from  the total  revenues, in any year  of   account,  after  meeting  all  expenses  properly chargeable to  revenues. Apart from subventions which may be received from the State Government, which depend entirely on the bounty  of the Government, the only revenue available to the Board  are the  charges leviable  by it  from consumers. [653B-D]      10. Section 59 (1) specifies ’operating maintenance and management  expenses’,   ’taxes  (if   any)  on  income  and profits’,  ’depreciation   and  interest   payable  on   all debenture, bonds  and loans’,  as  in  cluded  in  ’expenses properly chargeable  to revenues’. Section 59 (2) 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) loan amortization; (2)  contribution towards  the cost of capital works; and  (3) return on the capital. Section 67 prescribes the priority  to be  observed by  the Board 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 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 enumerated  in  s.  67,  the  balance  shall  be utilised for  the other  purposes specified in s. 59 in such manner as the Board may decide. [653E-H; 654A-B]      11. Payment  of interest  is expressly  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-s.  (1) of  s. 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. [654B-C]      12. Under  the  scheme  of  the  Act  principal  amount falling due  in any  year has  to be  met from  the  revenue receipts of  the year. No payment towards principal could be made or accepted, if interest of previ 633 ous 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 arrears of interest cannot be paid from revenue receipts,

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such arrears  cannot be paid 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 reasons 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. There is no 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 expenses properly chargeable to revenues within the meaning of that expression in s. 59 of the Act. [654D-G]      13.  The   Legislature  has   clarified  the  aforesaid position by  the Amending  Act 16  of 1983  which came  into force from  April 1,  1985. A  separate section,  s. 67A has been introduced alongwith a consequential amendment of s. 67 providing that  interest of  loans advanced  under s.  64 or deemed to  have been  advanced under s. 60, which is charged to revenues  in any year may be paid out of revenue receipts of a year only after all other expenses referred to in s. 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. 67A  in the  subsequent year  or years.  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. [654G-H; 655A-B]      14. 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, in  the present  case show that the Electricity Board has not been earning huge profits and generating large surpluses  as   suggested  by  the  consumers.  Once  it  is established there  is hardly  any revenue surplus left after meeting the  expenses required  to be  met  by  s.  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. [655G; 656H; 657A]      15. As  regards the  rates of  tariff for  the relevant years, in  the case  of Extra  High Tension and High Tension Industrial Consumers, the 634 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. [657D-E]      16. 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. 1980-81 and  1981-82 were  the years  when accounts  of  the Electricity Board  recorded a  net surplus after meeting all expenses  including  interest  charges.  It  is,  therefore, desirable that  the Board may reconsider the 1980 tariff for Low Tension Commercial and Low Tension Industrial Consumers. [658A-B]      17. 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

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arrived at  by the  Tariff Committee was in any way affected by the  non-commissioning of  the new  projects between 1980 and 1982. [658C-D]      18. 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,  cannot be  taken as a permanent phenomenon to every year. [658E-F]      19. The  actual cost of producing energy in 1981-82 and 1982-83 had  risen much  above the  projected 1982 costs and therefore the  1982 Committee  had no  option but  to  again consider further  revision of  the tariff.  It is not within the province of this Court to examine the price structure in minute detail  if it  is established  that the  revision  of tariff is  not arbitrary  and  is  not  the  result  of  the application of any wrong principle. [658G-H]      20. Section  49 (3) expressly reserves the power of the Board, if  it considers  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 factors. [659B-C] 635      D.C.M. v.  Rajasthan State  Electricity Board, [1986] 2 SCC 431, referred to.      21.  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 be reasonable and far from arbitrary and based on intelligent and intelligible criteria. [659C]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 1639 of 1985 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.      P. Subramanium  Poti, F.S.  Nariman, S.B. Saharya, V.B. Saharya, Vijay  Bahuguna, M.L.  Lahoty, S.P.  Singh,  Rakesh Dwivedi, Raj  Kumar Singh, Miss Helen Marc, V.B. Joshi, K.R. Nambiar, Vinoo  Bhagat, B.R.  Kurup, K. Dileep Kumar, Ramesh C. Kohli,  G.N. Rao,  A.S.  Nambiar,  P  Kesava  Pillai,  T. Sridharan, N  Sudhakaran, E.M.S Anam and T.G.N. Nair for the Respondents.      The Judgment of the Court was delivered by      CHINNAPPA REDDY,  J. These  appeals  preferred  by  the Kerala State  Electricity Board  raise the  question of  the extent of  the  authority  of  the  Board  to  increase  the Electricity Tariff  under the  Electricity Supply  Act.  The upward revision  of tariff  made by  the Board in 1980, 1982 and 1984  was successfully  challenged in  the  Kerala  High Court. The  first two  revisions were  struck down 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  majority of  four to  one. The principal ground of  challenge and that which was accepted by the High Court was  that the  Kerala State  Electricity  Board  acted outside its  statutory  authority  by  formulating  a  price structure intended  to yield  sufficient revenue  to off set

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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. 636 59 been  strictly followed  and 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 entitled 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 notifications prescribing revised tariffs were  therefore, struck  down. The  view of the High Court, as  might be  seen,  was  based  primarily  on  their construction of s.59 of the Electricity Supply Act.      In 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 1978, and finally as amended by Act No. 16 of 1983: ____________________________________________________________ Section 59 prior     Section 59 as     Section 59 as further to 1978              amended by Act    amended by Act                      No. 23 of 1978    No. 16 of 1983      (1)                     (2)              (3) ____________________________________________________________ General principles    General principles  General Principles for Board’s           for Board’s         for Board’s finance-              finance-            finance- The Board shall not,  (1) The Board shall (1) The Board as far as practicable after taking credit shall after taking and after taking      for any subvention  credit for any credit for any        from the State      subvention from subventions from the  government under s. the State Govern- State Government      63, carry on its    ment under s.63 under s.63, carry on  operations under    carry on its oper- its operations under  this Act and adjust ations under this this Act at a loss,   its tariffs so as   Act and adjust its and shall adjust its  to ensure that the  its tarrifs so as charges accordingly   total revenues in   to ensure that the from time to time.    any year of account total revenues      provided that    shall after meeting in any year of where necessary any   all expenses prope- account shall, amounts due for mee-  rly chargeable to   after meeting all ting the operating,   revenues, including expences properly maintenance and       operating maintena- chargeable to                       nance and manageme- revenues,including                       nt expences, taxes  operating, mainte-                       (if any on in-      nance and 637 management expenses   come and profits,   management ex- of the Board or for   depreciation and    penses. taxes (if the purposes of       interest payable on any) on income and clauses (i) and (ii)  debentures, bonds   profits, deprecia- of s.67 may, to such  and loans, leave    tion and  interest extent as may be san- such surplus as the payable on all ctioned by the State  State Government    debentures, bonds Government, be paid   may, from time to   and loans leave out of capital.       time, specify.      such surplus as is                       (2) In specifying   not less than                       the surplus under   three per cent or                       sub-section (1),    such higher perce-                       the State Governmentntage, as the                       shall have due reg- State Government

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                     ard to the          may be notifica-                       availibility of     tion in the offi-                       amounts accrued by  cial Gazette,                       way of depreciation specify in this                       and the liability   behalf, of the                       for loan amortiza-  value of the fixed                       tion and leave-     assets of the                       (a) a reasonable    Board in service                       sum to contribute   at the beginning                       towards the cost of of such years.                       capital works; and  Explanation:-For                       (b) where in res-   the purposes of                       pect of the Board   this sub-section                       a notification has  "Value of the fix-                       been issued under   ed assets of the                       sub-section(1) of   Board,in service                       s. 12A,a reasonable at the begining                       sum by way  return  of the year" mean                       on the capital pro- the original cost                       vided by the state  of such fixed as-                       Goverment under sub sets as reduced                       section(3) of that  by the aggregate                       section and the am- of the cumulative                       ount of the loans   depreciation in                       (if any) converted  respect of such                       by the state Govern assets calculated                       ment into capital   in accordance with                       under sub-section(1)the provisions of                       of section 66A.     this Act and                                           consumers                                           contributions for                                           service lines.                                           (2) In specifying                                           any higher                                           percentage 638                                           under sub-                                           section(1), the                                           State Government                                           shall have due                                           regard to the                                           availability of                                           mounts accrued by                                           way of depreciation                                           and the liability                                           for loan amortiza                                           ation 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.(1)                                           of s. 12A, a                                           reasonable sum                                           by way of return                                           on the capital pro-                                           vided by the State                                           Government under                                           sub-sec.(3) of that                                           section and the

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                                         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 1, 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  into consideration the  Parliamentary exposition contained in the 1983 amendment.  (See we  will come  back to the question of proper construction of s.59 later). 639      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  supplied  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   utilisation   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-ordination  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  power           system." 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

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         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  regard  to  all  or  any  of  the  following           factors, namely-           (a) the  nature 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 supply of electricity, the Board shall not           show undue preference to any person." Section 63  enables the  State Government, with the approval of the  State legislature,  to make subventions to the Board for the  purposes of  the act. Section 64 empowers the State Government to  advance loans  to the  Board and  Section  65 empowers the Board, with the 641 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 1983: ----------------------------------------------------------- Section 67 prior   Section 67 as amen- Section 67 as    to 1978               ded by Act No. 23   further amended                    of 1978             by Act No. 16                                        of 1983     (1)                    (2)                  (3) ----------------------------------------------------------- Priority of         Priority of liabi-  Priority of liab- liabilities of the  lities of Board-    ilities of the Board-The revenues  (1)If in any year,  Board-The Board of the Board shall, the revenue receipt shall distribute the after meeting its   are not adequate to surplus, reffered to operating, mainte-  to enable complianc in sub-section(1) of nance and manage-   with the requirment s.59 to the extent ment expenses and   of s. 59, the Board extent available in after provision     shall,after meeting a particular year in has been made for   its operating, mai- in the following or- the payment of      tenance and manage- der namely:

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taxes on its income ment expences and   (i) repayment of and profits be dis- after provision has principal of any as far as they are  been made for the   loan raised available in the    payment of taxes(if (including following order     any) on income and  redemption of deb- namely:             profits, distribute entures or bonds (i) interest on     the revenue receipt issued) under s.65 bonds not guranteed as far as they are  whichs becomes due under s.66;         available, in the   for payment in the (ii) interest on    following order,    year or which became stock not so guara- namely:             due for payment in nteed;              (i) payment of int- any previous year (iii) credits to    erest on loans not  and has remaind un-                     guaranteed under    paid;                                         (ii) repayment of                                         principal of any                                         loan advanced to the 642 depreciation        s.66;               Board by the State reserve under s. 68 (ii) repayment of   Government under (iv) interest on    principal of any    s. 64 which becomes bond guaranteed un- loan raised (incl-  due for payment in der s.66;           uding redemption of the year or which (v) interest on st- debentures or bonds became due for pay- ock so guaranteed;  issued) under s. 65 ment in any previous (vi)interest on sum which become due for year and remained paid by the State   payment in the year (iii) payment for Government under    (iii) payment of    purposes specified guarantees under    interest on loans   in sub-section (2) section 66;         guaranteed under    of s. 59 in such (vii)the write-down s.66;               manner as the Board amounts paid from   (iv)payment of in-  may decide." capital under the   terest on sums paid proviso to section  by the State Govern- 59;                 ment in pursuance of (viia) the write-   guarantees under down of amounts in  s.66; respect of intangi- ble assets to the   (v) payment of in- to which they are   terest on loans actually appropria- advanced to the ted in any year for the Board by the State for the purpose in  Government under the books of the    s. 64 or deemed to be Board;              advanced under sub- (viii) contribution section (2) of to general reserve  section 60; of an amount not    (vi) repayment of exceeding one half  principal of any loan of one percentum    guaranteed by the per annum of the    State Government original cost of    under s. 66 which be fixed assets empl-  come due for payment oyed by the Board   in the year or which be- so however that the come due for payment total standing to   in any previous year the credit such     and has remained reserve shall not   unpaid; exceed fifteen per- centum of the orig- inal cost of such   (vii) repayment of fixed assets;       principal of any loan (ix) interest on    advanced to the Board loans 643

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advanced or deemed  under s. 64 which be- to be advanced to   comes due for payment the Board under s.  in the year or which be- 64 including arrear came due for payment of such interest;   in any previous year (x) the balance to  and has remained be appropriated to  unpaid; and if any fund be called the  balance amount is left Development Fund    thereafter, the same to be utilised for- shall be utilised for (a) purposes bene-  the other purposes ficial, in the opi- specified in s. 59 nion of the Board,  in such manner as the to electrical deve- Board may decide. lopment in the      (2) If for any reason State;              beyond the control of (b) repayment of    the Board, the revenue loans advanced to   receipts in any year the Board under s.  are not adequate to 64 and required to  meet its operating, be repaid;          maintenance and Provided that where management expenses, no such loan is out taxes (if any) on in- standing, one-half  comes and profits and of the balance      the liabilities referred aforesaid shall be  to in clauses (i) and credited to the     (ii)of sub-section(1), Consolidated Fund   the shortfall shall, of the State.       with the previous                     sanction 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 State Government until  after all other expenses are met. It is in the following terms:           "67A Interest  on loans advanced by State Govt. to           be paid  only after  other Expenses.  Any interest           which is  payable on  loans advanced under section           64 or  deemed to  have been advanced under section           60 to  the Board by the State Government and which           is charged to revenues in any year may 644           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 to be shunned but  that service  and not  profit should inform its actions. It  is not  the function  of the Board to so manage its affairs  as to earn the maximum profit even as a private

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corporate body  may be  inspired to earn huge profits with a view to  paying large  dividends to its shareholders. 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 principles.  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  revenue 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 able  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 645 take it  is what  the Board  would necessarily  do it was an ordinary  commercial   undertaking  properly  and  prudently managed on  sound commercial  lines.  Is  the  position  any different  because   the  Board   is  the   public   utility undertaking or  because of the provisions of the Electricity Supply Act?  We do  not 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 distribution of the same, in the most efficient and economical manner and s. 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 turn to s. 59, 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

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         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,           casts an obligation on the State Government has so           far specied the quantum of any surplus. At present           there is no uni- 646           formity  in   the  manner  of  classification  and           presentation of  accounts 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 of           the year;           (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 forms  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 positive 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 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 adjust its 647           tariffs in  such a  way to  ensure that  the total           revenues earned in any year of account shall after           meeting all  expenses chargeable to revenue, leave           such surplus  as the  State Government  may,  from           time to  time, specify.  The tariff  fixation has,

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         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 Kerala State Electricity  Board v.  Indian Aluminium  Co., [1976] 1 SCR 552;  Bihar State Electricity Board v. Workmen, [1976] 2 SCR 42  and Dr.  P. Nalla  Thamby Thera  v. Union of India & Ors., [1984] 1 SCR 709 to contend that the Electricity Board was barred  from conducting  its  operations  on  commercial 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  Electricity   Board  is   not  an   ordinary           commercial  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 unserved areas without reference to           considerations of loss that might be incurred as a           result of such extension." 648 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  under  taking.  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,  the  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.

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         Since  it   is  a  public  utility,  there  is  no           justification to  run it  merely as  a  commercial           venture with  a view  to making profits. We do not           know-at  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 require 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 649 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,           "The facile  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 investment,  depreciation and payment of public obligations. It was stated more than once that the total operational  cost would  include the  interest on  the capital outlay  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.

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    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- 650 pany Limited  v. The  Municipal Council  Bezwada,  ILR  1941 Madras 897. One of the questions there raised was whether in the absence  of rules  made by  the  State  Government,  the Municipal Council  was entitled  to  determine  the  capital value of property in the face of a provision which stated,           "Provided that  such percentage or rates shall not           exceed the  maxima, if  any, fixed  by  the  Local           Government and  that the  capital  value  of  such           lands shall be determined in such manner as may be           prescribed." The High Court, in that case had observed, and we agree with what had been said,           "We cannot  accept the contention of the appellant           that, merely  because the Local Government has not           prescribed the  manner in  which the capital value           should be  determined, the  municipal  council  is           deprived of  the power  of levying  the tax  under           section 81(3) .... the omission of the rule-making           authority to  frame rules  cannot  take  away  the           right of  the municipal council to levy tax at the           rate mentioned  in the  notification issued  under           clause 3.  If, for  instance, the Local Government           refrained from prescribing the manner in which the           value of  such  lands  should  be  determined,  it           cannot, we  think,  be  said  that  the  municipal           council has  no power  at all to levy the tax at a           percentage of the capital value merely because the           method of  determining the  capital value  has not           been prescribed  by the  Local Government.  If the           Local Government  does not  prescribe it, then the           municipal authority  is free in our opinion to fix           it in any manner it chooses." We are  of the  view that  the failure  of the Government to specify the  surplus which  may be  generated by  the  Board cannot prevent  the Board  from generating  a surplus  after meeting the  expenses  required  to  be  met.  Perhaps,  the quantum of  surplus may  not exceed  what a  prudent  public service undertaking  may be  expected to  generate with  out sacrificing the  interests  it  is  expected  to  serve  and without being  obsessed by  the pure  profit motive  of  the private enterpreneur.  The Board may not allow its character as a public utility undertaking to be changed into that of a profit motivated  private trading  or  manufacturing  house. Neither the tariffs nor the resulting surplus may reach such 651 heights as  to lead  to the  inevitable conclusion  that the Board has  shed A  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  clear by  a Constitution  Bench  of seven judges  of this  Court in  Prag Ice  and oil  Mills v. Union of India, [1978] 3 SCR 293 where it was said,

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         "It is  customary in  price fixation cases to cite           the oft  quoted decision  in  Premier  Automobiles           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  t           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  every  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. Thirdly,  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 investment.           The decision thus proceeded partly on an agreement           bet- 652           ween the parties and partly on concessions made at           the Bar.  That is  the person  why the judgment in           Premier Auto  mobiles (supra) cannot be treated as           a precedent  and can  not 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, the 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 energy  prices which  reflect true  costs, curb           excessive energy  use and pro mote 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-fuel substitution. Energy users have

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         generally  not   adopted   conservation   measures           already identified. While action is being taken to           L   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           substitution, 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 653           a basic  input like  energy  would  aggrevate  the           inflationary A 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 priority  in the  beginning  of  the  Plan           period."      Turning back  to sec.  59 and  reading  it  along  with sections 49,  67, 67A  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 gene- rate  a surplus.  Broadly, sec.  59  requires  that  a surplus should  be left from the total revenues, in any year of account,  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) loan  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 Board  in the  matter  of  discharging  the liabilities enumerated  therein out  of its  revenues. First

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the operating maintenance and management expenses have to be met, next provision has to be 654 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  enumerated  in  s.  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 revenue 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 to 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. 67A has been introduced along with a consequential amendment of s.  67 providing that interest on loans advanced under s. 64 or  deemed to  have been  advanced under  s. 60, which is charged to revenues in any 655 year may  be paid  out of  revenue receipts  of a  year only after all  other A  expenses referred to in s. 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. 67A shall  be deemed  to  be  a  deferred  liability  to  be discharged in  accordance with  provision of  s. 67A  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  Abdul

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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 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  lakhs. After meeting operation  and 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  expenses  and  depreciation  the revenue surplus  left was  Rs.3253.94  lakhs.  The  interest which became  payable in  the year of account was Rs.2107.85 lakhs and  after meeting  it, the  revenue surplus  left was Rs.l146.09 lakhs.  The old  arrears of  interest which could not be  met fully in the previous 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.10,686.54 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 656 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 since  there was  no arrears of interest what was payable 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

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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.OO 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 sale  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 arrive at this position that there is hardly any revenue surplus left after 657 meeting the  expenses required  to be  met  by  s.  59,  the complaint of the A 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 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 l0.8, 18.24, 38, 24.5, 66 and 15  ps per  unit. 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 principle of  uniformity of  tariffs has  in any way been l: sacrificed. But,  as we  mentioned a  little earlier the Low Tension Industrial  and Commercial Tariff was subjected to a very steep  rise in  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

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Tension Industrial  Consumers, the tariff was increased from 14.5 ps  per unit to 24.5 ps per unit in 1980 and 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 1980 was 658 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  Idamalyar, 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  any way affected by the non-commissioning of the new projects between  1980 and  1982. Another submission made by Shri 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  l 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 1981-82 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 659 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

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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  considers it necessary or expedient, to fix different tariff for  the supply  of electricity  to any person having regard to  the geographical  l,, 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 Kerala 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. 660