# KERALA STATE ELECTRICITY BOARD, ETC. / v. S.N, GOVINDA PRABHU & BROTHERS AND OTHERS ETC

- **Citation:** [1986] 3 S.C.R. 628
- **Court:** Supreme Court of India
- **Decided:** 1986-08-26
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/kerala-state-electricity-board-etc-v-s-n-govinda-prabhu-brothers-and-others-etc-9103
- **Pages:** 32

## Headnote

A
B
c
D
E
F
KERALA STATE ELECTRICITY BOARD, ETC.
/
v.
S.N, GOVINDA PRABHU & BROTHERS AND
OTHERS ETC.
AUGUST 26, 1986
IO. CHINNAPPA REDDY AND M.M. DUTT, JJ.]
Electriciiy Supply Act, 1948-Section 59-Electricity BoardFormulation of price structure intended to yield sufficient revenueExamination of by Court-Electricity Tariff-Upward revisionWhether valid.
The upward re•ision of Electricity Tariff made by the appeUantBoard 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 hy 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
expt..tditure 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 FuU 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.
G
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 snrplus. Parliament bad, therefore, to intervene
once again and that was in 1983 to th the statutory minimnm surplus,
which was made clear by the 1983 Amendment which stipulated a
H
minimnm of 3 per cent surplus in the absence of specification by the
628
'
KER. STATE E.B. '· PRA.BHU IREDDY,J.J
629
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: ( l) 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 pro,jects 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 live 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 consu

## Text

_Characters 0–39,906 of 72,944. This is a partial read: ask again with offset=39906 for what follows._

A
B
c
D
E
F
KERALA STATE ELECTRICITY BOARD, ETC.
/
v.
S.N, GOVINDA PRABHU & BROTHERS AND
OTHERS ETC.
AUGUST 26, 1986
IO. CHINNAPPA REDDY AND M.M. DUTT, JJ.]
Electriciiy Supply Act, 1948-Section 59-Electricity BoardFormulation of price structure intended to yield sufficient revenueExamination of by Court-Electricity Tariff-Upward revisionWhether valid.
The upward re•ision of Electricity Tariff made by the appeUantBoard 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 hy 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
expt..tditure 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 FuU 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.
G
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 snrplus. Parliament bad, therefore, to intervene
once again and that was in 1983 to th the statutory minimnm surplus,
which was made clear by the 1983 Amendment which stipulated a
H
minimnm of 3 per cent surplus in the absence of specification by the
628
'
KER. STATE E.B. '· PRA.BHU IREDDY,J.J
629
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: ( l) 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 pro,jects 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 live 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: I. 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. [6$9D-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. His a public utility monopoly undertaking~ Service and not profit
A
B
c
D
E
F
G
H
A
B
c
0
F
G
H
630
SUPREME COURT REPORTS
I 1986] 3 S.C. R.
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 esssential 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. [644B-G]
Rohtas Industries v. B;har State Electricity Board, I 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. l64SB-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 ofs. 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
,i.
,
1t
KER. STATE E.B. >. PRABHU IREDDY.J.I
63 J
surplus is left. The original negative approach of functioning so as not
to suffer a loss is replaced .hy 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. :;9 was again amended in 1983,
which stipulates ~· 1niniinum of J per rent 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 I 3 SCR
59 followed, Kera/a State Electricity Board v. Indian Aluminium Co.,
[1976) 1 SCR 552, Bihar State Electricity Board v. Workmen, [1976)?
SCR 4? and Dr. P. Na/la Tham by Thera v. Union of India & Ors ..
[1984] l 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 generatfng a surplus.after meeting the expenses required to ·be met. The Board
may not allow its character as a 11ublic ·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
lteights 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. 'l'he Court will then refrain from
touching the tariffs. [6:;0G-H; 651 Al
Madras and Sowhern Maharatta Railway Company Ltd. v.
Bezwada Municipality AIR 1944 PC 7 I and Madras and Southern
Maharatta Railway Company Limited v. The Municipal Council
Bez wad a, ILR 1941 Madras 897, followed.
8. "Price fixation' is neither the fi>rte noi: the function of the
Court. The occasional excursions into this field were made at the request and hy the agreement of the parties. [651B)
Rohtas Industries v. Bihar State Electricity Board, [1984) J SCR
59 and Prag Ice and Oil Mills v. Union of India, [1978) J SCR ?9.'.
followed.
9. Readings. 59 alongwith ss. 49, 67, 67A etc. it is noticed that
A
B
c
D
E
F
G
H
B
c
fl
F
I
II
632
SUPKEME COUKI REPORTS
[ 1986] 3 S.C. R.
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. [65311-D I
IO. Section 59 (I) specifies "operating maintenance and management expenses', 'taxes (if any) on income and profits', 'depreciation
and interest payable on all debenture, bonds and loans', as included 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, thereforf, makes it clear that the
Board is to provide for (I) loan amortization; (2) contribution towards
the cost of capital works; and (3) return on the capital. Section 67
prescribes the prfority 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 sμecilied
ins. 59 in such manner as the Board may decide. [653E-H; 654A-B)
I I. 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. (I) 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-
.,
L
KER. STATE E.B. v. PRABHU [REDDY, J.[
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, 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 ins. 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. 67 A 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
revem~es in any year may be paid out of revenue receipts of a year only
after all other expenses referred to in s. 59 (l) 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 he discharged in accordance with provision of s~ 67 A 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 bas 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; 657 A]
15. As regards the rates of tariff for the relevant years, in the case
of Extra High Tension and High Tension Industrial Consumers, \he
A
B
c
D
E
F
G
H
634
SUPREME COURT REPORTS
[1986] 3 S.C.R.
· \
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. [6571l-E]
B
c
D
G
H
.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 re<.'Onsider the 1980 \ariff 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 arrived at by the Tariff Committee was in any way
affected by the non-commissioning of the new projects betw_een 1980
and· 1982. [6>Xl -111
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]
1
'
I
1,
KER. STATE E.B. v. PRABHU [REDDY,J.J
635
D,C.M. v. Rajasthan State Electricity Board, (1986] 2 SCC 431,
referred to.
21. Different tariffs for lligh and Low Tension Consumers and
A
for different classes of consumers, such as, Industrial, Commercial,
Agricultural and Domestic hal'e been prescribed and the. differention.., B
appears to .be reasonable and far from arbitrary and based on intelli-
·)._
geni and intelligible criteria. [659C]
·,_
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1639
r~~l985 etc.
. .
•
.
From the Judgment and Order 15.1.1985 of the Kerala High
C
Court in O.P. 760 of 1981
I.
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
~
. l
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.
D
E
F
G·
H
;
'
636
SUPREME COURT REPORTS.
{ 1986] 3 S.C. R.
A
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- ·
B ., 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 notifica-
~
lions 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.
.
.
.
.
C )
Jn order to understand the questions at issue; it is necessary to
D
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)
E
General principles
for Board's flllllnceThe 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 Govern- from
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
G
from time to time ..
Provided that
'--...
i where necessary any
/ amounts due for
· · meeting ·the operating,
H . 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
637
management expenses
come and profits,
management exA
of 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
B
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
c
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
D
(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
E
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 reI
Government under
duced by the aggreF
,
••
sub-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 accorState Government into dance with the proG
capital under subvisions of thi> Act and
section(J) of
consllmers' consection 66A.
trihutions for
~
service lines.
(2) In specifying any
higher percentage
"
H
A
B
c
D
E
F
G
H
638
SUPREME COURT REPORTS
[1986] 3 S.C. R.
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).
..,.
,
.L
f
KER. STATE E.B. v. PRABHU [REDDY, J.J
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 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:
B
c
D
£
F
G
H
A
B
c
D
E
F
G
H
640,
SUPREME COURT REPORTS
[1986] 3 S.C.R.
"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
641
..
previous sanction of the State Government. to borrow any sum re-
.·\
quired 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.
B
_;.
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 amenSection 67 as further
c
to 1978
ded by Act No. 23
amended by Act
of 1978
No. 16of 1983
.--
(1)
(2)
(3)
Priority of liaPriority of liabiPriority of liabiliD
bilities of the
lilies of Boardties of the BoardBoard,.-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 sub-
~--
operating, mainteto enable compliance section( 1) of s. 59
nance and managewith the requirements to the extent available
E
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 prin-
~-
taxes on its
ment expenses and
cipal of any loan
income and profits
after provision has
raised (including
F
)
be distributed as
been made for the
redemption of deben-
...
far 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
G
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
H
642
SUPREME COURT REPORTS
11986) 3 S.C.R.
A
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
B
( 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
c
(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
D
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
E
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
F
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 be-
(i
standing 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
H
(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.
643
A
B
c
D
E
F
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:
G
"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
;\
B
c
D
E
F
G
II
644
SUPREME COURT REPORTS
\ 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
,l.
(
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.