Holding

A State electricity board may fix tariffs to generate at least the statutory minimum surplus and may treat interest and its arrears as revenue expenses, provided the tariff fixation complies with the accounting hierarchy of Sections 59, 67 and 67A and is not arbitrary.

Summary

The Kerala State Electricity Board (KSEB) revised its electricity tariffs in 1980, 1982 and 1984, which the consumers challenged on the ground that the Board exceeded its authority under Section 59 of the Electricity Supply Act, 1948 by fixing a price structure that generated a surplus beyond covering only expenses properly chargeable to revenue. The Supreme Court held that the Board, as a public utility, is empowered to generate at least the statutory minimum surplus and that interest and its arrears are revenue expenditures payable from revenue receipts. The Court found the tariff revisions not arbitrary, upheld the notifications, but directed the Board to reconsider the 1980 tariff for low‑tension industrial and commercial consumers. Consequently, the High Court judgments were set aside and the writ petitions dismissed.

Issues considered

The scope of the Board's authority under Section 59 to fix tariffs that yield a surplus when the State Government has not specified a surplus percentage.
Whether a statutory minimum surplus (three per cent) applies under the 1978 and 1983 amendments of the Act.
Whether arrears of interest can be treated as revenue expenditure payable from revenue receipts.
Whether the 1980, 1982 and 1984 tariff revisions are arbitrary or beyond statutory authority.
Whether differential tariffs for different consumer classes are permissible.

Legislation cited

Electricity (Supply) Act, 1948s. 18, s. 49, s. 59, s. 63, s. 64, s. 65, s. 66, s. 66A, s. 67, s. 67A

Subjects

electricity tariffSection 59surplus requirementpublic utilityprice fixationinterest arrearsdifferential tariffstatutory authorityKerala State Electricity Boardconsumer protection

Judgment

A

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

AUGUST 26, 1986

IO. CHINNAPPA REDDY AND M.M. DUTT, JJ.]

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

The upward re•ision of Electricity Tariff made by the appeUant-
D 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 hy formulating a price structure intended to yield
sufficient revenue to offset not merely the expenditure properly charge-
able to the revenue account for the year as contemplated by s. 59 of the
Electricity Supply Act, 1948, but also expenditure not so properly
E 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
F holding thatin 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 con-
tended, 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 A
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 B
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. com-
mercial lines so as to earn a profit; (2) that in the absence of specifica-
tions 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
c
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 D
new power stations whereas these pro,jects were not commissioned till
1984 and thus the cost structure arrived at by the Committee was viti-
ated: (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 E
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,
F
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]
G
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 includ-
ing the principle of law which inhibits arbitrary action by the Govern-
ment. His a public utility monopoly undertaking~ Service and not profit H
630 SUPREME COURT REPORTS I 1986] 3 S.C. R.
A 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 undertak-
ings as to Commercial ventures. If the Board borrows sums either from
the Government or from other sources or by the issue of debentures and
B 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]

c 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
0 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, there-
fore, 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
F 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
G
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
H that after meeting the various expenses properly required to be met a
KER. STATE E.B. >. PRABHU IREDDY.J.I 63 J

surplus is left. The original negative approach of functioning so as not A
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 B
specification by the State Government which has the liberty to specify a
higher percentage than three. [646E-G) ·
,i.
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 .. c
[1984] l SCR 709, referred to ...

----
7. The failure of the Government to specify the surplus which
1t may be generated by the Board cannot prevent the Board from generat-
fng a surplus.after meeting the expenses required to ·be met. The Board
D
may not allow its character as a 11ublic ·utility undertaking to be
changed into that of a profit motivated private trading or manufactur-
ing 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,
E
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
F
Maharatta Railway Company Limited v. The Municipal Council
Bez wada, 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 re-
quest and hy the agreement of the parties. [651B)
G
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 H
632 SUPKEME COUKI REPORTS [1986] 3 S.C. R.

the Electricity Supply Act, 1948, requires the Electricity Board to fol-
low 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
B
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 manage-
ment expenses', 'taxes (if any) on income and profits', 'depreciation
c 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
fl
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
F
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 enume-
rated 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 I. Payment of interest is expressly mentioned among the liabili-
ties 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 pay-
ment towards principal could be made or accepted, if interest of previ-
II
KER. STATE E.B. v. PRABHU [REDDY, J.[ 633

ous years continued to be outstanding. The very provision for repay- A
ment 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 circumst-
ances under which the payment may be made are expressly provided in B
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, c
required to be paid out of revenue receipts of the Board and are ex-
penses 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
D
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
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
E
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
L revenues under the scheme of the Act. [654G-H; 655A-B]
F
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 G
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 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 Con-
sumers, the change effected in 1980 was very steep but tended to come
down in 1982. [6571l-E]

.16. On the whole, it cannot possibly be said that the rates have
B
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 ex-
penses including interest charges. It is, therefore, desirable that the 1
c 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
D 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]
G
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]
H
I '
1,

KER. STATE E.B. v. PRABHU [REDDY,J.J 635

D,C.M. v. Rajasthan State Electricity Board, (1986] 2 SCC 431, A
referred to.

21. Different tariffs for lligh and Low Tension Consumers and
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. D
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· E
ran, E.M.S. Anam and T;G.N. Nair for the Respondents.
' .
The Judgment of the Court was delivered by

I--)_
,· CHINNAPPA REDDY, J. These appeals preferred by the Kerala
.l
~
State Electricity Board raise the question of the extent of the authority · F
\ . 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
G·
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. 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 au-
thority in generating a surplus to be adjusted against items of expendi-
ture 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
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:

D '
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)

E General principles General principles General Principles .
for Board's flllllnce- for Board's finance- for Board'sfinance-
The Board shall not, (1) The Board shall (1) The Board shall
as far as practicable ·· after taking credit ·after taking credit
and after taking for any subvention for any subvention
., ' - credit for any from the State Govern- from the Statt
, ·F"· subventions from the ment unders: 63, carry Government under
· 'State Government on its operations under s. 63, carry on its
under s. 63, carry on this Act and adjust its operations under this
.its_operations under tariffs so'as to ensure Act and adjust its
this Act at a loss. that the total revenues tariffs so as to ensure
and shall adjust its in any year o(account that the total revenues
charges accordingly shall, after meeting in any year of account.
G from time to time .. . . all expenses properly shall, after meeting all
Provided that chargeable to revenues, expenses properly
'--...
i where necessary any including operating, chargeable to
/ amounts due for maintenance and · revenues, including .'
· · meeting·the operating, management expenses. ·operating, ·
H . maintenance and taxes {if any on in- . maintenance and

I
KER. STATE E.B. v. PRABHU [REDDY,J.l 637

management expenses come and profits, management ex- A
of the Board or for depreciation and in- penses. 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 sane- surplus 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 sub- such 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
liability for loan
of the value of the
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

I
l on the capital original cost of such
provided by the State · fixed assets as re-
F
, Government under duced by the aggre-

•• sub-section(3) of that gate of the cumulative
section and the amount depreciation in res-
of the loans (if any) pect of such assets
converted by the calculated in accor-
State Government into dance with the pro-
G
capital under sub- visions of thi> Act and
section(J) of consllmers' con-
section 66A. trihutions for
~ service lines.
(2) In specifying any
higher percentage H
"
638 SUPREME COURT REPORTS [1986] 3 S.C. R.

A under sub-section(l),
the State Govern'-
..,.
ment shall have due·
regard to the availa-
bility of amounts
B accrued by way of
depreciation and the
liability for Joan
amortization and
leave-
(a) a reasonable sum
to.contribute towards
c the cost of capital
works; and (b) where
in respect of the
Board, a notification
has been issued
D
under sub-sec.(l) of
s. 12A, a reasonable
sum by way of return
on the c(lpital pro-
vided by the State
Government under
sub-sec.(3) of that
E
section and the
amount of the loans
(if any) converted by
the State Govern-
ment into capital
under sub-section( 1)
F
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.
G
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 con-
struction of s. 59 Jater).
H
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 provi-
sions of this Act, the Board shall be charged with the fol-
B
lowing general duties, namely:

(a) to arrange, in co-ordination with the Generating Com-
pany 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 c
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 lincen-
see or other person requiring such supply if the Board is
competent under this Act so to do; D

(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-ordina-
tion with the Generating Company or Generating Com-
panies, if any, operating in the State, for the generation,

f
.L transmission and supply of electricity within the State;

(e) to prepare and carry out schemes for transmission, dis- F
tribution 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 G
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:
H
640, SUPREME COURT REPORTS [1986] 3 S.C.R.
A "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
B 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
c required;

(b) the co"Ordinated development of the supply and dis-
tribution of electricity within the State in the most efficient
and economical manner, with particular reference to such
D development in areas not for the time being served or ade-
quately served by the licensee;

(c) the simplification and standardization of methods and
rates of charges for such supplies;

E (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
F 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
G ~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
H loans l<> the Board and Section 65 empowers the Board, with the
. KER. STATE E.B. v. PRABHU !REDDY, J.J

previous sanction of the State Government. to borrow any sum 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
641

.·\

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
to 1978
Section 67 as amen-
ded by Act No. 23
Section 67 as further
amended by Act
c

.-- (1)

Priority of lia-
of 1978
(2)

Priority of liabi-
No. 16of 1983
(3)

Priority of liabili- D
bilities of the lilies of Board- ties of the Board-
Board,.-The revenues ( 1) If in any year, The Board shall dis-
of the Board shall, the revenue receipts tribute the surplus,
after·meeting its are not adequate referred to in sub-
operating, mainte- to enable compliance section( 1) of s. 59
~-- nance and manage- with 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, main- order, 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 guaran- available, 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;
(iii) credits to
interest on loans principal of any
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 (inclu- due for payment in the
s. 66; ding redemption of year or which became
( v) interest on stock debentures or bonds due for payment in any
B
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 in- decide."
capital under the terest on sums paid by
proviso to section 59; the State Government
(viia) the write-down in pursuance of
of amounts in res- guarantees under
D
pect of intangible s. 66;
assets to the extent (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 plirpOse in Government under
E
the books of the s. 64 or deemed to be
Board; advanced under sub-
(viii) contribution to section(2) of
general reserve of an section 60;
amount not exceeding (vi) repayment of
one half of one per prilicipal of any loan
F
centum pet annum of guaranteed by the
the original cost of State Government
fixed assets employed under s. 66 which be-
by the Board so how- come due for payment
ever that the total in the year or which be-
standing to the credit came due for payment
(i
of such reserve shall in any previous year
not exceed fifteen per and has remained
centum of the unpaid;
original cost of (vii) repayment of
such fixed assets; principal of any loan
(ix) interest on loans advanced to the Board
H
KER. STATE E.B. v. PRABHU [REDDY, J.I 643

,advanced or deemed under s. 64 which be- A
to he advanced to the comes due for payment
Board under s, 64, in the year or which be-
including arrears of came due for payment
such in~erest; in any previous year
(x) the balance to be and has remained B
·appropriated to a unpaid; and if any
fund to be called the balance amount is left
Development Fund thereafter, the same
to be utilised for- shail be utilised for
( a) purposes bene- . the other purposes
ficial, in the opi- specified ins. 59
nion of the Board, in such manner as the c
to electrical deve- Board inay decide.
lopment in the State; (2) If for any reason
(b) repayment of beyond the control of
loans advanced to the Board, the revenue
the Board under s. 64 receipts in any year · D
and required to be are not adequate to
repaid; meet its operating,
Provjded that maintenance and
where no such loan 1nanagement expc;(J.ses,
is outstanding, taxes (if any) on in-
one-halfofthe comes and profits and
E
balance aforesaid the liabilities referred
shall be credited to in clauses (i) and
to the Consolidated - (ii) of sub-section(!),
Fund of the State. the shortfall shall,
with the previous
;anction of the State
F
Government, be paid
out of its capital
receipts.
Section 67B which was introduced by Act 16 of 1983 defers pay-
ment of interest on loans advanced by the Stat,e Government until
· after all other expenses are met. It is in th¢ following terms: G
"67A 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 Gov-
ernment and which is ch11rged to revenues in ;iny year may If
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
B liability and shall be discharged in accordance with the pro-
visions 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
c action by the Government. (see Rohtas Industries v. Bihar State Electri-
city Board, [1984] 3 SCR 59). It is a public utility monopoly under-
taking 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.
1t is not the function of the Board to so manage its affairs as to earn the
D maximum profit even as a private corporate body may be inspired to
earn huge profits with a view to paying large dividends to its share-
hclders. 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
E 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
F Board must of necessity make provision year after year for the pay-
ment 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.
G 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 electri-
II city. Sufficient surplus has to be generated for this purpose. That we
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 Electri-
city Supply Act? We -do n~t think that either the character of Electricity
Board as a Public Utility· Undertaking or the provisions of the Electri-
B
city 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 c
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.
D
'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 simi-
,l. lar amendment is also proposed to be made in regard to the F
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 im-
prove matters as many State Government did not specify the quantum
of surplus. Parliament had, therefore, to intervene once again to fix a
G
statutory minimum surplus. The Statement of Objects and Reasons
relating to the 1983 amendment may also be extracted and it is as
follows:
t "Though section 59 of the Act, as amended in· 1978, casr.1
an obligation on the State Government has so far specified
the quantum of any surplus. At present there is no uni- H
646 SUPREME COURT REPORTS l 1986] 3 S.C. R.

A fonnity in the manner of classification and presentation of
acoounts of the Boards and this renders inter-Board com- ...
parison of financial performance difficult. It is also con-
sidered necessary to re-arrange the priorities with regard to
distribution revenues of the Boards . It is, therefore, pro-
B posed 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 per- ·-1
centage as the State Government may specify , of the value
of the fixed assets of the Board in service at the beginning
oftheyear; ·
c
(b) to re-arrange the priorities for distribution of revenues
of the Boards;

(c) ·to bring the financial reporting system of the Boards in
D
line with commercial accounting practice; and

(d) to empower with a view to securing uniformity in the
manner of classification and presentation of accounts, the
Central Government to prescribe the fonns in which the
accounts of the Board and other records in relation thereto
may be maintained." ·~
E
A plain reading of sec. 59 (as amended in 1978) plainly indicates
that it is the mandate of Parliament that the Board should adjust its
tariffs so that after meeting the various expenses properly required to
be met a surplus is left. The original negative approach of functioning
so as not to suffer a loss is replaced by the positiv~ approach of requir- --'.,
F
ing a surplus to be created. The quantum of surplus is to be specified
by the State Government. What the State Government is to specify is J
the minimum surplus. This is made clear by the 1983 amendment
which stipulates a minimum of 3 per cent surplus in the absence of
specification by the State Government which has the liberty to specify
a higher percentage than three. That s. 59, as it stood before 1983
G
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 statu-
H tory obligation to carry on its operations and ad just its
KER. STATE E.B. v. PRABHU [REDDY,J.[ 647

tariffs in such a way to ensure that the total revenues .·\
earned in any year of account shail after meeting all ex-
penses chargeable to revenue, leave such surplus as the
State Government may, from time to time, specify. The
tariff fixation has, therefore, to be so made··as to raise
sufficient revenue which will not merely avoid any net loss IL
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 re-
liance on the observations of this Court in Kera/a State Electricity
Board v. Indian Aluminium Co., [1976] 1SCR5'i2; Bihar State Electri-
city Board v. Workmen, [1976] 2 SCR 42 and Dr. P. Na/la Thamby
Thera vc Union of India & Ors.,. (1984 I 1 SCR 709 to contend that the
Electricity Board ·was barred from conducting its operations on com~
mercial lines so as to earn a profit. In the first case, the· observations
D
relied upon were. .

"Furthermore, Electricity Boards are not trading corpora-
tions. 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
E
distribution of electricity in the most efficient and economi-
cal 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
I
Governments (Section 63). In the discharge of their func-
... tions they are guided by directions on questions of policy
given by the State Governments (Section 78A). There are
no shareholders and.there is no distribution of profits."

In the second case the court observed,
(;

"The Electriciiy Board is not an ordinary oommercial con-
cern. It is a public service institution. It is not expected to
make any profit. It is expected to extend the supply of electri-
city to unseIVed areas without reference to considerations of
loss that might be incurred as a result of such extensio11."
648 SUPREME COURT REPORTS [1986] 3 S.C.R.

A 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
B writers of repute that the price policy of such a Public
Corporation should neither make a loss nor a profit after
meeting all capital charges and this is expressed by covering
all costs or breaking even; and secondly, the price it
charges for the services should correspond to relative costs.
Keeping the history of the growth of the Railways and their
functioning in view, tlie commendable view to accept may
c be that the rates and fares should cover the total cost of
service which would be equal to operational expenses, in-
terest on investment, depreciation and payment of public
obligations, if any. We need not, however, express any
opinion about it." l
D

>••••••••.•••..••••..•••.••••••.•••••.••..•.•••.••..

"We have said earlier that the Railways are a public utility
service run on monopoly basis. Since it is a public utility,
E 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
F 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 opera-
tion 'will reqttire a margin of adjustment and, therefore,
G
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
H. factor in the case of a public enterprise. If profit is made not for
KER. STATEE.B. v. PRABHU [REDDY,J.] 649

profit's sake but for the 'purpose of fulfilling, better and more exten- A
sively, 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 B
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
-t' expected to make a profit by saying that it is expected to extend the -
supply of Electricity to unserved areas without reference to considera-
tions of loss. It is of interest that in the second case, dealing with the

,., question whether interest cannot be taken into account in working out
profits, the court observed,

'TheJacile assumption by the Tribunal that the interest
should not be taken into account in working out the profits
is not borne out by the provisions of the statute."
c

D
In the third case, the court appeared to take the view that the railway
rates and fares should cover operational expenses, interest on invest-
. ment, depreciation and payment. of public obligations. It was' stated
more than once that the total operational cost would include the in-
terest on the capital oµtlay out of the national. exchequer. While the
court expressed the view that there was no justification to run a public
E
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 ..
F
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
G
mentioned. ·

We may also refer here to the decision of the Privy Council in
Madras and Southern Mahratta Railway Company Ltd. v. Bezwada
Municipality, AIR 1944 PC 71 which affirmed the Judgment of the
Madras High Court in Madras and Southern Maharatta Railway Com- H
KER. STAIB E.B. v. PRABHU (REDDY,J.] 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
B
enough 'price fixation' is neither the forte nor the function of the
court.

The occasional excursions that have been made into that field
were at the request and by the agreement of the parties. This was made
dear· by a Constitution Bench of seven judges of this Court in Prag Ice·
and Oil Mil/sv. Union of India, [1978] 3 SCR 293 where it was said, c
"It is customary in price fixation cases to cite the oft-
quoted decision in Premier Automobilies Ltd. & Anr. etc.
vs. Union of India which concerned the fixation of price of
motor cars. It is time that it was realized that the decision
D
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
E
involved, we should base our judgment on examination of
correct and rational principles and should direct deviation
from the report of the Commission which was an expert
body presided over by a former judge of a High Court only
when it is shown that there has been a departure from·
established principles or the conclusions of the Commission
F
are shown to be demonstrably wrong or erroneous." By an
agreement of parties the court was thus converted into a
Tribunal for considering ~very minute detail relating to
price fixation of motor cars. Secondly, as regards the esca-
lation clause the Court recorded at page 543 that it was not
disputed on behalf of the Government and the Attorney
G
General accepted the position, that a proper method
should be devised for escalation or de-escalation. Tillrdly,
it is clear from page 544 of the Report that the Learned
Attorney-General also agreed that a reasonable return
must be allowed to the manufacturers on their investliieni.
The decision thus proceeded partly on an agreement bet"
652 SUPREME COURT REPORTS [1986[ 3 S.C. R.

A 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."
B
The position was again clarified in Rohtas Industries v. Bihar State
Electricity Board (supra) : ·-!
"As pointed out by this Court in Prag Ice & Oil Mills and
another vs. Union of India, in the ultimate analysis, t.he
)
mechanics of price fixation is necessarily to be left to the
c judgment of the executive and unless it is patent that there
is hostile discrimination against a class of person, the pro-
cessual basis of price fixation is to be· accepted in the
generality of cases as valid."

D On the question of appropriate pricing policy we may conve-
niently 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
E priority to the evolution of a structure of enerb'Y 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-fud su bstirution.
F Energy users have generally not .adopted conservation
measures already identified. While action is being taken to
promote technologically energy-efficient equipment and
processes, on the one hand, appropriate energy pricing
policy would have to be followed, on the other hand, in
order to induce economics in the use of energy in all sectors
G and encourage desired forms of inter-fuel substirution, in-
cluding 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 res-
pect of coal and power industry. As we have said in the
H past, it is wrong to think that an adjustment in the prices of
KER. STATE E.B. v. PRABHU [REDDY.).[ 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 for-
mulation of an integrated energy pricing structure on the B
above lines should receive the highest prioriiy in the begin-
ning of the Plan period.""

Turning back to sec. 59.a_nd reading it along with sections 49, 67,
67A etc. we notice that the Electricity Supply Act requires the Electri-
city 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- c
rate a surplus. Broadly, sec. 59 requires that a surplus should be left.
from the total revenues, in any year of accoun_t, after meeting all
expenses properly chargeable to revenues. It has to be remembered
that apart from subventions which may be received from the State
Government, which depend entirely on the bounty. of the Govern- D
ment, 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 re-
course to the principles of corporate accounting or the rules which
determine what is revenue expenditure under the Indian Income-tax E
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 ex-
penses' 'taxes (if any) on income and profits', 'depreciation and in-

}. terest 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
F
due regard to the availability of amounts accrued by way of depreci-
ation 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 G
makes it clear that the Board is to provide for (1) !ban amortization (2)
contribution towards the cost of capital works; (3) return on the capi-
tal. We may now turn to s. 67 which prescribes the priority to be·
-Observed by the Boatd in the matter of discharging the liabilities enu-
merated therein out of its .revenues. First the operating•maintenance
and management expenses have to be met, next provision has to be H
654 SUPREME COURT REPORTS 11986] 3 S.C.R.

A made for payment of taxes on Income and Profits and thereafter vari-
)
ous items of expenditure are mentioned in order of priority. If any
amount is left after the discharge of the liabilities en\imerated ins. 67 it
is further provided that the balance shall be utilised for the other
purposes specified in s. 59 in such manner as the Board may decide.
B 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
c behalf of the consumers before the High Court and before us was that
while interest which accrued during the year might be properly con-
sidered to be reve!'ue expenditure, arrears of interest which accrued
during the previous years and had not been paid could not be so
considered. We fail to see why that should be so. Under the scheme of
D 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 ac-
crued upto the date of repayment of the capital. If as argued on behalf
E
of the consumers arrears of interest cannot be paid from revenue re-
ceipts, how then may such arrears be paid? Not from the capital re-
ceipts. 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 operat-
F ing, 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
G
of the Board and are expense properly chargeable ti:> revenues within
the meaning of that expression in s. 59 of the Act. The Legislature has
presently clarified the position by the amending Act 16 of 1983 which
came into force from April 1, 1985. By this Act a separate section, s.
67A has been introduced along with a consequential amendment of s.
67 providirig that interest on loans advanced under s. 64 or deemed to
H have been advanced under s. 60, which is charged to revenues in any
KER. STATE E.B. r. PRABHU I REDDY, J.I 655

year may be paid out of revenue receipts of a year only after all other A
expenses referred to ins. 59(1) are met and further providing that so
much of interest as is not paid in any year by reason of the priority
mentioned in s. 67 A shall be deemed to be a deferred liability to be
discharged in accordance with provision of s. 67 A in the subsequent
year or years. In our view these provisions show beyond doubt that
payment of arrears of interest is an expense properly chargeable to the
revenues under the scheme of the Act.

We may now assess the factual situation, Shri Abdu!Khader,

~
learned counsel for the Kerala State Electricity Board has placed be-
fore us statements containing details of interest payable in each year of·
accounting, the arrears of interest due and payable, the total revenue c
I 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 D
Rs.2926. 73 Iakhs. After meeting operation amd maintenance expenses
and depreciation the balance of revenue receipts was Rs.4161.60
lakhs. The amount of interest payable in the year of account was
Rs. 1946.37 lakhs. The revenue surplus left after payment of interest in
the year of account was therefore, Rs.2215.23 lakhs. The arrears of
,). interest accrued in previous years and not paid was Rs.4270.58 lakhs,
E
since the revenue surplus available after meeting the current interest
was Rs.2215.23. lakhs only there was a deficit of Rs.2055.35 lakhs. In
the year of account 1979-80 the total revenue receipts were Rs.9124.90
lakhs which included revenue of Rs.3856. 15 lakhs from sale of energy
( to neighbouring States. After meeting operation and maintenance ex-
/"· penses and depreciation the revenue surplus left was Rs.3253.94 lakhs.
F
The interest which became payable in the year of account was
--.4.. Rs.2107.85 lakhs and after meeting it, the revenue surplus left was
Rs.1146.09 lakhs. The old arrears of interest which could not be met
fully in the ptevious year was Rs.2055.35 lakhs , Thus in the year of
account year 1979-80, there was a deficit of Rs.909.27 lakhs. In the year
of account 1980-81 the total revenue receipts were Rs. J0,686.54 lakhs
G
.. •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 H
656 SUPREME COURT REPORTS [19861 3 S.C.R.

A 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
B of Rs.3183.77 lakhs. The total interest payable in the year of account
was Rs.3105.15 lakhs, this left a revenue surplus of Rs.78.62 lakhs and
si~ce there was no arrears of interest what was payaOle the net revenue
surplus was 78. 62. lakhs. In the year of account 1982-83 the total re- +
venue 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
c 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 re-
D venue surplus after meeting operation maintenance expenses and de-
preciation was Rs.2246.30 lakhs. The amount of interest which had .
. become payable was Rs.3426.53 lakhs, the arrears of interest was
Rs.376.76 lakhs leaving a total deficit of Rs.1556.99 lakhs. We may
mention here that the annual account for the year 1978-79 to 1983-84
have been certified by the Accountant General and the annual ac-
counts for the year 1984-85 are awaiting certification. The accounts
E
awaiting certification show that in the year of account 1984-85, the
revenue receipts after meeting operation and maintenance expenses
and depreciation were 4692.92 lakhs, while the interest which had
become payable during the year was Rs.3719 and the interest of the
previous year Rs.1556.99 lakhs this left a deficit of Rs.584.00 lakhs.
F 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
G
prevailing there. In those years also it would be seen from the accounts
that but for the boom in the siile of energy to neighbouring States there
would have been a serious deficit in every one of those years. It is clear ;
that the· Electricity Board has not been earning huge profits and

H
generating large surpluses, as suggested by the consumers. Once we
arriv.e at this position that there is hardly any revenue surplus left after 1
l
-
KER. STATE E.B. v. PRABHU IRED DY. J.I 657

meeting the expenses required to be met bys. 59, the complaint of the A
,( consumers that there was no justification for the tariff increase be-
cause 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 B
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

~ I
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 c
that order, but recommended, in the same order, 11.55, 21.4, 38, 27.,5,
74 and 18 ps per unit respectively. However, the actual tariff rates as
introduced in 1980 were 10.8, 18.24, 38, 24.5, 66 and 15 ps per unit.
r The 1982 Tariff Committee recommended rates of 24.5, 37.3, 47.5, 48,
55-70 and 34 ps per unit. The actual tariff introduced in 1982 was D
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 Ten-
sion 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 E
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 Elec-
tricity Board as to throw a heavy burden on any section of the consum-
ers without regard to their ability to pay without regard to the nature
of the supply and purpose for which the supply is required. Now do we
, find that the pri1_1ciple of uniformity of tariffs has in any way been F
sacrificed. But, as we mentioned a little earlier the Low Tension In-
dustrial 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

r case of Low Tension Industrial Consumers, the tariff was increased
from 14.5 ps per unit to 24.5 ps per unit in 1980 an·d maintained at the
rate of 24.5 ps per unit in 1982. In the case of Low Tension Commer-
cial Consumers, the tariff was increased from 38 ps per unit to 66 ps
c;

per unit in 1980 but brought down again considerably in 1982 to 50. 70
ps per unit. The very circumstance that the tariff was either brought
down or maintained at the same level in 1982 when compared with the
1980 tariff appears to be an indication that the increase in· !980 was H
658 SUPREME COURT REPORTS [19861 3 S.C.R.
A 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 Ten-
B sion Commercial and Low Tension Industrial Consumers.

Shri Potti submitted that the 1980 Committee took place consi-
deration the anticipated augmentation of the generating capacity from
· the proposed new power stations of Idukki, Saharigiri and ldamalyar,
whereas these projects were not commissioned till 1984 and thus the
cost-structure arrived at by the Committee was vitiated. We· do not
c 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
D correct .to say that the cost structure arrived at by the Committee was
in anx way affected by the non-commissioning of 'the new projects
between 1980 and 1982. Another submission made by Sbri Potti was
that the Committee erred in not taking into account the financial posi-
tion 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 there-
E fore 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 circumst-
ances which prevailed that year and continued to prevail for a few
years thereafter. The sale of energy to neighbouring States was not to
F be taken as a permanent phenomenon to every year. Yet another
submission of Shri Potti was that the 1980 Committee having taken as
the basis the 1982 projected cost so as to maintain price stability for a
period of five years, it was not proper to revise the tariff again in 1982.
But we find that the actual cost of producing energy in 198)-82 and
1982-83 had risen much above the projected 1982 cost and therefore
(; the 1982 Committee has no option but to again consider further revi-
sion 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 mani-
ll festly unjust and discriminatory that one consumer should benefit at
KER. STATE E.B. v. PRABHU [REDDY, J.[ 659

the cost of other consumers or general tax payers;" made in D.C. M. A
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 treat-
ment to Low Tension Domestic and Agricultural Consumers at the
cost of the rest of the consumers. We do not find any force in this
submission. Section 49 (3) expressly reserves the power of the Board, B
· if it cc;msiders it necessary or expedient, to fix different tariff for the
supply of electricity to any person having regard to the geographical
position of any area, the nature of the supply and purpose for which
supply is required and other relevant factor. Different tariffs for High
and Low Tension Consumers and for different classes of consumers,
such as, Industrial, Commercial, Agricultural and Domestic have been
prescribed and the differention appears to us to be reasonable and far c
from arbitrary and to be based on intelligent and intelligible criteria.

In the result, we allow the appeals filed by the Ketala State
Electricity Board, set aside the judgments of the High Court, uphold
the validity of the notifications revising the tariffs and dismiss the writ D
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 Commer-
cial 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.
E

A.P.J. Appeals allowed.