Supreme Court of India
STATE OF U.P. AND ORS.versusRENUSAGAR POWER CO. AND OTHERS
- Citation
- 1988 INSC 190
- Decided
- 28 July 1988
- Disposal
- Disposed off
- Bench
- SABYASACHI MUKHERJI
Holding
Renusagar is Hindalco's own source of generation; the corporate veil must be lifted, making Hindalco liable to electricity duty, and the State's order is valid and not violative of natural justice.
Summary
The State of Uttar Pradesh issued a demand notice for electricity duty on power supplied by Renusagar Power Co. to its wholly‑owned subsidiary Hindalco. The High Court quashed the demand, holding that Renusagar was Hindalco's own source of generation and that the State had not complied with natural‑justice requirements. On appeal, the Supreme Court examined whether Renusagar could be treated as Hindalco's own source of generation under section 3(1)(c) of the U.P. Electricity (Duty) Act, 1952, whether the corporate veil should be lifted, and whether the State’s exercise of its power under section 3(4) was valid. Relying on the facts that Renusagar was a 100% subsidiary, wholly controlled by Hindalco, and that all steps in its establishment and expansion were undertaken by Hindalco, the Court held that Renusagar must be treated as Hindalco's own source of generation and that the corporate veil should be lifted. Consequently, Hindalco is liable to electricity duty, and the State’s order was not violative of natural justice. The High Court judgment was set aside and the State’s demand restored, subject to recomputation of bills at the appropriate rate.
Issues considered
- Whether Renusagar Power Co. is the 'own source of generation' of Hindalco within the meaning of section 3(1)(c) of the U.P. Electricity (Duty) Act, 1952.
- Whether the corporate veil should be lifted to treat Renusagar and Hindalco as a single concern.
- Whether Hindalco is entitled to exemption from electricity duty under sub‑section (4) of section 3 of the Act.
- Whether the State Government’s order complied with the principles of natural justice.
- Whether the State’s exercise of power under section 3(4) is a valid quasi‑legislative/administrative act.
Legislation cited
- Indian Electricity Act, 1910s. 23, s. 28
- U.P. Electricity (Duty) Act, 1952s. 3(1)(c), s. 3(4), s. 4(1)(c)
- U.P. Electricity (Duty) (Amendment) Ordinance, 1959
- U.P. Electricity (Duty) (Amendment) Ordinance, 1970
Subjects
electricity dutyown source of generationcorporate veillifting veilnatural justicepublic intereststatutory interpretationexemption
Judgment
STATE OF U.P. AND ORS.
A
v.
RENUSAGAR POWER CO. AND OTHERS
JULY 28, 1988
[SABYASACHT MUKHARJI ANDS. RANGANATHAN, JJ.] B
U.P. Electricify (Duty) Act, 1952-Whether Renusagar Power
Co., respondent No. I, is 'own' source of generation of electricity of
Hindalco,. respondent No. 2 under section 3(1)(c) of-Whether
Hindalco is liable to pay electricity duty on ihat.footinirWhether
corporate veil should be lifted in the facts of the case-Whether
Hindalco is entitled to exemption from levy of electricity duty under c
sub-section (4) of section 3-0f.
Disallowing request for exemption from levy of electricity duty
under sub-section (4) of section 3 of the U.P. Electricity Duty Act, 1952
('the Act'), as amended, the appellants issued notice of demand asking D
respondent No. 1, Renusagar Power Co., to pay electricity duty on the
energy supplied by it to respondent No. 2, Hindalco, for industrial
purposes. Being aggrieved by the decision of the State Government, the
..,. respondents filed a writ petition in the High Court. The High Court
allowed the writ petition, holding that the impugned order of the State
Government was not maintainable in law, and quashing the order as E
well as the notice of demand abovesaid. The State Government was also
directed to consider the request of the respondents for exemption in
accordance with the directions issued by the High Court in the earlier
Writ Petition No. 4521 of 1972 filed by the respondents. Being
aggrieved by the decision of the High Court the appellants moved this
Court for relief. F.
Disposing of the appeal, the Court,
HELD: Per Sabyasachi Mukharji, J.
There were two different aspects of the case to be considered. One G
was whether the respondent No. 1, the Renusagar Power Co. Ltd., was
'own' source of generation of electricity for respondent No. 2, the
Hindalco, under section 3(l)(c) of the Act. The second aspect was
whether the order passed by the State Government was in accordance
with the principles of natural justice in so far as the same were applic-
able to the case. [646C] H
627
628 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
From 1952 to 1970, no duty was payable if electriciiy was
A
generated from own source of energy. From 1970 to 1973, duty of one
paisa was payable in respect of electricity supplied from own source of
generation. After 1973, no duty was payable in respect of electridty
supplied from own source of generation. (6460]
B Renusagar, a 100% subsidiary of Hindalco, wholly owned and
controlled by Hindalco, was incorporated in March, 1964. Hindalco
had established the power plant through the agency of Renusagar to
avoid complications in the case of a possible take-over of the power
plant by the State Electricity Board as power generation is generally not
permitted in normal conditions in the private sector. The respondents
C highlighted that the sanction under section 28 of the Indian Electricity
Act, 1910, given to Renusagar and its amendment established that
Renusagar was not a normal type of sanction under Section 23 of ihe
1910 Act as the holder could supply power only to Hindalco. All these
steps for the expansion of the power in Renusagar so as to match the
power requirement of Hindalco's expansion were taken by Hindalco
D even though Renusagar had been incorporated. Applications for all the
necessary sanctions and permissions were made by Hindalco. Per-
missions and sanctions were first intimated to Hindalco even though
Renusagar was in existence. Changes in the sanctions and/or permis-
sions were obtained by Hindalco and not Renusagar. The expansion of
the power plant in Renusagar was to exactly match the requirements of
E Hindalco for the production of Aluminium. The expansion of the power
plant in Renusagar was part and parcel of the expansion of the
aluminium plant of Hindalco. All the steps to set up the power plant in
Renusagar and its expansion were taken by Hindalco. Hindalco con-
sumed about 255 MW power out of which 250 MW came from
Renusagar. There was only one transmission line going out of
F Renusagar and that went to Hindalco, which had complete control over
Renusagar. The agreement between Renusagar and Hindalco indicated
this was not a normal sale-purchase agreement between two inde-
pendent persons at arms length. The price of electricity was determined
according to the cash needs of Renusagar. This covenant also showed
complete control of Hindalco over Rennsagar. All persons and anthori-
G ties dealing and conversant with this matter had consistently treated
Rennsagar as own sonrce of generation of Hindalco. In the power-cnts
matter nuder section 22B of 1910 Act, 100% cut was imposed on
Hindalco on the footing that it had its own sonrce of generation. All the
authorities including the State and Board had all lllong treated
Renusagar as own source of generation of Hindalco. It was thus con-
H tended that Renusagar must he treated as alter ego of Hindalco,. i.e.,
STATE OF U.P. v. RENUSAGAR POWER CO. 629
own source of generation of Hindalco within the meaning of section
A
3( 1)(c) of the Duty Act, and that consumption clearly fell within that
section, {653C-H; 655C-F]
'Own source of generation' is an expression connected with the
question of lifting or piercing the corporate veil. The appellants con-
tended that in this case there was no ground for lifting the corporate B
veil, urging that there was no warrant either in law or in fact to lift the
corporate veil and treat Renusagar's plant as Hindalco's own source of
generation. [657B-C]
In the expanding horizon of modem jurisprudence, lifting of
corporate veil is permissible. Its frontiers are unlimited. It must, how·
ever, depend primarily on the realities of the situation. The aim of c
legislation is to do justice to all the parties. The horizon of the doctrine
of lifting corporate veil is expanding. In this case, indubitably, it is
c11rrect that Renusagar was brought into existence by Hindalco in order
to fulfil the condition of industrial licence of Hindalco through produc-
tion of aluminium. It was also manifest from the facts that the model of D
the setting up of power staiion through the agency of Renusagar was
adopted by Hindalco to avoid complications in case of takeover of the
power station by the State or the Electricity Boiird. All the steps for
establishing and expanding the power station were taken by Hindalco
and· Renusagar was wholly owned subsidiary of and completely control-
led by Hindalco. Even the-today affairs were controlled by Hindalco. E
Renusagar had never indicated independent volition. Whenever felt
necessary, the State or the Board themselves had lifted the corporate
veil and treated Renusagar and Hindalco as one concern and ttie
generation in Renusagar as the own source of generation of Hindalco.
Indubitably, the manner of treatment of the power-plant of Renusagar
as the power-plant of Hindalco and the Government taking full F
advantage of the same in the case of power cuts and denial of supply of
100% power to Hindalco underlined the facts and implied acceptance
and waiver of the position that Renusagar was a power plant owned by
Hindalco. In this view of the matter, the corporate veil should be lifted
and Hindalco and Renusagar be treated as one concern and
Renusagar's power plant must be treated as the own source of genera- G
tion of Hindalco and should be liable to duty on that basis. In the
premises the consumption of such energy by Hindalco will fall under
section 3(l)(c) of the Act •. l667E-H; 688A-B]
The veil of corporate personality even though not lifted sometimes
is becoming more and more transparent in modem company juris- H
630 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
prudence. The ghost of the case of Aron Salomon v. A. Salomon & Co.
A
Ltd., [1897] AC 22 at 27, 30, 31, still visits frequently the hounds of
Company Law but the veil has been pierced in many cases. However,
the concept of lifting the corporate veil is a changing concept and is· of
expandinghorizon. [668C-D]
B The appellant was in error in not treating Renusagar's power
plant as the power plant of Hindalco and not treating it as the own
source of energy. The respondent was liable to duty on the same and on
that footing alone; this was evident in view of the principles enunciated
and the doctrine now established by way of decision of this Court in Life
Insurance Corpn. of India v. Escorts Ltd. & Ors., [1985] Suppl. 3
S.C.R. 909, that in the facts of this case sections 3(l)(c) and 4(1)(c) of
c the Act are to be interpreted accordingly. The person generating arid
consuming energy were the same and the corporate veil should be lifted.
Hindalco and Renusagar were in-extricably linked up together.
Renusagar had in reality no separate and independent existence apart
from and independent of Hindalco. Consumption of energy of Hindalco
D is consumption of Hindalco from its own source of generation. Rates of
duty applicable to own source of generation had to be applied to such
consumption-I paisa per unit for the first two generating sets and nil
rate in respect of 3rd and 4th generating sets. In the facts of this case,
the corporate veil must be lifted and Hindalco and Renusagar should be
treated as one concern and the consumption of energy by Hindalco must
E be regarded as consumption by Hindalco from own source of genera-
tion. The_ appeal directed against this finding of the High Court was
rejected. [668D-H; 669A-BI
Coming to the challenge to the order quashed by the High Court,
the dominance of public interest is significant according to the provi-
F sions of sub-section (4) of Section 3. In view of the ceilings prescribed,
the power conferred upon the State under Section 3( 1) of the Act by
itself is valid and does not amount to excessive delegation. The primary
purpose of the Act was to raise the revenue for development projects.
Whether, in a particular situation, rural electrification and develop-
ment of agriculture should be given priority or electricity or deve-
G lopment of aluminium industry should be given priority or which is in
public interest, are value judgments and the legislature is the best
judge. What was paramount before introduction of the development
programme and how the funds should be allocated and how far the
government considers a negligible increase and rise in the cost of
aluminium for the purpose of raising monies for other development
H activities are matters of policy to be decided by the Government. It is
STATE OF U.P. v. RENUSAGAR POWER CO. 631
true that the question regarding public interest and need to promote
A
indigenous industrial production was related with the question of
exemption of duty, but a matter of policy should be left to the Govern-
ment. In its order, the Government had adverted itself to all the aspects
of sub-section (4) of section 3 of the Act. Certain amount of encourage-
ment was given to Hindalco to start the industry in a backward area.
Aller considerable period, a very low rate of duty was charged. If other B
sectors of growth and development are needed, for example, food,
shelter, water, rural electrification, the need for encouragement to
aluminium industry had to be subordinated by a little high cost because
it is a matter on which the Government as representing the will of the
people is the deciding factor. Price fixation, which is ultimately the
basis of rise in cost because of the rise of the electricity duty is not a
matter for investigation of Court, Sub-section (4) of section 3 of the Act c
in the set up is quasi-legislative and quasi-administrative in so far as it
has power to fix different rates having regard to certain factors and in
so far as it has power to ;vant exemption in some cases, is quasi-
legislative in character. Such a decision must be arrived at objectively
and in consonance with the principles of natural justice. With regard to D
the nature of the power under section 3(4) of the Act when power is
exercised with reference to any class it would be in the nature of subor-
dinate legislation but when the power is exercised with reference to
individual it would be administrative. If the exercise of power is in the
nature of subordinate legislation the exercise must conform to the pro-
visions of the statute. The High Court was right only to the limited E
extent that all the relevant considerations must be taken into account
and the power should not be exercised on irrelevant considerations, but
singular consideration which the High Court had missed in this case is
the factors; namely, the prevailing charges for the supply of energy in
any area, the generating capacity of any plant, the need to promote
industrial production generally or any specified class thereof and other F
relevant factors cannot be judged disjointly. These must be judged in
adjunct to the public interest and that public interest. is as mentioned
· in the preamble to raise revenue. All that the section requires is that
these factors should be borne in mind but these must be subordinate to
the executive decision o.f the need for public interest. The power
conferred on the State Government of administrative nature must be G
in accordance with the principles of natural jµstice to a limited
extent. [67·IF-G; 672D-E; 673D-H]
The exercise of power whether legislative or administrative will be
set aside if there is manifest error in the exercise of such power or the
exercise of the power is manifestly arbitrary. Similarly ,if the power has H
632 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
been exercised on a non-consideration or non-application of mind to
A
relevant factors, the exercise will be regarded as manifestly erroneous.
If a power, legislative or administrative, is exercised on the basis of
facts which do not exist and which are patently erroneous, such exercise
of power will stand vitiated. This case related to the particular facts and
circumstances of an individual-Hindalco. The facts and circumstances
of the case had been examined in consonance with the principles of
natural justice and con•idered subject to public interest. Hindalco had
made profits much more than it had before the imposition of the duty.
The adequacy of the profil• or whether it made much more profits h not
a consideration which must prevail over public interest and the Govern-
ment having taken into consideration this factor, did not commit any
error and the High Court was in error in setting aside the order of the
c Government. The co;t of power to a similar industry in other States was
a relevant factor and the State was under a mandatory duty to consider
the same. The State bad taken note of all these factors, and considering
the prevailing practice of levy of electricity duty in other States as well '
as the provisions of section 3(4), the Government came to the conclusion
D that there was no justification for allowing exemption from electricity
duty to Hindalco, and did not commit any error. The factor of assur-
ance of cheap power by the Government did not fore-close the public
interest of raising public revenue. The impugned order did not suffer
from the vice of non-application of mind or non-consideration of the
relevant factors. The High Court was in error in interfering with the
E order of the Government in the manner it did. [676G-H; 677 A-Hi 678A]
Natural justice in the sense that a party must be heard before
hand need not be directly followed in fixing the price. There is scope for
trial and error in the sphere of price fixation which is more in the
nature of a legislative measure. Judged by that standard, the impugned
F order in this case was not bad. The Government did not act in violation
either of the principles of natural justice or arbitrarily or in violation of
the previous directions of the High Court. [678F;·679D; 680C]
The High Court should have ::;lowed the ,;aim of Hindalco for the
reduced rate of bill on the basis that Renusagar Power plant was its own
G source of generation under section 3(l)(c) and the bills should have
been made by the Boari:l on that basis. The High Court was in error in
upholding the respondents' contention that the State Government acted
improperly and not in terms of section 3(4) of the Act and in violation of
the principles of natural justice. The Judgment of the High Court was
set aside to the extent indicated above and State Government's
H impugned order was restored sub,ject to the modification of the bills on
STATE OF U.P. v. RENUSAGAR POWER CO. 633
the basis of own source of generation; Hindalco must be given the
A
benefit of the rate applicable to its own source of generation from
Renusagar plant. [680D-F)
Per S. Ranganathan, J. (Concurring): Agreeing, his Lord-
ship held that on the second issue it was difficult to define the precise
nature of the power conferred on the State under Section 3(4) of the B
Electricity Duty Act, and expressed doubts whether the sub-section
could at all be interpreted as conferring a right on individual consumers
to require that, in the light of the material adduced by them, the rates
applicable to them should have been fixed differently or that they
should have been exempted from duty altogether. However, his Lord-
ship observed that it was unnecessary to pursue this aspect further as
his Lordship agreed witl. the conclusion of Sabyasachi Mukharji, J. c
that in this case the respondent's representations had been fully con-
. sidered and the requirements of natural justice had been fulfilled and
that there was no warrant to interfere with the order of the State
Government. [680H; 681A-B)
D
Chiranjit Lal Anand v. State of Assam & Anr., [198S] Suppl. 2
S.C.R. 38S; State of U.P. v. Hindustan AluminWm Corpn. Llti., [1979]
J.!SCR 709; J.K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of
tr.P. & Ors., [1961] 3SCR18S; M/s. Girdharilal & Sons v. Balbir Nath
Mathur & Ors., [1986] 2 SCC 237 at 241, 246; State of Tam.ii Nadu v.
Kodaikanal Motor 'Union (P) Ltd., [1986] 3 SCC 91 at iOO; D. E
Sanjeevayya v. Election Tribunal, A.P. & Ors., [1967] 2 SCR 489, 492;
Western Coalfields Ltd. v. Special Area Development Authority, Korba
& Anr., [1982] 2 SCR 1at17; Andhra Pradesh State Road Transport
Corpn. v. The I. T.O. & Anr., [1964] 7 .SCR 17; Tamlin v. Hannaford,
[19SO] KB 18; Aron Salomon v. A. Salomon & Co. Ltd., [1897]AC 22
at 27, 30, 31; Western Coalfields Ltd. in Rustom Cavasjee Cooper v. F
Union of India, [1970] 3 SCR S30 at SSS; Bank Voordel En Scheepvaart
N. V. v. Stalford, [19S3] l'Q.B. 248; Kodak Ltd. v. Clark, [1903] I K.B.
SOS; DHN Food Distributors Ltd. & Ors. v. London Borough of
Tomer Hamlets, 11976] 3 AER 462; Harold Holdsworth & Co.
(Wakefield) v. Caddies, [19SS] 1 All E.R. 72S; Scottish Co'Pperative
Wholesale Societ; Ltd. v. Meyer and Anr., [1958] 2 All E~R. 66; G
Charterbridge Corpn. Ltd. v. Lloyds Bank Ltd. & Anr., [1969] 2 All
E.R. 1185; Marshall Richards Machine Co. Ltd., v. Jewitt (H.M.) Ins-
pector of Taxes, 36 TC Sll, S2~M/s. Sp encer & Co. Ltd., Madras v.
0
-,. The Commissioner of Wealth Tax, AIR 1969 Madras 359;. Turner Mor-
rison & Co. Ltd. v. Hungerford Investment Trust Ltd., AIR 1969 Cal.
238; Life Insurance Corpn. of India v. Escorts Ltd. & Ors., [i98S] H
634 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
Suppl, 3 SCR 909; Devi Das Gopal Krishnan & Ors. v.'State of Punjab
A & Ors., [1967] 3 SCR 557; Ram Bachan Lal v. The State of Bihar,
[1967] 3 SCR 1; Panama Canal Company v. Grace Line, 356 U.S. 309 2
Lawyers' Edn. 788; Vincent Panikurlangara v. Union of India &
others, [1987] 2 S.C.C. 165; Union of India & Anr. v. Cynamide India
Ltd. & Anr., [1987] 2 SCR 720; P.J. Irani v. State of Madras, [1962] 2
B SCR 169 at 179-180, 181, 182; Ryote of Garabandho and Ors. v.
Zamindar of Parlakimedi & Anr., AIR 1943 P.C .. 164; Saraswati
Industrial Syndicate Ltd. etc. v. Union of India, [1975] 1 SCR 956;
A.K. Kraipok v. Union of India, AIR 1970 S.C. 150; M/s. Travancore
Rayons Ltd. v. Union of India, AIR 1971 S.C. 862; Amal Kumar
Ghatak v. State of Assam & Ors., AIR 1971 Assam 32; Commissioner
of Income Tax v. Mahindra & Mahindra Ltd. & Ors., [1983] 3 SCR 773
C at 786, 787; Prag Ice & Oil Mills and Anr. etc. v. Union of India, 11978]
3 SCR 293; Shree Meenakshi Mills Ltd. v. Union of India, [1974] 2 SCR
398; Laxmi Khandsari, etc. v. State of U.P. & Ors., [1981] 3 SCR 92;
State of Orissa v. (Miss) Binapani Dei, [1967] 2 SCR 625; Mohd.
Rashid v. State of U.P., Am 1979 S.C. 592; S.L. Kapoor v. Jagmohan
O & Ors., AIR 1979 S.C. 592; Maneka Gandhi v. Union of India, Am
1978 S.C. 597; India Sugars & Refineries Ltd. v. Amrawathi Service
Co-operative Society Limited & Ors., [1976] 2 SCR 740, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 29(i6
of 1986.
E
From the Judgment and Order dated 26.9.1984 of the Allahabad
High Court in Writ Petition No. 3921of1982.
R.N. Trivedi, Additional Advocate General, Gopal Subra-
maniam and Mrs. Shobha Dikshit for the Appellants.
F
B. Sen,D.P. Gupta, N.A. Raja Ram Aggarwal, l'f.R. Khaitan,
E.D. Desai, Y.K, JChaitan, Jijina, Bandeep Aggarwal and T.N. Sen
for the Respondents.
The following Judgments of the Court were delivered:
G
SABYASACHI MUKHARJI, .J. This appeal by special leave is
directed against the judgment and order of the High Court of
Allahabad dated 26th September, 1984. The first appellani is the State
of Uttar Pradesh impleaded through the Chief Secretary to the
Government of Uttar Pradesh, Lucknow. The second appellant is the
H Secretary to the Government of Uttar Pradesh, Department of
STATE OF U.P. v. RENUSAGAR POWER CO. IMUKHARJI, J.] 635
Ene.rgy, Lucknow. The third appellant is one Shri Yogendra Narain,
presently acting as Secretary to the Chief Minister, State of Uttar A
Pradesh, Lucknow. At a particular point of time Shri Yogendra Narain
was the Secretary to lhe Department of Energy. The fourth appellant
is the Assistant Electrical Inspector, a functionary under· the U .P.
Electricity (Duty) Act, 1952, Mirzapur Zone, Rani Patti, Mirzapur.
The fifth appellant is the Collector of Mirzapur. B
There are four responden!'S in this appeal. The first respondent is
Renusagar Power Company Ltd. The second respondent is M/s
Hindustan Aluminium Corporation Ltd. Respondent No. 3 is Shri
D .M. Mimatramka who resides at Hindalco Administrative Colony,
Renukut, Mirzapur. The fourth respondent is Shri Rajendra Kumar
Kasliwal 'who·. resides at Hindustan Aluminium Corporation Ltd., c
'R'enukur;"District·Mirzapur. Respondents 3 and 4 mentioned above
are the shareholders of the first respondent and !he second tespon·
dent, that is, Renusagar Power Company and M/s. Hindustan
Aluminium Corporation Ltd. respectively. It is stated that Mis
·Hindustan Alulllinium Corporation Ltd;·, established and aluminium D
factory at Renukut inMirzapur District, U."P. in 1959. It is the case of
the respondents that it was induced to do so on the assurance that
cheap electricity and power would be made available at the relevant
time. In 1962, a plant of Hindustan Aluminium Corporation Ltd. for
manufacture of aluminium, was commissioned. M/s Renusagar Power
Co. Ltd. a wholly owned subsidiary of Mis Hindustan Aluminium E
Corporation Ltd, was incorporated in 1964. Mis Reriusagar Power
Company Ltd. was incorporated separately and had its own separate
· Memorandum and Articles of ,Association. On 9th September, 1967,
the first generating unit of 67.5 MW in-·Renusagar was commissioned
by Mis Renusagar Power'Company Ltd. The second generating unit
of the company was commissioned oh 5th October, 1968. The U .P F
Electricity {Duty) Act, 1952 (hereinafter ca~led· 'the Act') came into
force from 15th January, 1953 and it sf5ught to levy a duty on the
consumption of electrical energy in the State ofUttar Pradesh.
In the Statement of Objects and Reasons, which was published in
U .P. Gazette;it was stated that the programmes of development of the G
State involved enormous ell:penditure and• thus additional resources
had to be raised, the bulk of which could only be raised by means of
fresh taxation. It was stated that the object of the Bill, inter alia,
provided as_follows:
"A tax on the consumption of electrical energy will impose H
636 SUPREME COURT REPORTS [1988) Supp. 1 S.C.R.
a negligible burden on the consumer and is a fruitful source
A
of additional revenue. The Bill has been so prepared as to
ensure that the tax payable by a person will be. rela(ed to
the quantity of eleciricity consumed by him. The Bill is
being introduced with the above object."
B By virtue of the provisions of the U .!;'. Electricity (Duty)
(Amendment) Ordinance, 1959 various amendments were carried otit
in the said Act. In section 2 of the principal Act, a new clause, clause
(hh) describing a scheduled industry was inserted. By virtue of the
aforesaid newly inserted clause, the expression 'scheduled industry'
meant any of the industries specified in the schedule. In the proviso to
section 3 of the principal Act, after clause (d), a new clause (e) was
c inserted which provided for non-levy or exemption from the payment
of electricity duty on the energy consumed by a consumer in a
scheduled industry. The expression which was added was "by a con-
sumer in a scheduled industry". By virtue of section 8 of the Amending
Act, a schedule was added to the principal Act. In the schedule, non-
D ferrous metals and alloys were placed at serial No. 1 in Part B of the
schedule under a broad heading 'Metallurgical Industries'. It appears,
therefore, that by virtue of the aforesaid provisions electricity duty on
the energy consumed by M/s Hindustan Aluminium Corporation Ltd.
was exempted from 1st April, 1959, the date on which the Ordinance
came into force. It was further stated that the U .P. Electricity (Duty)
E (Amendment) Ordinance, 1959 was repealed and the provisions were
incorporated into an amending Act, viz,, 0.P. Act No. 12 of 1959 and
termed as the U.P. Electricity (Duty) (Amendment) Act, 1959. By
virtue of sub-section (2) of section 1, the Amendment Act provided
that the Act would be deemed to have come into force with effect from
1st April, 1959. The amendment Act repealed the provisions of the
U.P. Electricity (Duty) (Amendment) Ordinance, 1959. In section 2,
after clause (d), the clause which was inserted as a new clause (e)
provided that electricity duty would not be leviable on the consump-
tion of energy by a consumer in any industry engaged in the manu-
facture, production, processing, or repair of goods. Ordinance No. 14
of 1970 was promulgated on 5th August, 1970. The provisions con-
G tained in the Ordinance were subsequently incorporated in U .P. Act
No. 2 of 1971. The amended provisions of U.P. Act No. 2of1971 came
into force from 1st April, 1970. The Amendment Act was preceded by
U.P. Ordinance No. 14 of 1970. The Ordinance was described as "the
Uttar Pradesh Taxes and Fees Laws (Amendment) Ordinance 1970."
By virtue of Chapter III of the said Ordinance, amendments were
H sought to be made to the Act. Section 3 of the principal Act was
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.[ 637
substituted by a new section which provided that there wpuld be levied
A
and paid to the State Government a duty called electricity duty on the
energy sold to a consumer by a licensee/Board/the State Government
the Central Government; there would be a duty on the consumption of
energy by a licensee or the Board in or upon the premises used for
commercial or residential purposes, or in or upon any other premises
except "in the construction, maintenance or operation of his or its B
works", and there would be a duty upon the consumption of electricity
by any other person from "his own source of generation." It was
provided that a duty was to be determined at such rate or rates as may,
from time to time, be fixed by the State Government by notification in
the official gazette. Sub-section (2) of section 3 provlded that in
respect of certain classes of consumption the electricity duty would not
exceed 25% of the raie charged.
c
~.- It may be expedient to rekr 1o the Prefatory Note of the Act
which, inter alia, is as follows:
"Prefatory Note: The minimum programme of develop- D
ment which this St.ate mµst carry out within the next three
or four years for ti)e 11ttaiI!f11ent of the objective of a
welfare State is set out in the Five Year Plan drawn up by
the Planning Commission. This plan provides for an expen-
diture of 13.58 crores--of rupees on power development
projects. Such a huge expenditure cannot be met from our E
present resources. It is, however, eJiSential for the welfare
of the people that the expenditure should be incurred and
that nothing should be allowed to stand in the way of the
progress of the plan. Additional resoµrces have therefore
to_ be found, the bulk, ofwhi~h can be raised only by means
of fresh taxation." F
Section 3 of the Act provides as follows:
"3. Levy of electricity duty.-(1) Subject to the provisions
hereinafter contained, there shall be levied for and paid to
the State Government on the energy: G
(a) sold to a consumer by a licensee, the Board, the State
Government or the Central Government; or
(b) consumed by a licensee or the Boari) in or upon PT!'·
mises used for commercial or residential purposes, or in or H
638 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
A upon any other premises except in the construction,
maintenance or operation of his or its works; or
(c) consumed by any other person from his own source of
generation; a duty (hereinafter referred to as 'electricity
duty') determined at such rate or rates as may from time to
B time be fixed by the State Government by notification in
the Gazette, and such rate may be fixed either as a speci-
fied percentage of the rate charged or as a specified sum
per unit.
Provided that such notification issued after October
1, 1984 but not later than March 31, 1985 may be made
c effective on or from a prior date not earlier than October 1,
1984.
(2) In respect of clauses (a) and (b) of sub-section
(1), the electricity duty shall not exceed thirty-five per cent
D of the rate charged.
Provided that in the case of one-part tariff where the
rate charged is based on units of consumption, the electri·
city duty shall not be less than one paisa per unit or more •
than eight paisa per unit.
E
Explanation-For the purposes of the calculation of
electricity duty as aforesaid, energy consumed by a licensee
or the Board or supplied free of charge or at the conces-
sional rates to his or its partners, directors, members,
officers or servants shall be deemed to be energy sold to
F consumers by the licensee or the Board, as the case may be,
at the rates applicable to other consumers of the same
category.
(3) In respect of clause (c) of sub-section (1), the
electricity duty shall not be less than one paisa or more
G than six paisa per unit.
(4) The State Government may, in the public in-
terest, having regard to the prevailing charges for supply of
energy in any area, the generating capacity of any plant, .,
the need to promote industrial production generally or any
H specified class thereof and other relevant factors, either fix
STATE OF U,P. v. RENUSAGAR POWER CO. [MUKHARJI, J.) 639
different rates of electricity duty in relation to different A
classes of consumption of energy or allow any exemption
from payment thereof.
(5) No electricity duty shall be le.vied on-
(a) energy consumed by the Central Government or B
sold to the Central Government for consumption by that
Government; or
{b) x x x
(c) energy consumed in the construction, mainte-
nance or operation of any railway by the Central Govern- c
ment or sold to that Government for consumption in the
construction, maintenance or operation of any railway;
(d) by a cultivator in agricultural operations carried
on in or near his fields such as the pumping of water for D
irrigation, crushing, milling or treating of the produce of
those fields or chaffcutting.
(e) Energy consumed in light upon supplies made
under the Jania Service Connection Scheme.
E
Explanation.-For the purposes of clause (e) "Jania
Service Connection Scheme" means a scheme approved by
the State Electricity Board for supplying- Energy to Hari-
jans, landless labourers, farmers (hola1Ilg land not exceed-
ing one acre), members of armed forces (whether serving
or retired), war widows and other weaker sections in dis- F
trict notified by the State Government."
Section 4 of the Act read as follows:
"4. Payment of electricity duty and interest thereon.-(!)
The electricity duty shall be paid, in such manner and G
within such period as may be prescribed, to the State
Government.
{a) where the energy is supplied or consumed by a licen-
see,-by the licensee;
H
640 SUPREME COURT REPORTS I1988] Surp. 1 S.C.R.
(b) where the energy is supplied by the State Government
A
or the Central Government or is supplied or consumed by
the Board,-by the appointed authority; and
(c) where the energy is consumed by any other person
from his own source of generation,-by the person generat-
B ing such energy.
(2) Where the amount of electricity duty is not paid
by the State Government within the prescribed period as
aforesaid, the licensee, the Board or other person
mentioned in clause (c) of«ub-section (1), as the case may
be, shall be liable. to pay within such period as may be
c prescribed, interest at the rate of eighteen per cent per
annum on the amount of electricity duty remaining unpaid
until payment thereof is made."
Section 9 of the Act provides as follows:
D
"Exemptions. Nothing in this Act shall apply to any
energy generated by a person for his own use or consump-
tion or to energy generated by a plant having a capacity not
' exceeding two and a haH killowatts."
E M/s. Renusagar Power Company Ltd. had in the meantime
obtained a sanction under section 18 of the Indian Electricity Act,
1910 to engage in the business of supply of electricity to the second
respondent, M/s. Hindustan Aluminium Corporation Ltd. By virtue of
section 2(f) which defines a licensee for the purposes of the Duty Act
to mean any person licensed under Part II of the Indian Electricity
F Act, 1910 and includes any person who has obtained sanction from the
State Government under section 28. Renusagar Power Company Ltd.,
The first respondent herein, was deemed to be a licensee for the
purposes of the U.P. Electricity (Duty) Act. By virtue of section 2(d)
of the Act, M/s. Hindustan Aluminium Corporation Ltd. was a con-
sumer since it was supplied energy by the licensee, M/s. Renusagar
G Power Company Ltd., the first respondent. Thus, the consumption of
electricity by M/s. Hindustan Aluminium Corporation Ltd. under a
contract of sale by the licensee was exigible to duty. In other words,
clause (a) of sub-section (1) of section 3 of the Act, as amended, came
into operation arid a levy of duty would take place on the energy sold,
to a consumer by a licensee. Clause (a) of sub-section (1) of section 4
H as newly added provided that where the energy was supplied by a
STATE OF U.P. v. RENUSAGAR POWER CO. {MUKHARJl, J;J 641
licensee, the licensee would be liable to pay electricity duty. Thus, by
A
virtue of the amended provisions of the Electrieity (Duty) Act, M/s.
Renusagar Power Co. Ltd. the first respondent herein was liable to
pay electricity duty in respect· of its supplies lo M/s. Hindustan
Aluminium Corporation Ltd.
In exercise of the powers conferred by- the Amendment Ordi- B
nance (U.P. Ordinance No. 14 of 1970, the provisions of which were
re-enacted in U.P: Act No. 2 of 1971), the Governor on o.r about 25th
August, 1970 passed an order that with effect from 1st September,
1970 the electricity duty on industrial consumption would be levied at
one paisa per unit. On 28th August, 1970, the Governor ordered in
supersession of all the previous orders that with effect from 1st
September, 1970 electrieity duty on the energy consumed by the con- c
sumers would be levied at the rates specified therein. There was
further notificati9n dated 30th Septembq, 1970, issued in the name of
the Governor modifylng the terrns of the notifications dated 25th
August, 1970 and 28th August, 1970.
D
On or about 4th December, 1952 after the inauguration of the
First Five Year Plan, electricity duty was imposed to gather additional
revenue fot attaining the objectives set out in the plan. The U .P.
Electricity (Duty) Act, 1952 was enacted on 4th December, 1952. On
1st April, 1959 in order to mitigate the hardship which might be caused
to certain industries in the.State, the U.P. Electricity (Duty)'(Amend- E
ment),Ordiflance, 1959 (U.P. Ordinance No. 3 of 1959) was promul-
gated by the Governor of U.P. By the aforesaid Ordinance it was
provided in the first proviso to section 3 of the principal Act that no
duty shall be leviable on the energy consumed by a consumer in a
Scheduled Industry, including Non-ferrous Industries manufacturing
Aluminium like that of respondent No. 2, Hindalco. The aforesaid F
Ordinance was substituted by the U.P. Electricity (Duty) (Amend-
ment) Act, 1959 (U.P. Act No. 12 of 1959). It substituted sub-clause
( e) in the first proviso of section 3 which reads as follows:
"(e) by a consumer in any. Industry engaged in the
manufacture, production, processing or repairs of goods". G
In the year 1959 respondent No. 2 looking to the profitability of
establishing a factory for manufacture of aluminium, set up a plant at
Rennkut, District Mirzapur in the State of U .P. On or about 29th
October, 1959 an agreement was arrived at with the State Government
and the Hindustan Aluminium Corporation Ltd. (Hindalco) for supply H
642 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
A of 55 M.W. electrical power at the rate of 1.997717 paise per unit
inclusive of all charges, duties and taxes of whatever nature on electri-
city for 25 years.
In the year 1962 Hindalco, respondent No. 2, started production
of aluminium. On 14th October, 1964 respondent No. 2 requested the
B State Government to grant sanction to the Renusagar Power Company
Ltd., to supply electricity to respondent No. 2. On 12th November,
1964 respondent No. 1 Renusagar Power Company Ltd. was granted
sanction under section.28 of the Indian Electricity Act, 1910, to engage
in the business of supply of electricity to respondent No. 2 Hindalco.
-There was an'agreement on 29th December, 1967 with Hindalco and
U.P. State Electricity Board to supply 5.5 M.W. and 7.5 M.W. of
C power. The rate of charges along with levy of sales tax, etc. were to be
paid by the consumer. On 1st July, 1970, there was an agreement
between Hindalco and State. Electricity Board to supply 7 .5 M. W. of
power. The rate of charges including levy such as Sales Tax etc. were
to be paid by the consumer. On 5th August, 1970, the U.P. Ordinance
D No. 14 of 1970 was promulgated further to amend the U.P. Electricity
(Duty) Act, 1952 which came into force from 1st September, 1970. By
the aforesaid amendment orovisions of sections 3, 4 and 7 were sub-
stituted by new sections, sections 3A and 9 were omitted and there
were several amendments in various sections of the original Act. As a
result of the promulgation of the Ordinance, electricity duty became
E leviable on the industrial consumptiOn as well as on the energy con-
sumed by any person from his own source of generation. The provi-
sions of section 3 have been set out before. Thereafter notification was
issued on 25th August, 1970 under which rate of electricity duty on the
energy consumed for industrial purposes was presctibed at one paisa
per unit on consumption cif electricity with effect from 1st September,
F 1970. On 1st September, 1970, the provisions of the Ordinance amend-
ing U.P. Electricity (Duty) Act, 1952 came into force. Electricity duty
became leviable on the respondent No. I on the energy supplied to
Hindalco, respondent No. 2 for the industrial purposes. On 28th
September, 1970 respondent No. 2, Hindalco, made an application
under sub-section (4) of section 3 of the Act to the State Government
G to grant exemption on the energy supplied by respondent No. 1 to
respondent No. 2 for industrial purposes. On 17th January, 1971 Ordi-
nance No. 14 of 1970 was substituted by the U.P. Electricity (Duty) /
(Amendment) Act, 1970. On 26th February, 1971 report was made by
the Three-Men Committee appointed to examine the request of
Hindalco for grant of exemption from payment of electricity duty on
H the energy supplied by Renusagar Power Company Ltd. According to
ST~TE OF U,P. v. RENUSAGAR POWER CO. [MUKHARJ!, J.J 643
A
the Committee the burden as a result of the imposition of electricity
duty did not result in substantial or insufferable increase of the rate of
duty for Hindalco. On 27th August, 1971 a demand for payment of
electricity duty amounting to Rs-.59,13,891.80 was raised on respon-
dent No. 1. On 29th March, 1972 applicatiori of respondent No. 2 for
grant of exemption was rejected by the State Government on the B
following reasons:
"(a) That the intention ofthe legislation was clear to with-
draw the exemption from payment of electricity duty on the
industrial consumers with effect from 1.9.1970 the facility
of which was being availed for a period of more than 11
years. c
(b) That the applicant was never given any assurance that
he will be exempted from electricity duty nor the applicant
is entitled for any exemption as a matter of right under the
provisions of the amended Act. D
.
(c) That it was not in public interest io grant them exemp-
tion from electricit}' duty.
(d) That the electricity duty is also being levied on the
Aluminium Industries in other States also. E
(e) That the additional resources are taken into account to
give the final shape of the State Development Plans and
with a view to fulfil the requirement of these Development
Plans the Electricity Duty Act was amended in 1970. The
expected income from this duty is essential for the execu- p
tion of State Government plans.
(f) It ca1mot be inferred that the imposition of
electricity duty will be an unbearable burden on Hindalco,"
Aggrieved by the aforesaid rejection, the respondents filed Writ G
. Petition No. 4521 of 1972 before the High Court of Allahabad. On
17th March, 1973 the State Government granted exemption from pay-
ment of electricity duty on the energy consumed by any person from
his own source of generation. Exemption was also granted on the
energy sold to a consumer establishing a factory having capital invest-
ment upto Rs.25 laks in the backward district for five years. H
644 SUPREME COURT REPORTS (1988] Supp. 1 S.C.R.
A The High Court by its judgment on 17th May, 1974 in the Writ
Petition No. 4521of1972 quashed the order of the State Government
and directed the State Government to reconsider the application of the
respondents for exemption in the light of the observations made in that ·
judgment. On 6th September, 1975 Hindalco submitted an application
again to the State Government for reconsideration of their previous
B application for exemption from payment of electricity duty. In the
meanwhile, the State Government filed a special leave petition to this
Court against the judgment and order of the High Court of Allahabad
dated 17th May, 1974 in Writ Petition No. 4521 of 1972. In the
meantime of 13th November, 1976 an agreement was entered .into,..
between the State Electricity Board and Hindalco for supply of g5 :.
M .W . main supply. The rate fixed was 11 paise per unit inclusive of all\
c taxes of whatever nature on electricity. Special leave petition was,
however, dismissed on 28th March , 1977. In compliance with the High
Court's judgmnet dated 17th May, 1974, on 5th April, 1977 respon-
dents were given an opportunity of hearing by the State Government.
For the purpose of considering the representation and to verify the
D correctness of the data and the profit and loss accounts furnished by
Hindalco in their printed Balance Sheets .the matter was got examined
by Shri B.B. Jindal, Controller of Banking Operations, U.P . State
Electricity Board who submitted his report in 1977. The State Govern-
ment, however, was not satisfied with the report of Shri B.B. Jindal.
On 6th September, 1978 the matter was got re-examined by the Chief
E Electrical Inspector to Government, Uttar Pradesh. He submitted his
report. The Chief Electrical Inspector in his report compared the cost
of power of Hindalco with similar industries in other States. On 5th
December, 1978 Secretary of Power discussed the matter with Dr. R.
Rajagopalan, Chief Advisor (Costs), Government of India. Then a
note was prepared by the SecJ;"etary, Power, Government of U.P. in
F which reference was made to the above report of Chief Electrical
Inspector to the Government of U.P. Thereafter the Chief Secretary .
to the Government of U .P. on 26th December, 1978 wrote a letter to
the Secretary, Ministry of Finance , Government of India, requesting
him that the matter may be got examined by the Chief Advisor
(Costs), Government of India, expeditiously. After examination on
G 29th January, 1979 Dr. R. Rajagopalan, Chief Advisor (Costs),
Government of India, submitted his report that the effect of imposi- ·
tion of electricity duty on the margin of profit available to Hindalco
has been very insignificant. It did not have any adverse effect on the
profitability of H;indalco since such a leV'y has been included in the cost
in fixing the selling prices of Hindalco's products by the Government
H of India. Imposition of electricity duty did not result in reducing the
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHAR.JI, J.] 645
normal profits of Hindalco to either an absolute loss or such a small
A
margin of profit that Hindalco was turned into an uneconomic unit.
According to him the claim of Hindalco for exemption from levy of
electricity duty is not based on justifiable grounds of either low pro
fitability or incapacity of resources with which to pay. Personal hearing
was given to the respondents in view of the directions given by the
Higb Court. Report of Dr. Rajagopalan was made available to the B
respondents. On 28th January, 1980 rate of electricity duty on the
energy consumed for industrial purposes was revised from one paisa to
two .paise per unit applicable from the date of notification, that is,
from 16th February, 1980. There was an agreement on 24th April,
1980 between the State Electricity Board and the Hindalco regarding
85 M.W. main supply and 60 M.W. stand by Emergency Supply. Rate
c
of28.42 paise per unit was fixed. A personal hearing was given to the
respondents in compliance with the directions issued by the High
Court. Respondents were allowed to inspect the report of the Chief
Electrical Inspector and other reports available with the State Govern
ment were shown to them and they submitted their comments on the
report of Dr. Rajagopalan which were duly considered by the State D
Government. A personal hearing was again given to the respondents
to submit their submissions in support of their application for exemp
tion. Respondents were represented by counsel during the course of
hearing. After giving full consideration to the submissions made in the
original and additional representations and the comments dated 23rd
August, 1980 on the report of Dr. Rajagopalan and to the entire E
material placed before the State Government, the State Government
came to the conclusion that the claim for exemption from levy of
electricity duty was not at all justified on any ground whatsoever.
Accordingly the request for exemption was disallowed. On 3rd March,
·
1982 respondent No . 1 was asked to pay Rs.11,96,83,153.80 as the
amount of electricity duty on the energy supplied by it to respondent F
No.. 2 for industrial purposes. Respondent No. 1, however, failed to
pay the aforesaid amount within the stipulated time. On 22nd March,
1982, the District Magistrate, Mirzapur, was requested to recover the
said amount as arrears of land revenue. Being aggrieved by the de
cision of the State Government, the respondent filed a Writ Petition
No. 3921 of 1982 in the High Court of Allahabad and the High Court G
issued stay order directing the petitioners not to take any proceedings
for the recovery of the impugned electricity duty. On 26th September,
1984 the High Court allowed the Writ Petition No. 3921 of 1982 and
nek! tnat tll.e impugned order of the State Government was not main
tainable in law and hence quashed the order of the State Government
as well as the notice of demand dated 3rd March, 1982. The State H
646 SUPREME COURT REPORTS , [1988] Supp. 1 S.C.R.
Government was also directed to consider the request of the res
A
pondents for exemption in accordance with the directions issued by the
Division Bench in Writ Petition No. 4521of1972 and also in the light
of the observations made in the judgment after affording an oppor
tunity of personal hearing to the respondents. Being aggrieved thereby
the appellants have come up in appeal to this Court.
B
In the background of the facts and the circumstances set-out
herein before, we have now to examine the correctness of the judgment
and order of the High Court which is under appeal. There are two
different m1pects. One is whether the Renusagar Power Co. Ltd., was
'own' source of generation of electricity for the Hindalco, in the facts
and circumstances of the case. The second aspect is whether the order
c passed by the State Government, having regard to the nature of the
order passed, was in accordance with the principles of natural justice
insofar as the same were applicable to the facts of this case. As it is
apparent on the state of law mentioned hereinbefore from1952 to1970
no duty was payable if electricity was generated from own source of
D energy. From 1970 to 1973 duty of one paisa was payable in respect of
electricity supplied from own source of generation. However, after
1973 no duty was payable in respect of electricity supplied from own
source of generation.
'Own source of generation is an expression connected with the
E question of lifting .or piercing the corporate veil. It is well-settled that
in interpreting items in statutes whose primary object is to raise
revenue and for which purpose they classify diverse products, articles
and substances, resort should be had not to the scientific and technical
meaning of the terms or expressions used but to the meaning attached
to them by those dealing in them. See the observations of this Court in
F Chiranjit Lal.Anand v. State of Assam & Anr., [1985] Suppl 2 SCR
385.
As mentioned hereinbefore, the application for exemption was
made after disposal of the first writ petition No. 4521/72 by the High
Court on 17th May, 1974. Thereai:ter, the respondent made another
G application for exemption under section 3(4) of the Act. The said
application was ultimately rejected, which rejection was subsequently
challenged. The High Court in the judgment under appeal on 26th
September, 1984 has set aside the order of rejection passed by the
State Government.
H Was the High Court right, is the question involved in this appeal.
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.] 647
Examination of this question involves two aspects, namely, what is the A
rate of duty under which various notifications were applicable to the
energy consumed by Hindalco from Renusagar. Is Renusagar "own
source of generation" of Hindalco within the meanipg of section
3(1)(c) of the Electricity Duty Act, 1952 and the various notifications
issued thereunder. The question whether Renusagar was "own source
of generation" of Hindalco, is a mixed question of law and facts as B
correctly contended by Shri Palkhiwala as well as by Shri Sen appear-
ing..on behalf of the respondents. Shri Palkhiwala appearing for the
respondents submitted before us the historical back.ground of the set-
ting up of Renusagar Power Plant. It was urged that for producing
aluminium by Hindalco, electricity is a raw-material.· The Hindalco
was set up with a capacity of 20,000 tons per annum on the basis of sole
assurance according to the respondent, given by· the State of U .P. that
c
adequate power would be given at a very cheap and economical rate.
The Government of U.P. in 1959 agreed to give 55 m.w. of power@
1. 99 paise per unit. This, according to the respondents, was in accord-
ance with the policy of Central Government and on the basis of the
report of the various Committees set up by the Government. Our D
attention was drawn to certain facts appearing in Vol. A pages 8-9
which set out the averments made in the writ petition filed in the
instant case. It was stated therein that aluminium is an essential raw-
material in a large number of industries of strategic national impor-
tance and its production is of vital public interest. 60% of the produc-
tion of Renusagar goes to the electric industries and an extra 16% of E
the production goes to the utensils manufacturing unit and all the
remaining production goes to defence, ordnance, mint, transportation
and packaging industry. Aluminium is, therefore, a commodity of
national importance and, as such, is mentioned in Schedule 1 of the
Industries (Development and Regulation) Act, 1951 which contains
only such industries which have been declared by the Parliament to be F
of public interest. The Union Government was anxious to set up new
units in private sector as for want of sufficient foreign exchange such
units could not be set up in the public sector. In this connection
reliance was placed on the report of the Industrial Licensing Enquiry
Commitee known as 'Data Committee'. In this background Shri G.D.
Birla who eventually floated the Corporation was prevailed upon to G
explore the possibility of setting up of aluminium plant. The Govern-
ment of India appointed a Committee of Experts headed by Shri
Nagarajarao in the year 1956 for recommending the location of a new
Aluminium Plant.
In that report Shri Nagarajarao recommended Rihand as one of H
648 SUPREME COURT REPORTS [1988) Supp. 1 S.C.R.
A the places for setting up the Aluminium Plant. The U.P. Government
was also keen to have the industry located in the State and persuaded
Shri G.D. Birla to set up the plant with the assurance that sufficient
electricity at constant and concessional rate would be available. Here, I
it was reiterated that the· agreement dated 29th October, 1959 was
entered into called the parallel agreement so that at any time any one
B of the Thermal Power Stations could be maintained independently.
•
Hindalco was allowed to expand its aluminium production capa-
city from time to time on the condition that it would instal its own
power plant subject to the further condition that this power plant
could be taken over by the State at a later date. To avoid take-over
c complications Hindalco decided to set up captive power house through
the instrumentality of Renusagar Power Co., a 100% subsidiary of
· Hindalco fully controlled by Hindalco in all respects to supply power
to Hindalco only. Reference may be made to page 28 of Vol. XVI
which is .a letter dated 13th February, 1963 written by the Deputy
Secretary, Govt. of India, Ministry of Commerce & Industry, to Shri
D D.P. Mandelia of Hindustan Aluminium Corporation, New Delhi,
where on the question of power plant it was suggested that as stated by
Shri Mandelia a separate Company may be formed with the power
plant project and the major portion of the capital subscribed by
Hindalco. It was highlighted that setting up of a power plant project
was part of the scheme for meeting the. needs of Hindalco for
E electricity.
All planning, designing, engineering, purchase of equipments
financing was done by Hindalco exclusively for Renusagar. See Vol.
XVI Pages 20, 33, 49, 58 & 62 of the paper-book.
F The only object and purpose of power plant was to supply power
and suit the requirements of Hindalco. Reference may be made to
pages 36 & 37 of V-01. XVI of the Paper Book. According to Shri
Palkhiwala and Shri B. Sen from the aforesaid background the follow-
ing facts emerge:
G (a) 1967/1968 Unit 1 & 2 of Renusagar went into operation.
(b) Renuagar was set up as part and parcel of Aluminium Ex-
pansion Scheme.
(c) All steps to set up Renusagar including ex!Jansion were taken
H by Hindalco.
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.'J 649
(d) Agency of Renusagar was set up by Hindalco because of
A
Take Over option by the State.
(e) Renusagar is 100% subsidiary of Hindalco.
(f) Borrowings of Renusagar arranged and guaranteed by
Hindalco. B
(g) Renusagar supplies power to Hindalco only.
(h) There is only one transmission line from Renusagar to
Hindalco.
(i) Renusagar generates power only to the extent required by c
Hindalco.
(j) Hindalco has complete control over Renusagar. Hindalco
has undertaken various obligations for the running of Renusa-
gar. D
(k) The· agreement between Renusagat and Hindalco is not a
normal· sale purchase agreement. This agreement shows comp-
lete control of Hindalco over Renusagar.
THE CONDITIONS UNDER THE INDIAN ELECTRICITY E
ACT, 1910 APPLICABLE TO NORMAL SANCTION HOLDERS
AND LICENSEES WERE NOT APPLIED TO RENUSAGAR
BECAUSE !TWAS HINDALCO'S CAPTIVE SOURCE OF GEN-
ERATION. For Instance:
(a) After the incorporation in 1964 Renusagar was granted F
sanction u/s 28 of the Electricity Supply Act, 1910 to supply
power to Hindalco only. See Vol. XVI page 64 of the Paper
Book.
(b) Since Renusagar was not public utility but a captive
plant of Hindalco certain conditions applicable to normal sane- G
tion holders in the nature of public utilities but inapplicable to
Renusagar were deleted from the sanction. See Vol. XVI page
74 of the. Paper Book.
FOR THE PURPOSE OF EXPANSION OF HINDALCO AS
WELL. AS RENUSAGAR THE GOVT. OF INDIA AND THE H
650 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
STATE OF U .P. SPECIFICALLY PROCEEDED ON THE FOOT-
A ING THAT HINDALCO HAD ITS "OWN SOURCE OF
GENERATION" IN RENUSAGAR, SINCE RENUSAGAR WAS
THE CAPTIVE POWER PLANT OF HINDALCO.
(a) Hence, for all practical purposes Renusagar was treated as
.B part and parcel of the Hindalco's expansion programme. In 1962
Hindalco decided to expand capacity to 60,000 tons per annum. This
meant need of extra power. The U .P. Government and the UPSEB
expressed inability to gjve the extra power. The U .P. Govt. had no
objection if Hindalco set up its own power-house with an option to the
U.P. Govt. to take over the power plant later. On this important basis
Hindalco was granted permission to set up captive power plant.
C Reliance was placed in this connection on Vol. XVI, pages 4, 6, 7,.15
and 16 of the Paper Book. Also see sections 34, 36, 37, & 44 of the
Electricity Supply Act, 1910.
(b) Thus Hindalco was allowed to expand its aluminium produc-
D tion on the condition of its setting up its own power plant which was
part and parcel of the expansion scheme. See in this connection Vol.
XVI, pages 22 & 25 of the Paper Book.
(c) When Hindalco decided to expand its aluminium plant again
from 60,000 to 1,20,000 tons per annum, the expansion of the power-
E house was a condition precedent to aluminium expansion. All negotia-
tions, requests for permission, correspondence with authorities, in-
timation from Government were done and received by Hindalco. In
this connection reference may be made to Vol. XVI, pages 129 to 134,
151, 157 & 180 of the Paper Book.
p ( d) Renusagar was allowed expansion limited to power require-
ment of Hindalco for captive µse of Hindalco. See Vol. XVI, pages
145, 159, 161, 185, 187and 189ofthePaperBook.
(e) All Government authorities including Central Govt., State
of U.P. and U.P. State Electricity Board have always treated
G Renusagar to be "Captive Plant" as either "Self Generation" or "Own
generation" or "Own Plant" or "Own Source of generation" or
"Generation for self-use" or "Own use" etc. of Hindalco. In this
connection reference may be made to Vol. XVI, pages 81, 90-91, 112,
135A, 139-140, 146, 150, 152, 160, 163, 167, 169, 172, 183A & 184 of
the Paper Book. It further appears that 100% power-cuts-stoppage
H. of electricity from the State grid-were imposed on those who had
STATE OF U.P. v. RENUSAGAR POWER CO. (MUKHARJI, J.] 651
A
50% or more of their "own source of generation''. Hindalco suffered
100% power cuts pre~isely on this account. It was submitted on behalf
of the respondents ,and in our opinion rightly that the words "own
source of "generation" could not have one meaning for power cuts and
·"· another meaning for concession/exemptions under the same law.
B
It further.appears that the Secretary, Power, U.P. Govt. submit-
ted a note to the Advisory Council for recommending 100% power-
cuts on Hindalco as Hindalco had more than 50% power supply from
its own source of generation i.e. Renusagar. See Vol. XVI, page 163 of
the Paper Book.
Notification under section 22B of the Act as appearing in Vol. c
XIII of the Paper Book was accordingly issued·.
The U.P.S.E.B. served notice on Hindalco to reduce drawal to
zero. See Vol. XVI, page 167 of the Paper Book.
D
The U .P. Government refused exemption from power-cut to
Hindalco on the ground that it had its own source of generation. See
Vol. XVI, page 172.
In Court proceedings Hindalco challenged power-cut. The
Government filed affidavits, always asserting Renusagar to be "own E
source of generation" of Hindalco. See Vol. XXIV, page~ 68 to 75 of
the Paper Book.
Indeed, it appears from the observations of this-Court in State of
U.P. v. Hindustan Aluminium Corpn. Ltd., [1979) 3 SCR 709 that this
Court proceeded on the basis that Renusagar had its own source of F
generation.
It is further said that the appellants have also admitted in the
present proceedings the position that Hindalco had in Renusagar its
ow11 source of generation. Reliance has been placed on:
G
(a) Section 9 of the Duty Act as it existed upto 1970. See Vol.
XVIII, page 5 of the Paper Book.
(b) Three men Committee Report on exemption treated
Renusagar as own generation. See Vol. A page 158 at 163 of the
Paper Book. H
652 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
A (c) The Government of U.P. rejected exemption application.
Vol. A page 3 of the Paper Book.
(d) Counter-affidavit in the first petition. Vol. X, pages 26, 27 &
32 of the Paper Book. ·
B (e) Counter-affidavit in second petition. Vol. XI, pages 93 &
130 of the Paper Book.
. .
(f) See the Judgment of the Allahabad High Court. Vol. A,
pages 7, 10-11, 13 & 19.
(g) Petition of the U.P. Government under Article 138. Vol. XI,
c page 134.
(h) It is also significant to note the special leave petition filed by
the U.P. Government. Reference may be made to Vol. XI,
pages 139 to 141.
D
(i) Reference may be made to Rajagopalan Report, Vol. A
pages 237 & 265 of the Paper Book.
(j) See the affidavit of State of U.P. in Allahabad High Court in ,_
present proceedings. Vol. A, pages 71-72, 76 & 84. ·
E
(k) The High Court's Judgment dated 26.9.84 in the present
proceedings. Vol. B, pages 391-397.
All these factors have to be borne in mind in considering whether
Renusagar was Hindalco's own source of generation. Counsel for the
F respondents drew our attention to the fact that in the manufacture of
aluminium, electrical energy is raw-material and between 16,000 to
20,000 units of energy are required for the production of 1 ton of
aluminium. The impact of the imposition of duty on energy © 1 paise
per unit would he an increase in the cost of production of aluminium
by Rs.160 to Rs.200 per 'ton. The impact of the imposition of duty on
G energy @ 6 paise per unit will be an increase in the cost of aluminium
by Rs.960 to Rs.1,200 per ton.
Hindalco was incorporated in 1959 and its aluminium plant com-
menced production in 1962 with a capacity of 20,000 tons of aluminium.
ingots p.a. Hindalco obtained electrical energy required for the
H manufacture of aluminium to the extent of 55 MW from the State/
. STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.I 653
A
Board Hydle power under an agreement dated 29. 10.59 @ 1.997717
paise per unit inclusive of all charges, duties and taxes of whatever
nature on electricity. Hindalco's plant was located at Renukut because
of their assurances for power supply at economical rates.
The first expansion of Hindalco from 20,000 to 60,000 tons p.a. B
required further electricity. According to the respondent the basic
planning of the power plant at Renusagar, the arrangement for its
design, engineering, purchase and for importing the plant and for
financing the whole project were done by Hindalco.
Renusagar, which is a 100% subsidiary of Hindalco, wholly
owned and controlled by Hindalco, was incorporated in March 1964. c
Hindalco established the power plant through the agency of Renusagar
in order to avoid complications in the case of a take over of the power
plant by the State/Board of which there could be a possibility as power
generation is generally not permitted in normal conditions in private
sector. D
In this background what was highlighted on behalf of the res-
pondent was that the sanction under section 28 of the 1910 Act given to
Renusagar and its amendment established that Renusagar was not a
normal type of sanction under section 23 of the 1910 Act as the holder
could supply power only to Hindalco. E
The first generating unit in Renusagar commenced on 9.9.67 and
the second one commenced on 5.10.68. All steps for the expansion of
the power in Renusagar so as to match the power requirement of
Hindalco's expansion were taken by Hindalco even though Renusagar
had been incorporated. Applications for all the necessary sanctions F
.and permissions were made by Hindalco.
Permissions aild sanctions were first intimated to Hindalco even
though Renusagar was in existence. See Vol: XVI, pages 129-134 &
149 of the Paper Book. Changes in the sanctions and/or permissions
granted were obtained by Hindalco and not by Reizusagar. See Vol. G
XVI, pages 157, 180 of the. Paper Book. The expansion of the power
plant in Renusagar was to exactly match the requirements of Hindalco
for the production of aluminium. The expansion of the power plant in
Renusagar was part and parcel of the expansion of the aluminium
plant of Hindalco. See Vol. XVI, pages 145, 159, 161, 185, 187 & 189
of the Paper Book. H
654 SUPREME ,COURT REPORTS I1988] Supp. 1 S.C.R.
The third generation unit in Renusagar commenced in Novem-
A
ber 1981 and the fourth generating unit in April 1983. Hindalco c9n-
sumes about 255 MW power out of which 250 MW comes from
Renusagar and 5 MW by way of main supply and 15 MW by way of
emergency supply is made by the Board.
B It was emphasised on behalf of Hindalco that the power plants at
Renusagar were set up as part and parcel of the aluminium expansion
scheme of Hindalco and the only object and purpose of the power
plants in Renusagar was to supply power to suit the needs of Hindalco.
All steps to set up the power plant in Renusagar and its further
expansion were taken by Hindalco. The power plant was set up by
c Hindalco through the agency of Renusagar (100% subsidiary and
wholly owned and controlled by Hindalco) to avoid complicdtions in
the event of take over by the State/Board.
All the borrowings of Renusagar were arranged and guaranteed
D by Hindalco. Further, there is only one transmission line going out of
Renusagar and the same goes to Hindalco. Renusagar can supply
power only to Hindalco. Renusagar generates power only to the extent
required by Hindalco. Hindalco has complete control over Renusagar
iucluding its day-to-day operations. This will be evident from the
applications with regard to running of Renusagar Power Plant Statiop
E undertaken by Hindalco to the Board. See Vol. XV, pages 104, 118,
124 of the Paper Book.
The agreement between Renusagar and Hindalco indicates this
was not a normal sale-purchase agreement between two independent
persons at arms length. The price of electricity is determined according
F to the cash needs of Renusagar. This covenant also shows complete
control of Hindalco over Renusagar.
":''-t ..
It was submitted before us that if looked at. properly, Renusagar
was Hindalco's own source of generation and according to the res-
pondent an analysis of the different provisions of the Amendment Act,
G makes the position clear. Submissions were made on the construction
of section 3 of the Act and also that the difference in language of
section 2(g)(c) and old section 9 is significant. Ambit of section 3(1)(c)
is wider than the old section in view of the addition of the words
'source of generation' which must be given their full meaning. We have
set-out hereinbefore the provisions of sections 3(1)(c) and 9 of the
H Act. Rule 2(g) referred to "irrthe order shows that the expression 'any
STATE OF U.P. v. RENUSAGAR POWER CO. IMUKHARJI, J.] 655
person' in.section 3'1)(c) would mean a person other than licensee or a
A
Board who consumes energy from his own source of generation.
Hindalco fixes in the expression 'any other person' under section
3(l)(c) and it consumes energy from its own source of generation.
Generation being done by Renusagar, it was pointed out that Rule 2(g)
of the U.P. Electricity Duty Rules, 1952 supports this plea of the
respondents. It should be borne in mind that the expression 'own B
source of generation' which has not been defined in the Duty Act or
1910 Act, cannot be regarded as a term of art.
The various documents and letters placed before the Court and
referred to hereinbefore indicate that all persons and authorities deal-
ing and conversant with this matter had consistently treated Renusagar
as own source of generation of Hindalco. In the power-cuts matter
c
under section 22B of 1910 Act, 100% cut was imposed on Hindalco on
the footing that it has its own source of generation. Ali the authorities
including the State and the Board have all along treated Renusagar as
own source of generation of Hindalco. The High Court as well as this
Court had proceeded on that basis. In a note with the Advisory D
Counsel dated 31.5. 77 the Secretary, Power Deptt. ·of the State Govt.
treated Rennsagar as own source of generation of Hindalco.
In the proceedings under the Electricity Duty act itself, it was
the case of the State that Renusagar generation was by Hindalco for its
own use within the meaning of section 9 of the Duty Act. It was also E
the case of the State that Renusagar was own source of generation of
Hindalco and since by its amendment in 1952 the Legislature had
shown an intention to levy duty on own source of generation, Hindalco
was not entitled to exemption. It was, therefore, submitted that
Renusagar must-be regarded as alter ego of Hindalco i.e., own source
of generation of Hindalco within the meaning of section 3(1)(c) of the F
Duty Act.
The word "own" is a generic term, embracing within itself
several gradations of title, dependent on the circumstances, and it does
not necessarily mean ownership in fee simple; it means, "to possess to
have or hold as property". See Black's Law Dictionary, 5th Edn. p. G
996. It was further submitted that by the 1970 Amendment Act, the
Legislature intended to cover a wide area under section 3(l)(c) than
under the old section 9. If Renusagar is the own source of generation
of Hindalco then the consumption clearly falls within section 3(1)(c).
The three clauses of section 3(1), it was submitted, had to be read
together by way of harmonious construction. Section 3(1)(a) should H
656 SUPREME COURT REPORTS I19881 Supp. 1 S.C.R.
A not be so construed as to defeat the aim of section 3(1)(c). In the case
of harmonious construction what needs to be looked at, is the domin-
ant or the primary element in the provisions. Thus section 3(1)(c)
should I]Ot be interpreted to cover all the cases of own generation
notwithstanding the fact that a sale may be involved and to that extent
the transaction should be excluded from the operation of section
B 3(l)(a). Alternatively, it was submitted that if the three clauses were
to be treated as independent of each other then the result of construe~
tion that each provision would yield to special provisions applied
should be applied as a part and parcel of hannonious construction of
this section.
C In this approach clause (c) of section 3( l) ought to be regarded as
dealing with the special situation, namely, a person consuming from its
own source of generation while provisions of clause (a) of section 3(1)
should be regarded as general provisions dealing with the cases of sale
and consumption generally. The aforesaid construction would be in
harmony, it was urged, with the object and purpose of the legislation.
D Reliance was placed on the observations of this Court in J. K. Cotton
Spinning & Weaving Mills Co. Ltd. v. State of U.P. & Ors., [1961] 3
SCR 185, where at page 193 this Court insisted on hannonious con-
struction and not on literal construction. Also see Mis Girdhari Lal &
Sons v. Balbir Nath Mathur & Ors., [1986] 2 SCC 237 at 241 & 246;
State of Tamil Nadu v. Kodaikanal Motor Union (P) Ltd., [1986] 3
E SCC 91 at 100 and D. Sanjeevayya v. Election Tribunal, A.P. & Ors.,
[ 1967] 2 SCR 489 at 492.
On behalf of the respondents and in support of their contention,
it "'.as urged that the hannonious construction would advance purpose
and object of the legislation inasmuch as it was clearly one of the
F purposes of the legislation to treat captive generation or self-genera-
tion as a separate category and to confer benefits on the same in public
interest. Our attention was drawn to the notification dated 17th March,
1973 which appears at Vol. XVIII, page 34. It was further contended
on behalf of the respondents that interpretation of section 3(l)(c) of
the Act would not depend on the manner in which a person might
G choose to organise his affairs. Further that there was no rational dis-
tinction having a nexus with the object of ihe Duty Act, where a
person generating electrical energy himself was consuming the same
and a person who engaged another person t.o generate electrical
energy exclusively for and on behalf of his complete control and who
consumes all the electrical energy so <reneratcd. Accordingly it was
Fl urged that such a distinction being arbitrary ;rnd irrational, it would be
STATE OF U.P. v. RENUSAGAR POWER CO. (MUKHARJI, J.] 657
violative of Article 14 of the Constitution. Hence, it was contended
A
that a construction of the Duty Act, which would make such a distinc
tion, must be avoided.
This naturally brings us to the question of lifting the corporate
veil or piercing the corporate veil as we often call it. On behalf of the
appellants, however, it was very strongly urged that in this case there B
was no ground for lifting the corporate veil and Shri Trivedi, learned
Additional Advocate-General, State of U .P., who was assisted by Shti
Gopal Subramaniam, submitted before us elaborate argument� and
made available to us all the relevant documents, urged that there was
no warrant either in law o; in fact to lift the corporate veil and to treat
Renusagar's plant as Hindalco's own source of generation. Shri
c
Trivedi urged that facts in this case do not justify such a construction
and the law does not warrant such an approach. We may say that Shri
Trivedi mainly relied on the proposition that normally the Court has
disregarded the separate legal entity of a Company only where the
Company was formed or used to facilitate evasion of legal obligations.
He referred us to the observations of this Court in Western Coalfields D
Ltd. v. Special Area Development Authority, Korba & Anr., [1982] 2
SCR 1 at 17. The facts of that case were, however, entirely different
and it is useless to refer to them but at page 17 of the report,
Chandrachud, C.J. speaking· for the Court quoted the observations in
Andhra Pradesh State Road Transport Corpn. v. The I. T.O. & Anr.,
I 1964 I 7 SCR 17, where this Court had held that though the Transport E
Corporation was wholly controlled by the State Government it had a
separate entity and its income was not the income of the State Govern
ment. While delivering the Judgment in that case Gajendragadkar,
C.J., referred to the observations of Lord Denning in Tamlin v.
Hannaford, [1950] KB 18 where Lord Denning had oblierved that the
Crown and the corporation were different and the servants of the F
corporation were not civil servants.
Chandrachud, C.J., relied ort the aforesaid observations and re
ferred to P'enningtoii's Company Law 4th Edn., pages 50-51, where it
was stat�d that there were only two cases where the Court had dis
regarded the separate legal entity of a Company and that was done G
because the company was formed or used to facilitate the evasion of
legal obligations.
1'he \earned editor of Penningtori1s Company Law, 5th Edn., at
page 49 has recognised that this principle has been relaxed in subse
quent cases. He states that the principle of company's separate legal H
658 SUPREME COURT REPORTS · 119881 Supp. 1 S.C.R.
entity has on the whole been fully applied by the Courts since Salo-
A
mon's case. Corporate veil has been lifted where the principal question
before the court was one of company law, and in some situations
where the corporate personality of the company involved was really of
secondary importance and the application of the old principle has ..,.,
worked hardship and injustice. In England, there have been only a few
B cases where the ·court had disregarded the company's corporate entity
and paid attention to where the real control and beneficial ownership
of the company's undertaking lay. When it had done this, the court
had relied eitheron a principle of public policy, or on the principle that
devices vsed to perpetrate frauds or evade otiligations will be treated
as nullities, or on a presumption of agency or trusteeship which at first
sight Salomon's case seems to prohibit. Again at page 36 of the same
c Book, the learned author notes a few cases where the courts have
disregarded separate. legal entity of a comp~ny and investigated the
personal qualities of the shareholders or the' persons in control of it
because there were overriding. public interests to be served by doing
so.
D
Indubitably, in this case there was no qu~stion of evasion of taxes
but the manner of treatment of the power plant of Renusagar as the
power plant of Hindalco and the Government taking full advantage of
the same in the case of power cuts and denial of supply of 100% power
to Hindalco, in our opinion, underline the facts and, as such, imply
E acceptance and waiver of the position that Renusagar was a power
plant owned by Hindalco. Shri Trivedi natually relied on several de-
cisions which we shall briefly note in aid of the submission that
Renusagar's power plant could not be treated as Hindalco's power
plant. He referred us to the well-known case of Aron Salomon v. A.
Salomon & Co. Ltd., [18971 AC 22 at 27, 30131, 43. 56 to emphasise
F the distinction between the shareholders and the company. This point
of view was emphasised by this Court also in which Chandrachud, CJ.,
relied on Western Coalfields Ltd. in Rustom Cavasjee Cooperv. Union
of India, [19701 3 SCR 530 at 555, where ,this Court held that a
Company registered under the Companies Act was a legal person,
separate and distinct from its individual members. Property of the
G Company was not the property of the shareholders. These proposi-
tions, in our opinion, do not have any application to the facts of the
instant case. Shri Trivedi also drew out attention to the Bank Voor
Handel En Scheepvaart N. V. v. Stalford, [1953'] 1 QB 248, where in the
context of the international law property belonging to or held on
behalf of a Hungarian national came up for consideration and the
H distinction between a shareholder and a company was emphasised
and highlighted.
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.J 659
In Kodak Ltd. v. Clark, [1903] 1 KB 505, the Court of Appeal in
A
England while dealing with an English company carrying on business
in the U.K. owned 98% of t)le shares in aforeign company, which gave
it a preponderating influence in t.he control, erection of•directors etc.,
of the foreign company. The remaining shares in the foreign company
were, however, held by independent persons, and there was no
evidence that the El\glish company had ever attempted to control or B
interfere with the management of the foreign company, or had any
power to do so otherwise than by voting as shareholders. It was held
that the foreign company was not carried on by the English company,
nor was it the agent of the English company, and that the English
company was not, therefore, assessable to income tax. Renusagar was
not the alter ego of Hindalco, it was submitted. On, the other hand C
these English cases have often pierced the veil to serVe the real aim of
the parties and for public purposes. See in this connection the observa-
tions of the Court of Appeal in DHN Food Distributors Ltd. & Ors v.
London Borough of Tower Hamlets, [1976] 3 AER 462. It is not neces-
sary to take into account the facts of that case. We may, however, note
that in that case the corporate veil was lifted to confer benefit upon a D
group of companies under the provisions of the Land Compensation
Act, 1961 of England. Lord Denning at page 467 of the report has
made certain interesting observations which are worth repeating in the
context of the instant case. The Master of the Rolls said at page 467 as
follows:
E
"Third, lifting the corporate veil. A further very interesting
point was raised by counsel for the claimants on company
law. We all know that in many respects a group of com-
panies is treated together for the purpose of general
accounts, balance sheet and profit and loss account. They
are treated ~s one concern. Professor Gower in his book on F
company law says: 'there is evidence of a general tendency
to ignore the separate legal entities of various companies
within a group, and to look instead at the economic entity
of the whole group'. This is especially the case when a
parent company owns all the shares of the subsidiaries, so
much so that it can control every movement of the sub- G
sidiaries. These subsidiaries are bound hand and foot to the
parent company and must do just what the parent company
says. A striking instance is the dP,cision of the House of
Lords in Harold Holdworih & Co. (Wakefield) Ltd v. Cad'
dies. So here. This group is virtually the same as a partner-
ship in which all the three companies are partners. They H
660 SUPREME COURT REPORTS [1988) Supp. 1 S.C.R.
A should not be treated separately so as to be defeated on a
technical point. They should not be deprived of the com-
pensation which should justly be payable for disturbance.
The three companies should, for present purposes, be
treated as one, and the parent company, DHN, should be
treated as that one. So that DHN are entitled to claim com-
B pensation accordingly. It was not necessary for them to go
through a conveyancing device to get it.
I realise that the President of the Lands Tribunal, in view
of previous cases, felt it necessary to decide as he did. But
now that the matter has been fully discussed in this court,
we must decide differently from him. These companies as a
c group are entitled to compensation not only for the value
of the land, but also compensation for disturbance. I would
allow the appeal accordingly."
Lord Justice Goff proceeded with caution and observed as fol-
D lows at pages 468 & 469 of the report:
"Secondly, on the footing that that is not in itself
sufficient, still, in my judgment. this is a case in which one is
entitled to look at the realities of the situation and to pierce
the corporate veil. I wish to safeguard myself by saying that
E so far as this ground is concerned, I am relying on the facts
of this particular case. I would not at this juncture accept
that in every case where one has a group of companies one
is entitled to pierce the veil, but in this case the two sub-
sidiaries were both wholly owned; further, they had no
separate business operations whatsoever; thirdly, in my
F judgment, the nature of the question involved is highly
relevant, namely whether the owners of this business have
been disturbed in their possession and enjoyment of it. I
find support for this view in a nuinber of cases, from which
I would make a few brief citations, first from Harold Hold-
worth & Co (Wakefield) Ltd. v. Caddies where LorJ Reid
G said: ..._
'It was argued that the subsidiary companies were separate
legal entities, each under the control ofits own board of
directors, that in law the board of the appellant company
could not assign any duties to anyone in relation to the
H management of the subsidiary companies, and that, there-
STATE OF U.P. v. RENUSAGAR POWER CO. (MUKHARJI, J.J ·661
fore, the agreement cannot be construed as entitling them A
to assign any such duties to the respon.dent. My Lords, in
my judgment, this is too technical an argument. This is an
agreement in re mercatoria, and it must be construed in the
light of the facts and realities of.the situation_.. The appel-
lant company owned the whole share capital of British Tex-
tile Mfg., Co. and, unde.r tl]~ agreem~nt of 19'\7, the B
directors of this company were to be the nominees of the
appellant 'company. So, in fact, the appellant company
could control the internal management of their subsidiary
companies, and, in the unlikely event of there being any
difficulty, it was only necessary to go through form.al pro-
. cedure in order to make the decision of the appellant com- C
pany's board fully effective.
That particular passage is, I think, especially cogent
having regard to the fact that counsel for the local authority
was constrained to admit that in this case, if they had
thought of it soon enough, DHN could, as it were, by mov- D
ing the pieces on their chess board, have put themselves in
a position i.n which t.he questi<;>n wo.ul.d J:i~ve been wholly
unarguable.
lalso refer to Scottish Co-operative Wholesa(e society
Ltd. v. Meyer. That was a case under s. 210·of the Com- E
panies Act, 1948 and Viscount Simonds said:
'I do not think that my own views could be stated
better than in the late Lord President Cooper's words on
the first hearing of this case. He said: "In my view, the
section warrants the court in looking at the 'business F
realities of a situation and does not confine thent to a nar-
row legalistic view."
My third citation is from the judgment ofD.anckwerts
LJ in Merchandise rransport Ltd. v. British' Transport
Commission where he said that the cases:.... G
'Show thafwherethe character of a company, or the
nature of the persons who control it, is a relevant fea.ture
the court will go behind the mere status· of the company as a
l.egal <ontity, and will consider who are the p_e_r~oµs as shar.~
sholders or even as agents who dir.t;ct. anfi' c_ontwl. the 1:1;
662 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
activities of a company which is incapable of doing any-
A
thing without human assisiance.'
The third ground, which I place last because it is
longest, but perhaps ought to come first, is that in my judg-
ment, in truth, DHN were the equitable owners of the
B property. In order to resolve this· matter, it will be neces-
sary for me to refer in some detail to the facts."
Shaw L.J. also observed at page 473 as follows:
"Even if this were not right, there is the further argu-
ment advanced on behalf of the claimants that there was so
c complete an identity of the different companies comprised
in the so-called group that they ought to be regared for this
purpose as a single entity. The completeness of that
identity manifested itself in various ways. The directors of
DHN were the same as the directors of Bronze; the share-
D holders of Bronze were the same as in DHN. the parent
company, and they had a common interest in maintaining
on the property concerned the business of the group. If
anything were necessary to reinforce the complete identity
of commercial interest and personality. cl. 6, to which I
have referred already, demonstrates it, for DHN under-
E took the obligation to procure their subsidiary company to
make the payment which the bank required to be made.
If each member of the group is regarded as a com-
pany in isolation, nobody at all could have claimed com-
pensation in a case which plainly calls for it. Bronze would
F have had the land but no business to disturb; DHN would
have had the business but no interest in the land."
In this connection it would be useful to refer to Harold
Holdsworth & Co. (Wakefield), Ltd. v. Caddies, [1955] 1 All E.R. 725,
where Lord Morton of Henryton in England, at page 734 of the report
G observed as follows:
"My Lords, this clause refers to a group of companies con-
sisting of the appellant company and their existing subsi-
diary companies. I cannot read the clause as compelling the
board to assign duties to the respondent in relation to the
H business of every company in the group. Nor can I read it as
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI. J.I 663
compelling the board to assign him duties in relation to the
A
business of the appellant company. That business is not
treated as being on a different footing from the business of
British Textile or of another subsidiary of the appellant
company, Whalley & Appleyard. Ltd., which is mentioned
in the respondent's condescendence 3. As I read the clause,
it leaves the board of the appellant company free to assign B
to the respondent duties in relation to the business of one
only, or two only or all of the companies in the group, and
to vary the assignment and the duties from time to time.
Further, I think the clause leaves the board free to appoint
another person to be "a managing director", and to divide
the duties and powers referred to in the clause between the
respondent and the other managing director in such man-
c
I
ner as they think fit. It is true that each company in the
group is, in law, a separate entity, the business whereof is
to be carried on by its own directors and managing
director, if any; but there is no doubt that the appellant
company, by taking any necessary formal steps, could D
make any arrangements they pleased in regard to the man-
agement of the business of (for instance) British Textile.
They owned all the issued capital and the directors were
their nominees."
Lord Reid at pages 737-738 observed as follows: E
"It was argued that the subsidiary companies were separate
legal entities, each under the control of its own board of
directors, that iri law the board of the appellant company
could not assign any duties to any one in re!~tion to the
management of the subsidiary companies, and that, there- F
fore, the agreement cannot be construed as entitling them
to assign any such duties to the respondent.
· My Lords, in my judgment, this is too technical an
argument. This is an agreement ih re mercatoria, and it
must be construed in the light of the facts and realities of G
the situation. The appellant company owned the whole
share capital of British Textile Manufacturing Co., and,
under the agreement of 1947, the directors of this company
were to be the nominees of the appellant company. So, in
fact, the appellant company could control the internal man-
agement of their subsidiary companies, and, in the unlikely H
664 SUPREME CQURT REPORTS I1988] Supp. 1 S.C.R.
event of there being any difficulty, it was only necessary to
A
go through fQnnal proced.ure in order to make the de<;ision
of the appellant compa.n{s boardfully effective."
Ou~ attention was drawn by Shri Sen to Scottish Co-operative
Wholesale Society Ltd. v. Meyer andAnr., [1958] 3 All E.R. 66, where
B Viscount Sil'\\ln<:I.s of House of 1-,or(is observec;l at p~g~s 7 L 72 as
follows: ·
"My Lords, it may be that the.acts of the society of which
co.inplaint is made could not be regarded as cqrn;luc.t of the
aff.ai.rs of the company if the so~iety and the company were
bodies wholly independent of each other, competitors in
c the rayon market, and using against each 0th.er such
methods of trade warfare as custom. permitted. B,.t this is
to pursue a false anaiogy. It is not possible to separate the
transactions of the society from those of the company.
Evezy step taken by the latter was determined by the policy
D of the former.. I will give an example of this. I observed
t.hat,.in the C().urse. of the argumel)t before the House, it. was.
suggested· that the company had: only itself to blame: i{,
through: its. negl.ect to get a contract with. the soci.ety, it
faileq· in a crisis. to obtain from the. Falkland Mill the supply
of cloth that is needed. The short answer is that it w.as the
E policy.o.f the society that the affairs of the company should
be so conducted, and the minority shareholders were con-
t.e.nt that it. should be so. they relied-how unwisely the
event proved-on the good faith of the society, and in any
case. I.hey were impotent to impose t})eir own views. It is
just because t)le. society could l!ot only use the ordinary and
i:'· l~gitimate: >yeapons on commercial warfare. but could also
co~trol from within the operations of the company that it is
ill~g~ti~at~ tQ regard the conduct of the company's affairs
as a ma(ter f()r which it had no responsibility. After much
consid~ration of this question, I do not think that my own
views c.ould be stated better than in the late Lord Pre-
G. sid<tQt, Lord Cooper's words on the first hearing 0 f this
case. l;It< saio ( 1954 SC at I?· 39 I);
''In tnY vi!-{w~ the.section.w~r-rants the cou_rt,in.IQQ~ing
at the qusint<SS realiti«s qf. a. situation aqd:does:nQt> CQnfinc.:
them to a !)arrow l~galistic view. The trutli is that;.
w.'1ene_ver a· subsidiary. is fo!J11ed. as in tl:lis case. with au
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.] 665
independent minority of shareholders, the parent company
A
must, if it is engaged in the same class of business, .accept as
a result of having formed such a subsidiary an obligation so
to conduct what are in a sense its own affairs as to deal
fairly with its subsidiary."
At the opposite pole to this standard may be put the con- B
duct of a parent company which says "our subsidiary com-
pany has served its purpose, which is our purpose. ·;I'here-
fore Jet it die" and, having thus pronou~ced sentence, is
able to enforce it and does enforce it .not only hy attack
from without but also by support from within. If ,this sec-
tion is inept to cover such a case, it will be a dead ·letter
indeed. I have expressed myself strongly in this case c
because it appears to me to be a glaring example of pre-
cisely the evil which Parliament intended to remedy."
Similarly. at page 84 of the report, Lord Keith's observations are
also relevant to the facts of this case. D
"My Lords, if the society could be regarded as an organisa-
tion independent of the company and in competition with
it, no legal objection could be taken to the actions and
policy of the society. Lord Carmon! pointed this out in the
Court of Session. But that is not the position. In law, the E
society and the company were, it is true, separate legal
entities. But they were in the relation of parent and sub-
sidiary companies, the company being formed to .run a
business for the society which the society . could not at the
outset have done for itself unless it could have persuaded
the respondents to become servants of the society. This the F
respondents were not prepared to do. The company,
through the knowledge, the experience, the connexions,
the business ability and the energies of the respondents,
had built up a valuable goodwill in which the society shared
and which there is no reason to think \vould not have been
maintained, if not increased, with the co-operation of the G
society. The company was in substance, though not in law,
a partnership consisting of the society and the respondents.
- Whatever may be the other different legal consequences
following on one or other of these forms of combination
one result, in my opinion, followed in the present case from
the method adopted, which is common to partnership,.that H
666 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
there should be the utmost good faith between the constitu-
A
tent members. In partnership the position is clear. As
stated in Lindley on Partnership (11th Edn.) p. 401:
"A partner cannot, without the consent of his co-partners,
lawfully carry on for his own benefit, either openly or
8 secretly, any business in rivalry with the firm to which he
belongs."
It may not be possible for the legal remedies that would
follow in the case of a partnership to follow here, but the
principle has, I think, valuable application to the circumst-
ances of this case."
c
In Charterbridge Corpn. Ltd. v. Lloyds Bank Ltd. & Anr. [1969]
2 All E.R. 1185 at page 1194 Justice Pennycuick emphasised that the
reality of the situation must be looked in.
D Shri Trivedi drew out attention to the decision in Marshall
Richards Machine Co. "Ltd. v. Jewitt (H.M. Inspector of Taxes) 36 TC
511, where at page 525 of the report Lord Upjohn, J. observed that
where you have a wholly-owned subsidiary, and both the parent com-
pany and wholly-owned subsidiary enter into trading relationships,
there is, of course, a dual relation, but you cannot for the purposes of
E tax disregard the fact that there are, in fact, two entities and two
trades, that is to say, the trade of each company. It is normally a
question of fact whether the disbursement in question is laid out
wholly and exclusively and for the purposes of the trade. In aid of this
proposition and in furtherance Shri Trivedi drew our attention to the
profits of the two companies which were separately computed and also
F referred to Vol. C, 641 where the profits of Renusagar were separately
indicated and Vol. C at page 642 where the profits of Hindalco were
separately indicated.
We are, however, of the opinion that these tests are not con-
clusive tests by themselves. Our attention was also drawn to the deci-
G sion of the Madras High Court in M/s. Spencer & Co. Ltd., Madras v.
The Commissioner of Wealth Tax, AIR 1969 Madras 359, where Vee-
raswami J. held that merely because a company purchases almost the
entirety of the shares in another company, there was no extinction of
corporate character for each company was a separate juristic entity for
tax purposes. Almost on similar facts, are the observations of P.B.
H Mukharji, J. in Turner Morrison & Co. Ltd. v. Hungerford Investment
STATE OF U.P. v. RENUSAGAR POWER CO. IMUKHARJI, J.] 667
Trust Ltd., AIR 1969 Cal. 238 where he held that holding company
A
and subsidiaries are incorporated companies and in this context each
has a separate legal entity. Each has a separate corporate veil but that
.. does not mean that holding company and the subsidiary company
within it, all constitute one company.
Mr Justice 0. Chinnappa Reddy speaking for this Court in Life B
Insurance Corpn of India v. Escorts Ltd. & Ors., [1985] Suppl 3 SCR
909 had emphasized that the corporate veil should be lifted where the
··I associated companies are inextricably connected as to be, in reality,
part of one concern. It is neither necessary nor desirable to enumerate
the classes of cases where lifting the veil is permissible, since that must
necessarily depend on the relevant statutory or other provisions, the
object sought to be achieved, the impugned conduct, the involvement c
of the element of the public interest, the effect on parties who may be
...f! affected. After referring to several English and Indian cases, this
Court observed that eversince A. Salomon & Co. Ltd's case (supra), a
company has a legal independent existence distinct from individual
members. It has since been held that the corporate veil may be lifted D
and corporate personality may be looked in. Reference was made to
Pennington and Palmer's Company Laws.
It is hightime to reiterate that in the expanding of horizon of
modern jurisprudence, lifting of corporate veil is permissible. Its
frontiers are unlimited. It must, however, depend primarily on the E
realities of the situation. The aim of the legislation is to do justice to all·
the parties. The horizon of the doctrine of lifting of corporate veil is
expanding. Here, indubitably, we are of the opinion that it is correct
-" that Renusagar was brought into existence by Hindalco in order to
fulfil the condition of industrial licence of Hindalco through produc-
tion of aluminium. It is also manifest from the facts that the model of F
the setting up of power station through the agency of Renusagar was
adopted by Hindalco to avoid complications in case of take over of the
power station by the State or the Electricity Board. As the facts make
it abundantly clear that all the steps for establishing and expanding the
~·
power station were taken by Hindalco, Renusagar is wholly-owned
subsidiary of Hindalco and is completely controlled by Hindalco. Even G
the day-to-day affairs of Renusagar are controlled by Hindalco.
Renusagar has at no point of time indicated any independent volition.
Whenever felt necessary, the State or the Board have themselves lifted
. the corporate veil and have treated Renusagar and Hindalco as one
concern and the generation in Renusagar as the own source of genera-
tion of Hindalco. In the impugned order of the profits of Renusagar H
i\\'
:~~
668 SUPREME COURT REPORTS [19881 Supp. 1 S.C.R.
A have been treated as the profits of Hindalco.
In the aforesaid view of the matter we are of the opinion that the
corporate veii -should be lifted and Hindalco and Renusagar· be treated
as one conce_m and Renusagar's power plant must be treated as the
to
:own source of generation of Hindalco and should be -liable duty on
B that basis. In the premises the consumption of such energy by Hindalco
will fall under section 3(1)(c) of .the Act. The learned Additional
Advocate-General for the State relied. on several decisions, some of
which have been noted. •
The veil on corporate personality even though not lifted some-
times, is becoming more and more transparent in modem Company
C jurisprudence. The ghost of Salomon's case still visits frequently the
hounds of Company Law but the veil has been pierced in many cases.
Some of these have been noted by Justice P.B. Mukharji in the New
Jurisprudence. (Tagore Law Lecture 183).
D It appears to us; however, that as mentioned the concept of
lifting the corporate veil is a changing concept and is of expanding
horizons. We think that the appellant was in error in not treating
Renusagar's power plant as the power plant of Hindalco and not treat-
ing -it as the own source of energy. The respondent is liable to duty on
Ui_e same and on that, footing alone; this is evident in view of the
E principles enunciated and the doctrine now established by way of deci-
sion of this Court in Life Insurance Corpn of India, (supra) that in the
facts of this case sections 3(l)(c) and 4(1)(c) of the Act are to be
ipterpreted accordingly. The person generating and consuming energy
were the same and the corporate veil should be lifted. In the facts of
this case Hindalco and Renusagar were inextricably linked up
F together. Renusagar had in reality no separate and independent exist-
ence apart from and independent of Hindalco.
In the aforesaid view of the matter we are of the opinion that
consumption of energy by Hindalco is clearly consumption by Hinda-
lco from its own source of generation. Therefore, the rates of duty
G applicable to own source of generation .have to be applied to such
consumption, that is to say. I paisa per unit for the first two generating
sets and nil rate in respect of 3rd and 4th generating sets. It is
-
appropriate to refer that having regard to the conduct of the State \he
power:cuts matter and also the present proceedings the State should
riot be permitted to treat consumption of Renusagar's energy by
H Hindalco as anything other than different from consumption of energy
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.J 669
by Hindalco from its own source of generation. We are, therefore, of
A
the opinion that in the facts of this case the corporate veil must be
lifted. and Hindalco and Renusagar should be treated as one concern
and if that is taken the consumption of energy by Hindalco must be
regarded as consumption by Hindalco from its own source of genera-
tion.
Inasmuch as the High Court upheld this contention of the
respondent we are in respectful agreement of its views and the appeal
directed against this finding of the High Court must, therefore, be
rejected.
The, electricity biJI for arrears, subject to consideration of other
aspects of the matter, that is to say, the validity of the order of rejec-
c
tion passed by the State on 16th February, 1982 rejecting the claim for
exemption would be treated hereinafter.
In order to appreciate the second aspect of the matter, that is to
say, the challenge to the order which has been quashed by the High D
Court, it is necessary to recapitulate certain facts. Hindalco made an
application to the State Government under section 3( 4) of the Act for
exemption on 28th September, 1970. In spite of repeated requests
made by Hindalco the State did not take any decision on the said
application of Hindalco and also purported to raise and enforce
demands under the Duty Act against Hindalco. Hindalco and E
Renusagar filed a Writ Petition No. 368 of 1972 ill the High Court of
Allahabad on 21st March, 1972. On that very date Hindalco was in-
- formed that the application previously made by it had been rejected by
the State Government. Hindalco applied for amendment of the writ
petition. Reasons for rejection were intimated on 16th June, 1972.
Thereafter Writ Petition No. 368 of 1972 was withdrawn. On 21st July, F
1972 Hindalco and Renusagar filed another Writ Petition No. 4521 of
1972 in the High Court of Allahabad challenging the order of rejec-
tion. On 17th May, 1974 the High Court delivered judgment quashing
the aforesaid rejection and asking the State Government to consider
the matter afresh in accordance with Jaw and in accordance with the
directions contained in the said judgment. Another Writ Petition be- G
ing Writ Petition No. 3921 of 1982 out of which the present appeal
arises was filed by Renusagar and Hindalco on 16th April, 1982. The
High Court passed an order on 26th September, 1984 quashing the
order. The High Court was of the view that the Government was under
a mandatory duty to consider certain factors. These were: (1) How did
th_e cost of power to the Corporation compare with the cost bf power to i-1
670 SUPREME COURT REPORTS I1988] Supp. 1 S.C.R.
similar industries in other States? (2) How the spending of huge sums
A
by the Government of India in foreign exchange decreased and its
keenness to attain self-sufficiency in the country by increasing its in-
digenous production in public interest attained? (3) The commitment
made by the Government of Uttar Pradesh to the Hindalco to supply
power at cheap rate as noticed in the report of Dr. Nagarajarao. (4)
B The effect of imposition of duty on the margin of profit available to
Hindalco.
The provisions of sub-section (4) of section 3 have been noticed.
As we have read the said provisions, it appears to us that the
dominance of public interest is significant and we refer to the various
factors, namely, (a) prevailing charges for supply of energy in any
c area, (b) the generating capacity of any plant, (c) the need to promote
industrial production generally or any specified class therof and other
relevant factors 'Ind then taking all these factors into consideration, in
public interest, to fix different rates of electricity duty in relation to
different classes of consumption of energy or allow any exemption
D from payment thereof. Various grounds have been made out.
Shri Sen for the respondents is right that in view of the ceilings
prescribed the power conferred upon the State under section 3(1) of
the Act by itself is valid and does not amount to excessive delegation.
See also in this connection the obs~rvations of this Court in Devi Das
E Gopal Krishnan & Ors. v. State of Punjab & Ors., [1967] 3 S.C:R. 557
and Ram Bachan Lal v. The State of Bihar, [1967] 3 S.C.R. 1.
Shri Trivedi, learned Additional Advocate-General, State of Ut-
tar Pradesh drew our attention to the case of Panama Canal Company
v. Grace Line, 356 U.S. 309 2 Lawyers' Edn. 788, where at page 793 of
F the report while dealing with the facts of that case Justice Douglas
observed that, as it was seen in that case, the conflict raged over
questions that at heart involved problems of statutory construction and
cost accounting: whether an operating deficit in the auxiliary or sup-
porting activitie~ was a legitimate cost in maintaining and operating
the Canal for purpose of the toll formula. These are matters on which
G experts might disagree; these involve nice issues of judgment and
choice, which required the exercise of informed discretion. In those
circumstances Justice Douglas observed that the case was, therefore,
quite unlike the situation where a statute created a duty to act and an
equity court was asked to compel the agency to take the prescribed
action. What was emphasised was that the matter should be far less
H cloudy, much more clear for courts to intrude. It is also in this connec-
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.) 671
tion necessary that if technical considerations are involved the Court
A
feels shy to int~rfere. Reliance was placed on the observations of this
Court in Vincent Panikurlangara v. Union of India and others, [1987] 2
S.C.C. 165. There the writ petition involved the claim for withdrawal
of 7000 fixed dose combinations and withdrawal of licences of
manufacturers engaged in manufacture of about 30 drugs which have
been licensed by the Drugs Control Authorities; the issues that fell for B
consideration are not only relating to technical and specialised matters
relating to therapeutic value, justification and harmfol side effects of
drugs but also involved examination of the correctness of action taken
by respondents 1 and 2 therein on the basis of advice; the matter also
involved the interest of manufacturers and traders of drugs as also the
interest of patients who require drugs for their treatment. This Court
reiterated that in view of the magnitude, complexity and technical
nature of the enquiry involved in the matter as also the far-reaching
implications of the total ban of certain medicines for which the
petitioner had prayed, a judicial proceeding of the nature initiated was
not an appropriate one for determination of such matters. The techni-
cal aspects which arose for consideration in a matter of that type could 0
not be effectively handled by a court. This Court also reiterated that
similarly the question of policy which was involved in the matter was
also one for the Union Government-keeping the best interest of citi-
zens in view-to decide. No final say in regard to such aspects came
under the purview of the court.
E
The High Court in the instant case reiterated the necessity of
cheap electricity and if cheap electricity was not made available, the
cost of indigenous aluminium would go up. It would necessitate import
of aluminium causing drain on the foreign exchange of the country. On
the other hand, the learned Additional Advocate General for the State
of U.P. contended and in our opinion .rightly that primary purpose of ·F
the Act as stated in the preamble wa~ to raise the revenue for the
development projects. Whether in a particular situation, rural elec-
trification and development of agriculture should be given priority or
electricity or development of aluminium industry should be given
priority or which is in public interest, in our opinion, are value judg-
ments and the legislature is the best judge. The High Court in its G
impugned judgment referred to the order of the Government. The said
order read as follows:
"The Corporation has also emphasized that the Govern-
ment of India is spending a huge sum of money in foreign
exchange to mee_t the requirements of aluminium in India, H
672 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
with a view to increasing· the aluminium production by
A
Hindalco Electricity should be made available at cheap rate
and exemption should be granted to the Corporation from
payment of electricity duty. In this connection it may again
be pointed out that the imposition of electricity duty will
not affect the productivity of aluminium by Mis Hindalco
B as electricity duty is negligible as clearly made out in the
earlier paragraphs. Accordingly, the electricity duty is not
likely to have any adverse effect on foreign exchange of the
country."
Referring to the aforesaid observations of the State Govern-
ment, the High Court was of the view that the said observations of the
c State Government clearly showed that the State Government did not
address itself to the need of promoting aluminium industry for increas-
ing production of aluminium which would in the long run save foreign
exchange. We are unable to agree. What was paramount before intro-
duction of the development programme and how the funds should be
D allocated and how far the Government considers a negligible increase
and rise in the cost of aluminium for the purpose of raising monies for
other development activities are matters of policy to be decided by the
Government. It is true as the High Court has pointed out that the
question regarding public interest and need to promote indigenous
industrial production was related with the question of exemption of
E duty. But what the High Court missed, in our opinion with respect, was
that a matter of policy which should be left to the Government. Read-
ing the order of the Government, it appears to us that the Government
had adverted itself to all the aspects of sub-section (4) of section 3 of
the Act. It is true that certain amount of encouragement was given to
Hindalco to start the industry in a backward area. After considerable
F point of time the very low rate of duty was charged. But if we need
other sectors of growth and development for example, food, shelter,
water, rural electrification, the need for encouragement to aluminium
industry had to be subordinated by little high cost because that is a
matter on which the Government as representing the will of the people
is the deciding factor. Price fixation, in our opinion, which is ulti-
G mately the basis of rise in cost because of the rise of the electricity duty
is not a matter for investigation of Court. This question was examined
by this Court in Union of India and another v. Cynamide India Ltd.
and another, [1987] 2 S.C.C. 720 where one of our learned brothers
who delivered the judgment of the High Court of Allahabad was a
party. There in exercise of the powers under section 3(2)( c) of the
H Essential Commodities Act, the Drugs (Prices Control) Order,
STATE OF U.P. v. RENUSAGAR POWER CO. (MUKHARJI, J.] 673
1979 was made. The Central Government thereafter issued notifica-
tion thereunder. At page 741 of the report, Chinnappa Reddy, J. A
speaking for the Court referring to a passage of the Administrative
Law by Schwartz with approval expressed the view that those powers
were more or less legislative in character. Fixation of electricity tariff
can also to a certain extent be regarded of this category. Chinnappa
Reddy, J. observed at page 735 of the report that price fixation is more B
in the nature of a legislative activity than any other. He referred to the
fact that due to the proliferation of delegated legislation, there is a
tendency for the line between legislation and administration to vanish
into an illusion. Administrative; quasi-judicial decisions tend to merge
in legislative activity and, conversely, legislative activity tends to fade
int.o. and present an appearance of an administrative or quashudicial
activity.· Any attempt to draw a distinct line between legislative and C
administrative functions, it has been said, is 'diffieult in theory and
impossible in practice'. Reddy, J. insisted that it.is necessary that the
-li!le must sometimes be drawn as different legal righis and con-
sequences may ensue. It appears to us that sub-section (4) of section 3
of the Act in the set up is quasi-legislative and quasi-administrative in so D
far as it has power to fix different rates having regard to certain factors
and in so far as it has power to grant exemption in some cases, in ·our
opinion, is quasi-legislative in character. Such a decision must be
arrived at objectively and in consonance with the· principles of
natural justice. It is correct that with regard to the nature of the
power under section 3( 4) of the Act when the power is exercised with E
reference to any class it would be in the nature of subordinate legisla-
tion but when the power is exercised with reference to individual it
would be administrative. Reference was made in this connection to the
cases of Union of India v.. Cynamide India Ltd. (supra) and P.J. Irani
v. State of Madras, [1962)2S.C.R.169at 179-180and 181-182.
F
If the exercise of power is in the nature of subordinate legislation
the exercise must conform to the provisions of the statute. All the
conditions of the statute must be fulfilled. The High Court was right
only to the limited extent that all the relevant consideratiQ!!S must be
taken into account and the power should not be exercised 01'1-irrelevant
considerations but singular consideration which the High Court, in our G
opinion, seems to have missed in the judgment under appeal, is these
factors, namely, the prevailing charges for supply of energy in any
area, the generating capacity of any plant, the need to promote indus-
trial production generally or any specified class thereof and other
relevant factors cannot be judged disjointly. These must be judged in
ad jun ct to the public interest and that public interest is as mentioned in H
the preamble to raise revenue.
674 SUPREME COURT REPORTS 119881 Supp. 1 S.C.R.
Reference was also made to the observations of the Judicial Com-
A mittee in Ryots of Garabandho and others v. Zamindar of Parlakimedi
and another, A.LR. 1943 P.C. 164 where the Judicial Committee had
to deal with the proviso to section 30 of the Act. It read as follows:
"In settling rents under this section the Collector shall pre-
B sume, unless the contrary is proved, that the existing rent
or rate of rent is fair and equitable and sliall have regard to
the provisions of this Act for determining rates of rent
, payable by a ryot."
Viscount Simon L.C. observed that the view taken by the major-
ity of the Collective Board of Revenue in making the order which is
c now complained of, is that the requirement to "have regard to" the
provisions in question has no more definite or technical meaning than
that of ordinary usage, and only requires that these provisions must be
,taken into consideration. In their view the prime duty of the Revenue
, Officer under Chap. II was to fix a fair and equitable rent, and though
D he must be guided by the principles underlying such provisions as were
contained in chap. 3, he was not strictly bound by such provisions.
The Judicial Committee observed at page 180 of the report as follows:
"Having regard to the long time that had elapsed since the
last tentative settlement of rent in 1867-68, to the pro-
E digious rise in prices that had taken place since then, and to
the general economic improvement of this part of the
country, the Collective Board considered that an enhance-
ment of 37-1/2 per cent, would not be oppressive and
directed the Revenue Officer to reduce to that figure the
enhancement of 100 per cent, which he had made. This
F view of the effect of the direction to "have regard to" the
provisions of the Act for determining rates of rent payable
by a ryot is supported by the decision of the High Court in
49 Mad. 499 at 5,06. It is also confirmed by certain observa-
tions of Reilly J. in 63 M.L.J. 450 at p. 486, where the
learned Judge said:
G
Where the settling officer has to deal only with such
questions as would arise in a suit for commutation,
for enhancement, or reduction of money rent, under
s. 168(2) he must be guided by the appropriate princi-
ples as set out in the Act, but there is no doubt that
H his settlement may embrace a much wider field of
f-
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.J 675
question and whenever he has not merely to adjust
A
the lawful rent but to fix what is fair and equitable in
variation from the lawful rent which can be exacted in
a suit, his settlement is clearly something which no
civil Court could do unless specially empowered.
Their Lordships find themselves on this matter in B
agreement with the view taken by the majority of the Col-
lective Board. It is not possible to peruse the proceedings
of the Special Revenue Officer in this case without seeing
that a number of matters besides the rise in prices of staple
food crops were considered by him, and had to be con-
sidered by him, if he was to carry out his duty under
chap. II. He observed in para. 30 of the final proceed,irtgs C
dated 10th December 1935:
I hold that the present settlement is also a fresh and
initial settlement wherein everything has to be re-classified
afresh and new rates of rent have to be fixed. It is not D
therefore a case of enhancement but of fixing and introduc-
ing a new rate of rent based on the principles of equity and
faimes as laid down in Chap. II, Estates Land Act."
The High Court in the impugned judgment commented that it
was a mandatory duty to separaiely consider these· relevant factors and E
has committed the error against which the Judicial Committee cau-
tioned. The High Court was of the view at page 10 of the judgment
that there was a mandatory duty to consider the factors mentioned
hereinbefore. All that the section requires was that these factors
should be borne in mind but these must be subordinate to the execu-
tive decision of the need for public interest. F
In Saraswati Industrial Syndicate Ltd. etc. v. Union of India,
'
•
~·
t
[1975] 1 S.C.R. 956 the Sugar (Control) Order, 1966 came up for
consideration. Clause 7(2) of the Sugar (Control) Order had been set
out at page 951r of the report. It read as follows:
I G
'
"Such price or maximum price shall be fixed having regard
to the estimated cost of production of sugar determined on
the basis of the relevant schedule of cost given in the
Report of the Sugar Enquiry Commission (October 1965),
subject to the adjustment of such rise in cost subsequent to
the Report aforesaid as, in the opinion of the Central H
676 SUPREME COURT REPORTS ' [19881 Supp. 1 S.C.R.
Government, cannot be absorbed by the provision for con-
A
tingencies in the relevant schedule to that Report."
'
Beg, J. as the learned Chief Justice then was, observed that
clause 7(2) set out above required the Government to fix the price
"having regard to the estimated cost of prbduction of sugar on the
B basis of the relevant schedule". The expression "having regard to"
only obliges the Government to consider as relevant data material to
which it must have regard to.
In so far as the High Court held in this judgment that the power
conferred on the State Government was of the administrative nature,
the High Court may not be in error. But the High Court held that it
c should be in consonance with the principles of natural justice, in our
\
opinion-it must be in accordance with natural jl)stice to a limited
extent-and such principles of natural justice are enunciated by this
. '
Court in several decisions, namely, A.K. Kraipak v. Uni~n of India,
A.LR. 1970 S.C. 150; Mis. Travancore Rayons Ltd. v. Union of India,
D A.I.R. 1971 S.C. 862 and Amal Kumar Ghatak v. State of Assam &
Others, A.I.R. 1971Assam32. -
Keeping in view the aforesaid principles, the High Court
examined the petitioners' grievance. Dr. Rajagopalan submitted his
report to the State Government in January; 1979. Admittedly, Dr.
E Rajagopalan placed reliance on the report of Working Group on
Aluminium set up by the Government of India in 1970 and various
other reports of Bureau of Industrial Cost and,Price (hereinafter refer-
red to as 'BICP'), submitted to the Government from time to time. It
is based on the balance-sheet of the appellants and had been made
available to the respondents. We have examined the correspondence
F that passed between the parties and we are of the opinion that there
was no violation of the principles of natural justice because the relev-
ant datas were made available to the appellants. It is true that the
principles of natural justice must be adhereq to. In this connection
reference may be made to S.D. Hotop "Principles of Australian Ad-
ministrative Law 6th Edition, Pages 210-212, Cases and Materials on
G Review of Administrative Action (2nd Edition) by S.D. Hotop, Wade
on Administrative Law, 5th Edition, pages 506/507 and Bennion on
Statutory Interpretation, 1984 Edition, pages 140-141. The exercise of
power whether legislative or administrative will be set aside if there is
manifest error in the exercise of such power or the exercise of the
power is manifestly arbitrary. Similarly, if the power has been
H exercised on a non-consideration or non-application of mind to re-
STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.l 677
levant factors the exercise of power will be regarded as manifestly
A
erroneous. If a power (whether legislative or administrative) is
exercised on the basis of acts which do not exist and which are patently
erroneous, such exercise of power will stand vitiated. See Commis-
sioner of Income Tax v. Mahindra & Mahindra Ltd. & Ors., [1983] 3
S.C.R. 773 at 786-787. The present case relates to the particular facts
and circumstances of an individual, namely, Hindalco. To the extent, B
its claim for exemption was entitled to the consideration. In our
opinion, the facts and circumstances of the case were examined in
consonance with the principles of natural justice. All relevant factors
were given consideration but subject to public interest. The High
Court considered whether electricity duty was included in the prices of
aluminium fixed by the Central Government. On this aspect our atten- C
tion was drawn on behalf of the respondents at pages 372-387 of the
judgment in Volume B. It was submitted that the assumption that
electricity duty was included in the prices of Hindalco fixed by the
Central Government formed a basic and a very important considera-
tion in the making of the impugned order. We are unable.to agree. It
was also submitted that the said assumption was made by the State 0
Government and Dr. Rajagopalan.on the basis of the reports of BICP
and the Working Group. The High Court on a perusal of the reports of
the BI!=P and the Working Group came to the conclusion that the said
assumption of the State and Dr. Rajagopalan is based on non-existent
fact and/or is patently erroneous. Apparently such examination by the
High Court was not warranted. It was pointed out that Dr. Rajagopa- E
lan had determined the adequacy of the profits of Hindalco by relating
the same to the original subscribed capital only and had completely
ignored the reserves of Hindalco. The aforesaid Qasls, it was held by
the High Court is contrary to the well accepted pc;/nciples of return on
capital employed/net worth. It is true that Hindalco has made profits
much more than it had before the imposition of the duty. The adequ- F
acy of the profits or whether it made much more profits is not a
consideration which must prevail over public interest and the Govern-
ment having taken into consideration this factor, in our opinion, did
not commit any error and the High Court was in error in setting aside
the order of the Government. It is true that the cost of power to similar
industry in other State was a relevant facto~ and the State was under a G
mandatory duty to consider the same. The State has taken note of all
those factors and has observed that M/s. Hindalco is being supplied
with electrical energy at a ,very nominal rate and taking into considera-
tion the prevailing practice of levy of electricity duty in other States as
well as the provisions stated in section 3(4), the Government have
come to the conclusion that there is no justification for allowing H
678 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
exemption from electricity duty to M/s. Hindalco. The Government
A
did not commit any error which required interference by the High
Court in the manner it did . The assurance of cheap power factor was
there. But the assurance of cheap power factor does not foreclose the
public interest of raising public revenue. "
B In July, 1975 the Central Government fixed uniform· prices of
alfiminium for all the producers of aluminium. The Central Govern-
ment also fixed uniform sale prices of aluminium applicable to all •
producers. The Central Government also fixed individual retention
prices (based, inter alia, on the cost of production) for each individual
producer. All producers of aluminium were to sell aluminium at the
uniform sale prices. Any producer whose retention prices were lower
c than the sale prices had to pay difference into the Aluminium Regula-
tion Account. Any producer whose retention prices were higher than
the sale prices was entitled to receive the difference from the
Aluminium Regulation Account. Price, therefore, was no question of
the respondent being loser or sufferer. It is true that electricity duty
D was not included and was also considered in the fixation of the price.
That is the only pre-dominant factor, having regard to the technical
nature of the order. The impugned order does not suffer from the vice
of non-application of mind or non-consideration of the relevant factors
and the High Court was in error in interfering with the order of the
Government. We are clearly of the opinion that the High Court was in
E error in interfering with the order in the manner it did. The High Court
should not have interfered for interference by the High Court the
matter should have been far less cloudy and far more clear.
Natural justice in the sense that a party must be heard before-
hand need not be directly followed in fixing the price. Reference in
F this connection may be made to the observations of this Court in Prag
lee & Oil Mills and another etc. v. Union of India, [1978] 3 S.C.R. 293,
where at page 325 of the report, this Court observed that in the ulti-
mate analysis, the mechanics of price fixation has necessarily to be left
to the judgment of the executive and unless it is patent that there is
hostile discrimination against a class of operators, the processual basis
G of price fixation has to be accepted in the generality of cases as valid.
In this connection reference may also be made to Shree Meenakshi Mills
Ltd. v. Union of India, 11974] 2 S.C.R. 398, where this Court dealing
with the Cotton Textile (Control) Order, 1948 at page 419 of the
report observed that if fair price is to be fixed leaving a reasonable /'
margin of profit, there is never any question of infringement of funda-
H mental right to carry on business by imposing reasonable restrictions.
STATE OF U.P. v. RENUSAGAR POWER CO. IMUKHARJI, J.] 679
Unreasonableness and natural justice have to be judged in that con-
A
text. In that view of the matter non-supply of the basis of the report of
the BlCP does not by itself, in our opinion, in the facts and circum-
stances of the case make the order of the State Government vulnerable
to challenge.
In Laxmi Khandsari etc. etc. v. State of U.P. & Ors., (1981] 3 B
S.C.R. 92 this Court was dealing with the Essential Commodities Act,
1955 and the Sugarcane (Control) Order, 1966 and observed that in
determining the reasonableness of restrictions imposed by law in the
field of industry, trade or commerce, the mere fact that some of the
persons engaged in a particular trade may incur loss due to the imposi-
tion of restrictions will not render them unreasonable because it is
manifest that trade and industry pass through periods of prosperity c
and adversity on account of economic, social or political factors. At
page 129 of the report rejecting the plea that before fixing a price the
rules of natural justice should be adhered to, this Court emphasised,
referring to the observations in the case of Saraswati Industrial Syndi-
cate Ltd. v. Union of India, [1975] 1 S.C.R. 956 that price fixation is D
more in the nature of a legislative measure even though it may be
based upon objective criteria found in a report or other material.
There is scope for trial and error in such sphere. Judged by that
standard, the impugned order in this case, in our opinion, is not bad.
In support of the proposition that the principles of natural justice E
had been violated in passing the impugned order, five decisions were
referred to, namely, State of Orissa v. Mr. (Miss) Binapani Dei, [1967]
2 SCR 625; A.K. Kraipak v. Union of India, A.LR 1970 S.C. 150;
Mohd. Rashid v. State of U.P. A.LR. 19(9 S.C. 592; S.L. Kapoor v.
Jagmohan and others, A.LR. 1981 S.C. 136 and Maneka Gandhi v.
Union of India, A.LR. 1978 S.C. 597. The principles of these cases F
will have no application to the facts of this case. There has been no
violation of the principles of natural justice to the extent appiicable to
the order of this nature.
Reference was made to the observations in the case of India
Sugars & Refineries Ltd. v. Amravathi Service Co-operative Society G
Ltd., [1976] 2 S.C.R. 740 where at page 746 of the report, this Court
observed that the power to grant exemption to factories from payment
of additional price is intimately connected with the right Of sugarcane
growers to claim additional price. In granting of such power, principles
of natural justice should be followed. In such a case a duty to act
judicially does arise. H
}
680 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.
This Court in Commissioner of Income Tax, Bombay and others
A v. Mahindra and Mahindra eimited & Ors., [1983] 3 S.C.R. 773 at
page 786 of the report, dealt with the parameters of the Court's power
of judicial review'of adri:tinistrative or executive action or decision.
Indisputably, it is a settled position that if the action or decision is
perverse or is such that no reasonable body of persons, properly
B informed, could come to or has been arrived at by the authority misdi-
recting itself. hf-adopting a wrong approach qr has been influenced by
irrelevant or extraneous matters, the Court would be justified in
interfering with the same. See also the observations at page 787 of the
report. In this. case the parameters had been adhered to. All relevant
factors had been borne in mind. It is true that each factor had not been
independently considered, but these had been borne in mind. In our
c opinion, the Government did not act in violation either of the princi-
ples of natural justice or arbitrarily or in violation of the previous
directions of the High Court.
In the premises, the High Court was in error in setting aside the
D order of the State Government in its entirety. The High· Court should
have allowed the claim of Hindalco for the reduced rate of bill on the
basis that Renusagar Power Plant was its own source of generation
under section 3(1)(c) and the bills should have been-made by the
Board on that basis. But the.High Court was in error in upholding the
respondents' contention that the State Government acted improperly
E and not in .terms of section 3(4) of the Act and in violation of the
principles of natural justice. We, therefore, allow the appeal to the
extent indicated above and set aside the judgment of the Allahabad
High Court to that extent and restore the State Government's
impugned order subject to the modification of the bills on the basis of
own source of generation. We, therefore, direct that the electricity
F bills must be so made as to give· Hindalco the benefit of the rate
· applicable to its own source of generation from Renusagar Plant.
The appeal is disposed of in those terms. The electricity bills
must be computed as indicated above. After recomputation and pre-
serltation of such bills the respondents will pay the same within two
G months thereof.
In view of the facts and circumstances of the case, the parties will
pay and bear their own costs.
RANGANATHAN, J. I agree. On the second issue, I think it is
H difficult to define the precise nature of the power conferred on the
STATE OF U.P . .-. RENUSAGAR POWER CO. IRANGANATHAN, J.] 681
State Government under Section 3(4) of the Electricity Duty Act and 1 A
have doubtS' whether the sub-section can at all be interpreted as con-
ferring a right on individual consumers to require that, in the light of the
material adduced by them, the rates applicable to them should have
been fixed differently or that they should have been exempted from
duty altogether. However, it is unnecessary to pursue this aspect
B
further as I agree with the conclusion of my learned brother that, in
this case, the respondent's representations have been fully considered
and the requirements of natural justice have been fulfilled and that
there is no warrant to interfere with the order of the State Government.
S.L. Appeal disposed of.
I
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