Holding

The Supreme Court held that supervision costs must be added only if proven, depreciation on consumer‑financed service lines cannot be deducted, and the Special Officer’s deductions of such depreciation and the inflated reserve balances were erroneous, requiring those amounts to be added back to the compensation.

Summary

The appellant, Pilibhit Electric Supply Co., held a licence to generate electricity which was revoked and its undertaking was taken over by the Uttar Pradesh State Electricity Board on 1 December 1975. The Special Officer, under Section 7‑A of the Indian Electricity Act (as amended by U.P. Act 14 of 1976), fixed the compensation payable to the appellant and the appellant appealed for additional amounts. The Court examined whether (i) supervision costs actually incurred (up to 15% of the purchase price) must be added to the book value of assets under the Explanation to Section 7‑A(2)(ii), (ii) depreciation on service lines paid for by consumers could be deducted under Section 7‑A(2)(i), (iii) the Special Officer could rely on a legal opinion from the Legal Remembrancer without the licencee’s presence, (iv) energy bills incurred before the vesting date could be deducted under Section 7‑A(5)(b), and (v) inflated balances in the Tariffs and Dividends Control Reserve and Consumer Rebate Reserve could be deducted under Section 7‑A(5)(h). The Court held that the appellant failed to prove supervision costs, but the Special Officer erred in deducting depreciation on consumer‑financed service lines and in inflating reserve balances; those amounts must be restored to the compensation. Consequently, the appeal was allowed in part, granting additional compensation of Rs 3,25,141 with interest, while rejecting the other claims.

Issues considered

The proper inclusion of supervision costs actually incurred (up to 15%) in the book value of assets under Section 7‑A(2)(ii).
Whether depreciation on service lines constructed with consumer contributions may be deducted from the book value under Section 7‑A(2)(i).
The procedural propriety of the Special Officer seeking a legal opinion from the Legal Remembrancer without the licencee being present.
The legitimacy of deducting pre‑vesting energy bills under Section 7‑A(5)(b).
The validity of inflating the balances of Tariffs and Dividends Control Reserve and Consumer Rebate Reserve for deduction under Section 7‑A(5)(h).

Legislation cited

Electricity Act, 1910s. 6A, s. 7A
Electricity (Supply) Act, 1948s. Section 57, s. Section 57‑A, s. Seventh Schedule, s. Sixth Schedule

Subjects

electricity licencecompensationSection 7-Asupervision costdepreciationservice linesreserve accountsspecial officerlegal procedure

Judgment

A MIS. PILIBHIT ELECTRIC SUPPLY CO. (P) LTD. AND ANR.
v.
SPECIAL OFFICER (ELECTRICITY) AND ANR.

OCTOBER 9, 1996
B
[N.P. SINGH AND S.B. MAJMUDAR, JJ.]

Electricity Act, 191(}-Sections 6A & 7A as substituted by U.P. Act 14
of 1976-Compensation-Detemiination of-Revocation of licences and ac-
C quisition of undertaking-Cost of supervision actually incun-ed-lt has to be
considered as an addition to book value of acquired asset~onstrnction of
service line~ontributions made by consumer~omputation of capital
base of licensee.
I
The appellant licensee functioning under the provisions of the In-
D dian Electricity Act, 1910 having licence to generate electrical energy for
being supplied to consumers in Pillibhit town of Uttar Pradesh, was a
purchaser of the licensee rights !from the earlier licensee and held Pillibhit
Electric Licence, 1935 from 1.4.ll954. The said licence was revoked as per
the provisions of clause (3) of U.P. Ordinance 1937 of 1975 in exercise of
the powers vested in the U.P. State u/s. 6A of the Indian Electricity Act.
E The U.P. State Electricity Board took over the electrical undertaking of the
appellant on 1.12.1975. The Special Officer passed the award of compen-
sation u/s. 7A of the Indian Eledricity Act, 1910, as substituted by the U.P.
Act 14 of 1976.

F The appellant ex-licensee challenged the award by filing this appeal
in quest of additional compensation. It was alleged that in the impugned
award the Special Officer had erroneously excluded supervision charges
actually incurred by the appellant from the book value of the assets as
defined by the Explanation to Section 7-A(2). The appellant contended that
the gross amount of compensation payable to the appellant licensee had
G to be the aggregate value of the amount specified in Section 7-A(2) which
would include book value of all c:ompleted works in beneficial use pertain-
ing to the undertaking and taken over by the State Government; that it
had incurred from )ear to year large amounts of supervision charges paid
to the staff engaged for having st:pervision over these fixed assets and the
H appellant was entitled to at least 15% of the cost of supervision actually
324
PILIBHITELECIRICSUPPLY CO. (P) LTD. v. SPL OFRCER(ELECIRICITY) 325

incurred as permissible under Explanation (ii) to Section 7-A(2); that A
Section 7·A(2)(ii) nowhere laid down that the costs of supervision actually
incurred should be capitalised by the licensee from year to year; that this
original cost of the asset was meant to be calculated in connection with the
operation of the Sixth Schedule which operated of its own even inde-
pendently of the acquisition proceeding and prior thereto and had a direct B
linkage with paragraph I of the Sixth Schedule as applicable at the relevant
time and had an entirely different purpose to achieve and had nothing to
do with Explanation (ii) to Section 7-A(2) of the Act; that the concept .of
clear profit has to be kept in view for ascertaining the legality of tariff
charges; that the concept of reasonable return defined in sub-para (9) of
paragraph XVII of Sixth Schedule, encompassed in respect of any year of C
account, the sum of the amounts mentioned in clauses (a) to (e) thereof
and for finding out whether clear profit in a given accounting year exceeded
reasonable return, reasonable return had to be calculated for the year and
for determining reasonable return capital base has to be ascertained as
required by clause XVIl(9)(a) and for finding out capital base, original D
cost of fixed assets was required to be computed as per clause XVIl(l)(a)
and for that purpose original cost was to be ascertained as per clauses
XVll(6)(a) and (c); that as per Section 7-A(2)(i) the book value of all
completed works in beneficial use pertaining to the undertaking and taken
over by the State Government or local authority, had to be computed but
that computation must exclude the works constructed at the cost of and E
the works paid for by the consumers and thus the works for which payment
emanated from the consumers were not to be taken into consideration
while computing the book value of the completed works which were taken
over from the licensee by the acquiring authority. From this total amount
of book value of the assets so computed depreciation calculated in accord- F
ance with the Sixth and Seventh Schedules to the Electricity (Supply) Act,
1948 had to be deducted and that would necessarily mean depreciation on
the computed book value of the acquired assets which had entered the
computation of the book value as per the first part of Section 7- A(2)(i).
It was alleged further that the Special Officer had erroneously deducted
an amount pertaining to variations in the energy bill raised by the Board G
which seriously disputed by·the appellant. Deductions on account of the
.
I purported balance in the Consumer Rebate Reserve Account and in the
Tariffs and Dividends Control Reserve Account were challenged as illegal.

The respondents submitted that the the cost of supervision men- H
326 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.
A tioned in the Explanation to Section 7·A(2) has necessarily a linkage with
the Sixth Schedule and Section 57 of the Supply Act as the Sixth Schedule
becomes a part and parcel of the very licence issue to the licensee and that
is why the Special Officer was justified in insisting that in absence of
capitalisation of costs of supervision from year to year by the appellant
B the claim was not maintainable for addition of supervision charges; that
when the Legislature has clearly provided for deduction of depreciation
from the book value of all completed works as per the Sixth Schedule read
with the Seventh Schedule, paragraph XII of the Sixth Schedule as ap·
plicable in 1975 when the appellant's undertaking was acquired would also
C be relevant; that the two bills referred to the period prior to the take over •
were for the period for October 1974 to November 1975 and October and
November 1975 and as this energy was admittedly supplied to the licensee
by the Board which was the predecessor of this Undertaking before the
vesting date, i.e., 1.12.1975 the predecessor Board was entitled to deduct
the said sum from the amount payable to the licensee for such acquisition
D •and purchase as computed u/s. 7-A(l) r/w. sub-section (2).

Allowing the appeal accordingly, this Court

HELD : 1.1. The aspect of original cost which may include proper
E addition on account of supervision not exceeding 15% of the cost referred
to in sub-para (a) of clause (b) of definition paragraph XVII of the Sixth
Schedule has nothing to do with the computation of proper compensation
payable to the licensee as per Section 7-A sub-section (2) Explanation (ii)
of the Indian Electricity Act. Cost of supervision actually incurred up to
the ceiling of 15% of the amount referred to in paragraph (i) of the
F Explanation to Section 7-A(2) had to be straightaway added to the book
value of fixed assets which was to be paid for by the acquiring authority.
The provision of computation of original cost as found in paragraph XVII
clause (6) of the Sixth Schedule referred to the 'proper addition on account
of supervision' which left a discretion regarding computation of the
G amount of supervision. Therefore, concept of capitalisation of the cost of
supervision for computing the original cost of the asset for the purpose of
· paragraph I of the Sixth Schedule has nothing to do with the cost of
.
'
supervision actually incurred which had to be considered as an addition
to the book value of the acquired fixed assets for computing compensation
H under Section 7-A sub-section (2). [341-F-H, 342-A·B]
.
PILIBHITELECTRlCSUPPLY CO. (P) LTD. v. SPL OFFICER(ELECTRlCITY) 327

1.2. The provisions of Sixth Schedule to the Supply Act are general A
provisions which were enacted to lay down guidelines for fixation of
licensee's charges to consumers as provided in Section 57 of the Supply
Act and also for supplying guidelines to the Rating Committee under
Section 57-A and for that purpose various paragraphs of Schedule 6·have
been enacted and are made a part and parcel of the terms and conditions B
of the licence. But so far as the question of compensation is concerned,
Seetion 7-A of the Act represents a complete circle. Under the provisions
of the Explanation to Section 7·A(2) for computing the book value of any
fixed asset, its original cost has to comprise of two ingredients • the
purchase price paid by the licensee for the asset and secondly 15% addition
to the said purchase price by way of cost of supervision actually incurred
c
on such an asset. It is almost analogous to solatium to be paid for
acquisition of land under Land Acquisition Act. No question of capitalisa-
tion of such supervision charges from year to year is contemplated by the
said Explanation. All that is required to be shown by the licensee is whether
it had actually incurred the supervision costs in connection with the staff D
engaged for supervising the concerned fixed assets which were sought to
be acquired from the licensee. Unless clear evidence was available on
record pointing to the actual amount of cost incurred by the licensee from
year to year for meeting the wage bill of supervisory staff which was
entrusted with the sole duty of supervising the concerned fixed assets E
which ultimately vested in the State and the Electricity Board, it could not
be said that the appellant had made out a case for grant of costs of
supervision actually incurred by it in maintaining these fixed assets and
that it had satisfied the requirements of Explanation (ii) to Section 7A(2)
of the Act. [342-D-G, 343-F] F

1.3. While considering the question of total capital base which in-
cludes the assets consisting of service lines for installation of which
contributions are made by consumers towards the construction of such
service lines, the net cost of such service lines after deducting such con- G
tributions has to be included in the costs of such fixed assets. However,
for computing the depreciation as per paragraph VI on such assets,
wherein consumers have contributed towards 1their acquisition, the total
original cost of construction of the service lines had to be taken into
account. The Special Officer had applied paragraph XII whole hog while H
•
328 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.
A deducting the depreciation from the book value of all completed works
which were acquired from the licensee as per Section 7-A(2)(i). The said
approach of the Special Officer was ex facie unjustified. Paragraph XII of
the Sixth Schedule to the Supply Act deals with a special type of asset,
namely, service lines which are installed by the licensee wherein the con-
B somers have contributed towards the cost of construction of such service
lines. For this type of assets, in computing the capital base of the licensee,
the contribution by the consumers has to be excluded but for computing
depreciation under paragraph VI for such assets, namely, the service lines,
the total original cost of construction of service Jines has to be taken into
C account which may include the cost of construction of service lines in-
curred by the licensee as well as the other part of the component of the
cost of construction of service lines which has come from the pockets of
the consumers. But entire paragraph XII deals with only one type of assets,
namely, service Jines construction cost of which is wholly or partially borne
D by the consumers. Paragraph VI of Schedule VI, however, is general in
nature and covers all types of tixed assets and the method of computation
of depreciation on these tixed assets. Fixed assets employed in the business
of electricity supply may consist of those assets which are wholly acquired
at the cost of the licensee and may also include assets like service lines ·
which may partly be acquired and installed at the cost of the licensee and
E partly out of contribution of the consumers who would be interested in
getting electrical supply at their own premises and for that purpose they
may be willing and may be made to pay contribution towards extension of
service lines to their premises. Therefore, reference to service lines in
paragraph XII of Schedule VI is with a view to finding out as to how
F depreciation has to be computed for such a special type of asset, namely,
service Jines wherein consumecs have also contributed towards their in-
stallation. Consequently on a conjoint reading of paragraph VI and para-
graph XII of Sixth Schedule the depreciation on such service lines installed
by drawing upon the contributions from the consumers' is required to
G include the total original cost of construction of such service lines and that
would necessarily include the component of the amount of cost contributed
by the consumers. However that has nothing to do with the computation
of depreciation on the assets which are required by the acquiring authority
under Section 6-A read with Section 7-A(2)(i). It is now well settled that
H service lines whose installation had been paid for by the consumers are
PILIBHITELECIRIC SUPPLY CO. (P) LID. v. SPL OFflCER (ELECTRICITY) 329

not to be compensated for and they vest in the acquiring authority under A
Section 6-A read with Section 7-A free of cost or payment of compensation
to the licensee. The logic underlying this settled legal position is that as
the licensee had not spent from his pocket for installing such an asset, he
was not required to be compensated for that part of the asset which was
paid for by consumers. A mere look at Section 7-A(2)(i) shows that the B
gross amount payable to such licensee for acquiring his assets amongst
others has to consist of an amount of the book value of all completed works
in the beneficial use pertaining to the undertaking. While computing such
book value of acquired assets the works paid for by the consumers have
to be ignored and omitted from consideration. Therefore, the amount of C
book vain~ computed as per Section 7- A(2)(i) will consist of only those
works which are for beneficial use of the undertaking which was installed
and acquired by the licensee at its own cost. From the book value of the
assets which were financed by the licensee as computed as per Section
7- A(2)(i) when a question arises about deducting the depreciation, only D
the calculation of such depreciation on the concerned asset is to be done
in accordance with Sixth Schedule because the words advisedly used by the
Legislature in Section 7-A(2)(i) in this connection are less depreciation
calculated in accordance with the Sixth Schedule read with the Seventh
Schedule. Therefore, only the method of calculation of depreciation has to E
be applied by way of reference to the Sixth Schedule. But the type of asset
for which depreciation has to be computed is not to be gathered from the
Sixth Schedule. It has to be gathered from the very first part of Section
7-A(2)(i), namely, only self- financed fixed assets whose book value is to
be computed by the Special Officer for payment to the licensee and from
that amount depreciation is to be deducted which would necessarily mean F
depreciation on the very same asset which has undergone the book valua-
tion as per Section 7-A(2)(i). If for calculating the book value of such
assets the works paid for by the consumers are to be excluded; they
necessarily cannot be included for the purpose of ascertaining deductible
depreciation on such assets. Consequently reference to paragraph XII G
Schedule VI would be totally out of picture and redundant so far as the
scheme of Section 7-A(2) (i) is concerned. The Special Officer was patently
in error when he computed the depreciation on the assets under Section
7-A(2)(i) by adding the amount of depreciation on the service lines which
were paid for by the consumers. Amount of Rs. 2,48, 718.81 must be treated H
330 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.
A to have been wrongly deducted from the book value by way of.depreciation
on consumer-financed assets, namely, service lines.
[347-E-H, 348-A-H, 349-A-H, 350-A-B, G]

1.4. The Special Officer exercising quasi-judicial functions under
Section 7-A of the Act who has the same powers as are vested in a Civil
B Court under the Code of Civil Procedure, 1908 when trying a suit, in
respect of the matters enumerated in Section 7-A sub-section 7(7)(b) could
not have called for such an opinion of Legal Rememberancer and even
though Section 7·A clause (7)(a) permits the Special Officer to have the
assistance of such officers and staff of the State Government or the State
C Electricity Board or the licensee as he may deem fit in assessing the net
amount payable, it has to be done in presence of the licensee and an
opportunity should have been given to the licensee to meet such an opinion.
.As that has not been done in the present case such an exercise on the part
of the Special Officer and the reliance placed by him on the opinion of the
Legal Rememberancer obtained behind the back of the licensee must be
D treated to be totally an incompetent and uncalled for exercise and such an
opinion should have been completely ignored by the Special Officer. The
Special Officer had wrongly deducted from the book value of the assets as
computed under Section 7-A(2)(i) an amount of Rs. 2,48,718.81 and that
amount was required to be added back to the book value of the assets
E which was to be made payable to the appellant-licensee by way of additional
compensation. [351-B-F]

1.5. The Special Officer was entitled to deduct from the amount
payable to the licensee for the acquisition of his undertaking the amount
due to the Board by way of supply of energy to the licensee. Even though
F
the bill might have been issued after the acquisition and the appointed day
as the bills referred to the period 11rior to the appointed day in connection
with with the electricity admittedly supplied by the Board to the licensee,
the licensee was statutorily bound to reimburse the Board to the extent of
these bills and that amount could be legitimately deducted from the
G computed amount of compensation by the Special Officer as enjoined by
Section 7-A sub-section (5)(b). (352-F-G]

1.6. From the amount of compensation payable to the purchaser the
Special Officer can deduct the amounts remaining in Tariffs and
H Dividends Control Reserve, Contingencies Reserve and the Development
PILIBHITELECTRIC SUPPLY CO. (P) LTD. v. SPL OFFICER(ELECTRICITY) 331

Reserve, insofar as such amounts have not been paid over by the licensee A
to the purchaser. These are trust amounts in the hands of the licensee
which are ultimately to be paid over to the consumers and at the time of
acquisition of its undertaking the said reserves have to be handed over to
the purchaser, namely, the Board. But what is to be handed over to the
Board by the licensee is the amount remaining in the Tariffs and Dividends B
Control Reserve. So far as the figures of the outstanding amounts in these
reserves were concerned they were supplied by the licensee to the Special
Officer. Accordingly the amount of Rs. 8,615 stood credited to the Tariffs
and Dividends Control Reserve while an amount of Rs. 54,560 stood in the
Consumer Rebate Reserve which was also part and parcel of Tariffs and
Dividends Control Reserve. However the Special Officer artificially in-
c
flated the balances of these reserves and held that Tariffs and Dividends
Control Reserve should be treated to be showing the balance of Rs. 46,826
instead of Rs. 8,615 while the Consumer Rebate Reserve balance should
be inflated to Rs. 97,727 instead of Rs. 54,560. On the clear language of
Section 7-A(5)(h) such an exercise was not contemplated. While deducting D
the depreciation from the book value of the concerned assets as per Section
7-A(2)(i) the amount of extra depreciation which is dehors the permissible
scheme of the Sixth Schedule read with Seventh Schedule of the Supply
Act had to be ignored. Once that is done Section 7-A(2)(i) gets completely
exhausted and complied with. The said provision clearly in.dicates that E
whatever amounts have remained in the concerned Reserve Accounts with
the licensee on the date of acquisition have to be paid over to the pur-
chaser. Thus actual balances of these Reserves as reflected from the books
of accounts of the licensee, has to be handed over to the Board. The said
provision nowhere, permits an exercise of artificially inflating the balan- F
ces of these Reserves which are not reflected by the books of accounts of
the licensee. As even the awarded amount as per the Award of 31st March
1980 was still not paid to the appellant the Board is directed to pay up the
appellant the amount as awarded by the Special Officer with interest
thereon at the relevant Reserve Bank rate ruling at the appointed day, that
is, 1.12.1975 plus one per cent for the period from the date of award to the G
... date of actual payment to the appellant-licensee .
[353-C-F, 354-D, F-G, 356-C]

Tinsukhia Electric Supply Co. Ltd. v. State of Assam & Ors., [1989] 2
SCR 544, relied on. H
332 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.

A CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1339 of
1981.

From the Judgment and Order dated 31.3.80 of the Special Officer
under the India Electricity Act, 1910.

B Sunil Gupta, Ashok Sagar, Ms. Punita Singh, for .TBD & Co. for the
Appellants.

R.B. Misra and Kavin Gulati for the Respondent No. 1.

B.S.en, Pradeep Misra and T. Mahipal for the Respondent No. 2.
c
The Judgment of the Court was delivered by

S.B. MAJMUDAR, J. The appellant Electric Supply Co~ has brought
in challenge the judgment and award dated 31st March 1980 rendered by
Special Officer under Section 7-A as substituted in the Indian Electricity
D Act, 1910 (hereinafter referred to as 'the Act') by U.P. Act 14 of 1976. The
appellant, original licensee, under the Act had sought appropriate compen-
sation under the aforesaid provision from the Special Officer entrusted
with the task of determining the purchase price of the appellant's Under-
taking acquired under Section 6-A as inserted by the very same Act of the
E U.P. Legislature. This appeal by grant of special leave under Article 136
of the Constitution of India was pressed at the time of final hearing by their
learned senior counsel Shri Salve and learned counsel Shri Gupta on the
following grounds :

1. In the impugned award the Special Officer had erroneously
F excluded supervision charges actually incurred by the appellant
from the book value of the assets as defined by the Explanation
to Section 7A(2).

2. The Special Officer had erroneously deducted from the book
value of the assets of the appellant an amount of Rs. 2,48,718
G
being the purported depreciation on works paid for by the
consumers.

3. The Special Officer had erroneously deducted an amount of
Rs. 2,67,622 pertaining to variations in the energy bill raised by
H the Board which were seriously disputed by the appellant. In the
PILIBHITELECTRJCSUPPLYCO. (P) LID. v. SPL OFFICER (ELECTRICITY) [S.B. MAJMUDAR.J.) 333

aforesaid item ultimately the claim was reduced to Rs. 60,603.78. A
4. The Special Officer had erroneously deducted from the amount
payable to the appellant an amount of Rs. 92,727 on account of
the purported balance in the Consumer Rebate Reserve Account
and an amount of Rs. 46,826 on account of the purported balance
in the Tariffs and Dividends Control Reserve Account. So far as B
this item of claim is concerned ultimately the learned counsel for
the appellant confined the claim to the total amount of Rs. 76,423
being the purported inflated balance in the Tariffs and Dividends
Control Reserve Account and Rs. 38,211 being such balance in
the Consumer Rebate Reserve Account. C

In the Special Leave Petition originally two additional claims were also put
forward as item no. 2 consisting of Rs. 35,483 and item no. 5 consisting of
Rs. 1,51,111. But at the time of hearing of this appeal these two claims were
not pressed. We are therefore, concerned with the aforesaid four claims
surviving for consideration. D
Backdrop facts

Before we deal with these claims, it will be necessary to note a few
relevant background facts. The appellant-licensee was functioning under
the provisions of the Indian Electricity Act, 1910 having licence to generate E
electrical energy for being supplied to consumers in Pilibhit town of U ttar
Pradesh. It was a purchaser of the licensee rights from the earlier licensee
named M/s Champion Electrical Engineering Works. The said licensee had
got its licence from 1935. On 1st April 1954 Mis Champion Electrical
Engineering Works transferred to the appellant its licence to generate F
electricity in Pilibhit town. Thus the appellant became a transferee-licensee
and held Pilibhit Electric Licence, 1935 from 1st April 1954. The said
licence was revoked as per the provisions of clause (3) of U.P. Ordinance
1937 of 1975 in exercise of the powers vested in the U.P. State under
Section 6-A of the Indian Electricity Act, 1910 as inserted in the aforesaid G
Act by the said Ordinance. Pursuant to the said revocation of the
. appellant's licence and acquisition of its assets, the U.P. State Electricity
Board took over the electrical undertaking of the appellant at 00.00 Hrs.
on 1st December 1975. On such acquisition of the assets of the appellant
and the taking over of the electrical undertaking of the appellant by the
U.P..state Electricity Board and as the undertaking of the appellant- H
334 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.

A licensee stood statutorily acquired for the purpose of the State Electricity
Board under Section 6-A of the Act. the question arose regarding deter-
mination of appropriate compensation to be paid to the erstwhile licensee
for acquisition of its assets under the Act. The determination of the amount
was to be made under Section 7-A as substituted by the U.P. Amending
B Act that task was statutorily assigned to a Special Officer. The Special
Officer after hearing the appellant's representative on diverse claims put
forward under the said provision for determination of appropriate amount
of compensation passed the impugned award dated 31st March 1980.

The aforesaid award is brought in challenge by the appellant ex-
C licensee by filing this appeal in quest of additional compensation. At this
stage it may be stated that direct writ petitions under Article 32 of the
Constitution of India challenging the constitutional validity of Section 7-A
of the parent Act were pending in this Court since 1972. Consequently the
appellant challenged the impugned award directly in this Court after
D obtaining special leave as stated above. A Constitution Bench of this Court
in the case of Tinsukhia Electric Supply Co. Ltd. v. State of Assam & Ors.,
[1989) 2 SCR 544 upheld the vires of the said provision. Consequently this
appeal survived for consideration of the payment of proper compensation
to the appellant ex-licensee whose licence was also revoked and whose
undertaking got acquired under the said Section 7-A as substituted in the
E State of U.P. by Amending Act 14 of 1976.

Statutory background

Before adverting to the aforesaid four claims for compensation it will
p be necessary to note the relevant statutory provisions. The Indian
Electricity Act, 1910 deals with supply of energy and licences in connection
therewith. As per Section 3 of the said Act the State Government may on
application made in the prescribed form and on payment of the prescribed
fees, if any, grant after consulting the State Electricity Board, license to any
person to supply energy in any specified area, and also to lay down or place
G electric supply-lines for the conveyance and transmission of energy. 'State
Electricity Board' as defined by Section 2(11) of the Act, in relation to any •
State means the State Electricity Board, if any, constituted for the State
under Section 5 of the Electricity (Supply) Act, 1948 (54 of 1948), and
includes any Board which functions in that State under Sections 6 and 7 of
H the said Act. The appellant was the transferee-licensee functioning under
.
PILIBHITELECJRJCSUPPLYCO. (P) LID.>. SPL OFFICER (ELECTRICITY) [S.B. MAJMUDAR,l.] 335

the said Act and was entru~ted with the right to generate electricity through A
its undertaking functioning at Pilibhit in U.P. State. It is this undertaking
of the appellant which came to be acquired under Section 6-A of the Act
as inserted by Section 3 of the U.P. Act 14 of 1976. Said Section 6-A
dealing with 'Revocation of licences and acquisition of undertaking' along
with its relevant sub-sections reads as under :
B
"6-A. Revocation of licences and acquisition of u11de1taki11g.- (1) In
this section 'appointed day' means in relation to licensees other
than local authorities, December 1, 1975 and in relation to local
authorities being licensees, such date as may be specified by the
State Government by notification in that behalf, and different dates C
may be specified for different such undertakings.

(2) Notwithstanding anything contained in Sections 4, 4-A, 5
and 6, the licence of every undertaking, unless revoked before the
commencement of the Indian Electricity (Uttar Pradesh Second
Amendment) Ordinance, 1975, shall stand revoked with effect D
from the appointed day.

(3) On revocation of the licence under sub-section (2), the
following provisions shall have effect, namely:-

(a) every undertaking the licence in respect of which stands E
revoked shall by virtue of this section stand and be deemed
to have stood transferred to and vest and be deemed to have
vested in the State Electricity Board, hereinafter in this sec-
tion called "the Board" free from any debt, mortgage or
similar obligation of the licensee attaching to the undertaking: F
Provided that any such debt, mortgage or similar obligation
shall attach to the amount payable for the undertaking as men-
tioned in clause (h;

(b) ······························· G
(c) .............................. .

(d) .............................. .

(e) ······························· H
336 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.

A (f) ·······························

(g) ·······························

(h) the Board shall pay to the licensee an amount determined in
accordance with the provisions of Section 7-A:
B
Provided that the licensee shall be in addition to the said
amount, be entitled to interest thereon at the Reserve Bank rate
ruling at the appointed day plus one per centum for the period
from the appointed day to the date of payment of the said amount."
c It is not in dispute between the parties that pursuant to the said provisions
the appellant's undertaking stood statutorily acquired by the respondent-
Board with effect from the appointed day, that is, 1.12.1975. So far as the
question of compensation to be paid to the appellant-licensee for the
aforesaid acquisition of its undertaking is concerned, Section 7-A is re-
D quired to be noted. The relevant provisions of the said Section 7-A in the
light of which the controversy in the present case will have to be resolved
read as under :

"7-A. Detennination of amount.- (1) Where an undertaking of a
licensee has been purchased by the State Electricity Board in
E
consequence of revocation of his licence under sub-section (2) of
Section 4 or is sold under sub-section (1) of Section 5 or is
purchased under Section 6 or acquired under Section 6-A, the
amount payable therefor shall be determined as hereinafter
provided.
F
(2) The gross amount payable to such licensee shall be the
aggregate value of the amounts specified below :-

(i) the book value of all completed works in beneficial use
pertaining to the undertaking and taken over by the State
G Electricity Board, the State Government or local authority,
as the case may be (excluding works constructed at the cost
of local bodies for street lighting and works paid for by
consumers), less depreciation calculated in accordance with
the Sixth Schedule read with the Seventh Schedule to the
H Electricity (Supply) Act, 1948;
PILIBHITEI.ECTRICSUPPLY CO. (Pl LID.'· SPI.. OFFICER (El.ECTRICITY) (S.B. MAJMUDAR,J.] 337
(ii) the book value of all works in progress taken over, excluding A
works paid for by the consumers or prospective consumers;

(iii) the book value of all stores, including spare parts taken over,
and in the case of used stores and spare parts, if taken over,
such sum as may be decided upon by the Special Officer
referred to in sub-section (6) (hereinafter referred to as the B
Special Officer);

(iv) the book valut! of all other fixed assets in use on the date of
vesting under Section 6-A or Section 7, hereinafter referred
:::t
to as the vesting date, and taken over, less depreciation c
calculated in accordance with the said Schedules;

(v) the book value of all plants and equipments existing on the
vesting date, if taken over but no longer in use owing to wear
and tear or to obsolescence, to the extent such value has not
been written off in the book of the licensee, less depreciation D
calculated in accordance with the said Schedules;

Explanation - The book value of any fixed asset means its
original cost, and shall comprise -

(i) the purchase price paid by the licensee for the asset, including E
the cost of delivery and all charges properly incurred in
erecting and bringing the asset into beneficial use as shown
in the books of the undertaking;

(ii) the cost of supervision actually incurred, but not exceeding F
fifteen per cent of the amount referred to in paragraph (i) :

Provided that before deciding the amount under this sub-section,
the licensee shall be given an opportunity by the Special Officer
of being heard, after giving him a notice of at least 15 days therefor.
G
(3) .............................. ..

(4) .............................. ..

(5) The purchaser shall be entitled to deduct the following sums
from the gross amount payable under the foregoing sub-section to H
338 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.

A a licensee -

(a) the amount, if any, already paid in advance;

(b) where the purchaser is the State Electricity Board the amount
due, if any, including interest thereon, from the licensee to
B the Board, for energy supplied by the Board before the
vesting date;

(c) ····························

c (d) ... ,....................... .

(e) ····························
-
(f) ····························
(g) ........................... .
D '·

(h) the amounts remaining in Tariffs and Dividends Control
Reserve, Contingencies Reserve and the Development Reserve,
insofar as such amounts have not been paid over by the licensee
to the purchaser. ·
E
(i) ·····························
(6) The State Government shall appoint, by order in writing, a
person having adequate knowledge and experience in matter relat-
ing to accounts, to be Special Officer to assess the net amount
F payable under this section to the licensee, after making the deduc-
tions mentioned in this section.

(7)(a) Th" Special Officer may call or the assistance of such
officers and staff of the State Government or the State Electricity
Board' or the licensee as he may deem fit in assessing the net
G amount payable.

(b) The Special Officer shall have the same powers as are
vested in a Civil Court under the Code of Civil Procedure. 1908,
\
(Act V of 1908) when trying a suit, in respect of the following
H matters-
PILIBH!TELECTRJCSUPPLYCO. (P) LID. v. SPL OFFICER (ELECTRICITY) (S.R M,VMUDAR,J.J 339

(i) enforcing the attendance of any person and examining him A
on oath;

(ii) compelling the production of documents; and

(iii) issuing commissions for the examination of witnesses.
B
The Special Officer shall also have such further powers as may
be specified by the State Government by notification in the
Gazette."

The other relevant statutory provisions which are required to be noted are
found in Electricity Supply Act, 1948, [hereinafter referred to as 'the
c
Supply Act'] which is an Act to provide for the rationalisation of the
production and supply of electricity, and generally for taking measures
conducive to electrical development. U.P. State Electricity Board is con-
stituted under Section 5 of the Supply Act. The State Electricity Board is
enjoined by Section 18 of the Supply Act to arrange, in co-ordination with D
the Generating Company or Generating Companies, if any, operating in
the State, for the supply of the electricity that may be required within the
State and for the transmission and distribution of the same, in the most
efficient and economical manner. As per Section 2 sub-section (6) of the
supply Act 'licensee' means a person licensed. Section 57 of the Supply Act E
deals with 'licensee's charges to consumers' and it provides that the
provisions of the Sixth Schedule shall be deemed to be incorporated in the
licence of every licensee, not being a local authority and the licensee is
required to comply with the provisions of the said Schedule. The Sixth
Schedule to the Supply Act as it stood on the appointed day when the
appellant's undertaking was acquired will be referred to by us at an F
appropriate stage while we will consider the aforesaid four claims for
additional compensation as put forward by the learned senior counsel for
the appellant. •

In the background of the aforesaid statutory provisions we now G
proceed to consider the four claims for additional compensation pressed
for our consideration.

Claim No. 1

This claim is based on Section 7-A sub-section (2) Explanation (ii) H
340 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.

A extracted earlier. The appellant contends that as per the aforesaid
provision the gross amount of compensation payable to the appellant-licen-
see has to be the aggregate value of the amount specified in section 7-A(2)
and which ~ould include book value of all completed works in beneficial
use pertaining to the undertaking and taken over by the State Government
B as in the present case. As per the Explanation the book value of any fixed
asset means its original costs and shall also comprise of the cost of
supervision actually incurred but not exceeding the amount referred to in
paragraph (i) of the said Explanation. The appellant submits that it had
incurred from year to year large amounts of supervision charges paid to
C the staff engaged for having supervision over these fixed assets and the said
claim was wrongly disallowed by the Special Officer, even though the
appellant was entitled to at least 15% of the cost of supervision actually
incurred by the appellant as permissible under Explanation (ii) to Section
7-A(2). A look at the relevant part of the Award on this aspect shows that
according to the appellant the salary and wages paid to the officers and
D supervisory staff of the undertaking were debited to· the Revenue Account
and the cost of the assets amounting to Rs. 25,58,581 as shown in the
audited Balance Sheet was required to be raised by Rs. 3,82,737 being the
supervision charges at the rate of 15% of the total supervision charges
actually incurred for supervising and maintaining these assets. This claim
E was rejected by the Special Officer on two counts; (i) that as per the
provisions of the Sixth Schedule to the Supply Act these supervision
charges had to be capitalised by the appellant from year to year when they
were incurred and as that was not done these supervision charges could
not be awarded: and (ii) in any case there was no clear evidence led by the
F appellant in respect of the said claim. Learned senior appearing for the
appell~nt vehemently submitted that both these reasons given by the Spe-
cial Officer were erroneous. In that connection it was submitted that
Section 7-A sub-section (2) Explanation (ii) nowhere laid down that the
costs of supervision actually incurred should be capitalised by the licensee
from year to year. Reference to the Sixth Schedule to the Supply Act
G showed that 'original costs' of the asset was defined as per paragraph XVII
clause (6) to mean in respect of any asset the cost of the assets to the
licensee to which a proper addition on account of supervision cost not •
exceeding 15% of the cost referred' to in sub-para (a) was to be made. That
this original cost of the asset was meant to be ·calculated in connection with
H the operation of the Sixth Schedule which operated of its own even
PILIBHITEIBCTRJCSUPPLYCO. (P) LID. v. SPL. OFFICER (ElECTRJCITY) (S.S. MAJMUDAR,l.J 341

independently of the acquisition proceeding and prior thereto and had a A
direct linkage with paragraph I of the Sixth Schedule as applicable at the
relevant time which clearly laid down that notwithstanding anything con-
tained in the Indian Electricity Act, 1910 and the provisions in the licence
of a licensee, the licensee shall so adjust the charges for the sale of
electricity whether by enhancing or reducing them that his clear profit in B
any year of account shall not, as far as possible, exceed the amount of
reasonable return and that for deciding whether the rates of electricity
charged by the licensee resulted in his clear profit in any year of account
exceeding the amount of reasonable return or not. The concept of clear
profit to be kept in view for ascertaining the legality of tariff charges. That C
the concept of reasonable return is defined in sub-para (9) of paragraph
XVII of Sixth Schedule. It encompassed in respect of any year of account,
the sum of the amounts mentioned in clauses (a) to ( e) thereof. For finding
out whether clear profit in a given accounting year exceeded reasonable
return as laid down in paragraph I of Sixth Schedule reasonable return had
to be calculated for the year. For determining reasonable return capital D
base has to be ascertained as required by clause XVII(9)(a). For finding
out the capital base, original cost of fixed assets was require~ to be
computed as per clause XVII(l)(a) and for that purpose original cost was
to be ascertained as per clauses XVII(6)(a) and (c). Thus definition of
original cost of fixed assets for _the purpose of paragraph I of Sixth E
Schedule had an entirely different purpose to achieve and had nothing to
do with Explanation (ii) to Section 7:A(2) of the Act. We find considerable
force in this contention. The aspect of original cost which may include
proper addition on account of supervision not exceeding 15% of the cost
referred to in sub-para (a) of clause (b) of definition paragraph XVII of
F
the Sixth Schedule had nothing to do with the computation of proper
compensation payable to the licensee as per Section 7-A sub-section {2)
Explanation (ii). It is also pertinent to note that the scheme of compensa-
tion reflected by the aforesaid provisions indicated that cost of supervision
actually incurred up to the ceiling of 15% of the amount referred to in
paragraph (i) of the Explanation to Section 7-A{2) had to be straightaway G
added to the book value of fixed assets which was to be paid for by the
acquiring authority. On the other hand the provision or computation of
original cost as found in paragraph XVII clause (6) of the Sixth Schedule
referred to 'proper addition on account of supervision' which left a discre-
tion regarding computation of the amount of supervision and the said H
342 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.
A provlSJon did not contain phraseology like 'cost of supervision actually
incurred' as found in the aforesaid Explanation to Section 7-A(2). It was,
therefore, rightly contended that concept of capitalisation of the cost of
supervision for computing the original cost of the asset for the purpose of
paragraph I of the Sixth Schedule had nothing to do with the cost of
B supervision actually incurred which had to be considered as an addition to
the book value of the acquired fixed assets for computing compensation
under Section 7-A sub-section (2).

Learned senior counsel Shri Sen for the respondents vehemently
submitted that the cost cf supervision mentioned in the Explanation to
C Section 7-A(2) has necessarily a linkage with the Sixth Schedule and
Section 57 of the Suµply Act as the Sixth Scheduled becomes a part and
parcel of the very licence issued to the licensee and that is why the Special
Officer was justified in insisting that in absence of capitalisation of costs of
supervision from year to year by the appellant the claim was not main-
D tainable for addition of supervision charges. It is not possible to accept the
aforesaid contention of the learned senior counsel Shri Sen. In our view
the provisions of Sixth Schedule to the Supply Act are general provisions
which were enacted to lay down guidelines for fixation of licensee's charges
to consumers as provided in Section 57 of the Supply Act and also for
E supplying guidelines to the Rating Committee under Section 57-A and for
· that purpose various paragraphs of Schedule 6 have been enacted and are
made a part and parcel of the terms and conditions of the licence. But so
far as the question of compensation is concerned, Section 7-A of the Act
represents a complete circle. When we turn to the Explanation to Section
7-A(2) for computing the book value of any fixed asset, its original cost has
F to comprise of ingredients - the purchase price paid by the licensee for the
asset and secondly 15% addition to the said purchase price by way of cost
of supervision actually incurred oti such an asset. It is almost analogous to
solatium to be paid for acquisition of land under Land Acquisition Act.
No question of capitalisation of such supervision charges from year to year
G is contemplated by the said Explanation. All that is required to be shown
by the licensee is whether it had actually incurred the supervision costs in
connection with the staff engaged for supervising the concerned fixed
assets which were sought to be acquired from the licensee. Consequently
the first ground put forward by the Special Officer for rejecting this claim
H cannot be sustained.
PILIBffiTELECTR!CSUPPLYCO. (P) LID. v. SP!. OFFICER (ELECTRICITY) [S.B. MAJMUDAR,J.] 343

However, learned senior counsel for the respondents was on a firmer A
ground when he submitted that even on the second ground also the Special
Officer was justified in rejecting the claim .. The Special Officer had taken
the view that there was no clear evidence led by the appellant to sustain
this claim on merits. A mere look at the Explanation (ii) to Section 7-A(2)
shows that before claiming permissible supervision costs not exceeding
B
15% of the purchase price of the asset it has to be shown by the appellant
that it had actually incurred supervision costs by engaging staff for super-
vising these fixed assets. In this connection learned senior counsel for the

-
appellant submitted that all the relevant documents were in the custody of
the Board which could have been easily called for by the Special Officer
for his scrutiny. Even that apart the balance sheets which were available C
on the record of the Special Officer showed that the appellant had bifur-
cated various costs incurred on the staff and one of the specified items was .
the cost of supervisory staff incurred by the appellant during the year. A
mere look at a specimen of one such balance sheet shown to us indicated
that a lump sum figure was shown in the balance sheet as the amount spent D
on supervisory staff. It is difficult to appreciate how this lump sum amount
could be treated as the cost of sµpervision actually incurred by the appel-
lant by way of meeting the wages of the staff engaged for supervising the
concerned fixed assets which were subject-matter of acquisition. It is easy
to visualise that supervisory staJf may be engaged by the licensee not only
for supervising the fixed assets }mt also the office staff. Even that apart E
there would be a watchman kept for supervising not ·only the factory
premises consisting of the relevant fJXed assets but also for supervising the
cash room, compound and other preperties of the licensee. Unless clear
evidence was available on record pointing to the actual amount of cost
incurred by the licensee from year to year for meeting the wage bill of F
supervisory staff which was entrusted with the sole duty of supervising over
the concerned fJXed assets which ultimately vested in the State and the
Electricity Board, it could not be said that the appellant had made out a
case for grant of costs of supervision actually incurred by it in maintaining
these fixed assets and that it had satisfied the requirements of the Explana-
tion (ii) to Section 7-A(2). Therefore, the second ground on which the G
Special Officer rejected the claim cannot be found fault with. Consequently
the first claim for additional compensation is found to be devoid of any
substance and is, therefore, rejected.

That takes us to the consideration of Claim No. 2. H
344 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.
A Claim No. 2

So far as this claim is concerned the appellant contended that as per
Section 7-A(2)(i) the book value of all completed works in beneficial use
pertaining to the undertaking and taken over by the State Government or
local authority, as the case may be, had to be computed but that computa-
B tion must ·exclude the works constructed at the cost of and the works paid
for by the consumers. Thus the works for which payment emanated from
the consumers were not to be taken into consideration while computing
the book value of the completed works which were taken over from the
licensee by the acquiring authority. Having computed the same, the ques-
C tion of deduction from the said computation would fall for consideration
as per Section 7-A(2)(i) which provided that from this total amount of book
value of the assets so computed depreciation calculated in accordance with
the Sixth and Seventh Schedules to the Electricity (Supply) Act, 1948 had
to be deducted. That would necessarily mean depreciation on the com-
D puted book value of the acquired assets which have entered the computa-
tion of the book value as per the first part of Section 7- A(2)(i). What the
Special Officer has done is that while computing the depreciation on fixed
assets for deducting it from the book value of all completed work as per
Section 7-A(2)(i) the depreciation claimed by the assessee on works paid
for by the consumers has also been deducted. That this is contrary to the
E express language of Section 7-A(2)(i). On the other hand learned senior
counsel for the respondents submitted that when the Legislature has clearly
provided for deduction of depreciation from the book value of all com-
pleted work as per the Sixth Schedule read with the Seventh Schedule,
paragraph XII of the Sixth Schedule as applicable in 1975 when the
F appellant's undertaking was acquired would also be relevant. The entire
I
paragraph XII of the sixth Schedule along with the proviso had to be kept
in view and was rightly kept in view.

In order to appreciate the rival contentions on this claim it is neces-
sary to refer to the relevant provisions of the Sixth Schedule that applied
G in 1975 when the appellant's undertaking was acquired with effect from 1st
December 1975. The relevant provisions for depreciation are found in
paragraphs VI to XII of the Sixth Schedule as applicable at the relevant
time. They read .as under :

H "VI. (1) There shall be allowed in each year in respect of
PILIBHITEIBCTRICSUPPLYCO. (P) LID. v. SP!. OFFICER (ELECTRICITY) (S.B. MAJMUDAR, l.! 345

depreciation of fixed assets employed in the business of electricity A
supply such an amount as would, if set aside annually throughout
the prescribed period and accumulated at compound interest at 4
per centum per annum, produce by the end of the prescribed
period an amount equal to 90 per cent of the original cost of the
asset after taking into account the sums already written off or set
B
aside in the books of the undertaking. Annual interest on the
accumulated balance will be allowed as an expense from revenue
as well as the annual incremental deposit :

Provided that, within 3 months from the date upon which these
principles are enacted, a licensee may elect to adopt the straight- C
line method of depreciation accounting in lieu of the compound
interest method above prescribed. Straight-line method of
depreciation accounting means the method whereby an allowance
is made in each year in respect of depreciation of fixed assets
employed in the business of such an amount as employed in the
business of such an amount as is arrived at by dividing ninety per D
cent of the original cost of the asset by the prescribed method in
respect of such asset.

(2) The year in which any asset becomes available for use in
the business and the relative cost thereof shall, in the absence of E
satisfactory record, be determined by the State Government. All
sums credited to depreciation account shall be invested only in the
business of electricity supply of the undertaking or where it is not
practicable to so invest them in investments approved by the State
Government.
F
(3) Any sums invested in investments approved by the State
Government under sub-paragraph (2) shall, as soon as practicable,
be utilised in the business of electricity supply of the undertaking
and if such sums are not so utilised they shall not form part of the
capital base under clause (d) of sub-paragraph (1) of paragraph G
XVII.

VII. (1) where any fixed asset ceases to be available for use
through obsolescence, inadequacy, superfluity or for any other
reason, it shall be described in the books of the licensee as no
longer in use and no further depreciation in respect thereof shall H
346 SUPREME COURT REPORTS (1996) SUPP. 7 S.C.R.

A be allowed as a charge against revenue.

(2) The written down cost of such fixed asset shall be charged
against the Contingencies Reserve :

Provided that where the accumulations in the Contingencies
B Reserve are no sufficient to permit the charging of the entire
written down cost of the asset, the excess amount may, be included
in the capital base for the purpose of clause (a) of sub-paragraph
(1) of paragraph XVII.

c (3) The amount for which any such fixed asset is sold or the
amount of its scrap value when actually realised shall be credited
to the Contingencies Reserve.

VIII. When any asset has been written down in the books of
the undertaking to 10 per cent, or less of its original cost, no further
D depreciation shall be allowed in respect of that asset.

IX. When any fixed asset is sold for an amount exceeding its
written down cost the excess after deducting all taxes payable
thereon shall be credited to the Contingencies Reserve.
E
X. Except with the previous consent of the State Government,
no sums shall be carried forward to a reserve and no dividends in
excess of 3 per cent shall be paid on share capital and no other
distribution of profits shall be made to the shareholders in respect
of any year of account so long as any of the following sums remain
F to be written off in the books of the undertaking, namely :-

(i) normal depreciation due for that year of account calculated
in accordance with the provisions of paragraph VI;

(ii) equated instalment in respect of arrears of depreciation,
G computed in accordance with the provisions of paragraph XI,
for that year of account;

(iii) arrears, if any, in respect of normal depreciation referred to
in clause (i), accumulated after the date of application of the
H provisions of the Sixth Schedule to the licensee;
PILIBHITELECTRICSUPPLYCO. (P) LID. v. SP!.. OFFICER (ELECTRICTIT) [S.B. MAJMUDAR,J.] 347
(iv) arrears, if any, in respect of equated instalments referred to A
in clause (ii).

XI. Arrears of depreciation calculated in accordance with
paragraph VI may be written off by equated payments over the
remainder of the prescribed period and the amount so set aside
in the books of the undertaking may be taken into account in any
B
year as a special appropriation for purposes of assessing the clear
profit.

XII. Where contributions are made by consumers towards the
cost of construction of service lines constructed after the date on C
which this Act comes into force only the net cost of such fervice
lines after deducting such contributions shall be included in the
cost of fixed assets for the purposes of arriving at the capital base:

Provided that for the purposes of depreciation under paragraph
VI, the total original cost of construction of the service lines shall D
be taken into account."

It is, of course, true that as mentioned in paragraph XII of the Sixth
Schedule while considering the question of total capital base which in-
cludes the assets consisting of service lines for installation of which con- E
tributions are made by consumers towards the construction of such service
lines, the net cost of such service lines after deducting such contributions
has to be included in the costs of such fixed assets. It is also true that,
however, for computing the depreciation as per paragraph VI on such
assets, wherein consumers have contributed towards their acquisition, the
total original cost of construction of the service line~ had to be taken into
F
account. The Special Officer has applied paragraph XII whole hog while
deducting the depreciation from the book value of all completed works
which are acquired from the licensee as per Section 7-A(2)(i). In our view
the said approach of the Special Officer is ex facie unjustified. The reasons
are obvious. Paragraph XII of the Sixth Schedule to the Supply Act deals G
with a special type of asset, namely, service lines which are installed by the
licensee wherein the consumers have contributed towards the cost of
construction of such service lines. For this type of assets, in computing the
capital base of the licensee, the contribution by the consumers has to be
excluded but for computing depreciation under paragraph VI for such H
348 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.
A assets, namely, the service lines, the total original cost of construction of
service lines has to be taken into account which may include the cost of
construction of service lines incurred by the licensee as well as the other
part of the component of the cost of construction of service lines which has
come from the pockets of the consumers. But entire paragraph XII deals
B with only one type of assets, namely, service lines construction cost of which
is wholly or partially borne by the consumers. Paragraph VI of Schedule
VI, however, is general in nature and covers all types of fixed assets and
the method of computation of depreciation on these fixed assets. It is
axiomatic that fixed assets employed in the business of electricity supply
C may consist of those assets which are wholly acquired at the cost of the
licensee and may also include assets like service lines which may partly be
acquired and installed at the cost of the licensee and partly out of con-
tribution of the consumers who would be interested in getting electrical
supply at their own premises and for that purpose they may be willing and
D may be made to pay contribution towards extension of service lines to their
premises. Therefore, reference to service lines in paragraph XII of
Schedule VI is with a view to finding out as to how depreciation has to be
computed for such a special type of asset, namely, service lines wherein
consumers have also contributed towards their installation. Consequently
on a conjoint reading of paragraph VI and paragraph XII of Sixth Schedule
E the depreciation on such service lines installed by drawing upon the
contributions from the consumers is required to include the total original
cost of construction of such service lines and that would necessarily include
the component of the amount of cost contributed by the consumers.
However that has nothing to do with the computation of depreciation on
F the assets which are acquired by the acquiring authority under Section 6-A
read with Section 7-A(2)(i). It is now well settled that service lines whose
installation had been paid for by the consumers are not to be compensated
for and they vest in the acquiring authority under Section 6-A read with
Section 7-A free of cost or payment of compensation to the licensee. The
G logic underlying this settled legal position is that as the licensee had not
spent from his pocket for installing such an assets, he was not required to
be compensated for that part of the asset which was paid for by consumers.
A mere look at Section 7-A(2)(i) shows that the gross amount payable to
such licensee for acquiring his assets amongst others has to consist of an
H amount of the book value of all completed works in the beneficial use
PILIBHITE!ECTRJCSUPPLYCO. (P) LTD.'· SPL OFFICER (E!ECTRJCITY) [S.B. MAJMUDAR,J.] 349

pertaining to the undertaking. While computing such book value of ac- A
quired assets the works paid for by the consumers have to be ignored and
omitted from consideration. Therefore, the amount of book value com-
puted as per Section 7- A(2)(i) will consist of only those works which are
for beneficial use of the undertaking which was installed and acquired by
the licensee at its own cost. Having computed this amount the next ques-
B
tion survives about deducting the depreciation on such acquired assets.
That would naturally imply deduction of depreciation on such assets from
the amount so computed being the book value of the completed works
installed and acquired at the cost of the licensee. If these are the assets
whose book value has to be computed as per Section 7-A(2)(i) the question
of deduction from that amount would necessarily imply deduction of c
depreciation on these very assets. In other words the field is clearly
earmarked both for computation of the book value of the concerned assets
as also for deduction of depreciation on such assets as enjoined by the
second part of Section 7-A(2)(i) itself. It is axiomatic that before any
depreciation is deducted from the computed book value of an asset it D
should be for the same asset whose book value has been ascertained and
from that value depreciation is to be deducted. It cannot be that for
computing the book value of licensee's assets only self-financed assets are
to be taken into consideration and not the works paid for by the consumers
but while deducting from this very amount of book value the depreciation
is to be deducted qua not only the assets whose book value is computed E
but also qua the assets belonging to somebody else like the consumers who
have paid for the works. This would on the face of it be very anomalous
and unfair. It is also pertinent to note that from the book value of the assets
which were financed by the licensee as computed as per Section 7-A(2)(i)
when a question arises about deducting the depreciation, only the calcula- F
tion of such depreciation on the concerned asset is to be done in accord-
ance with Sixth Schedule because the words advisedly used by the
Legislature in Section 7- A(2)(i) in this connection are less depreciation
calculated in accordance with the Sixth Schedule read with the Seventh
Schedule. Therefore, only the method of calculation of depreciation has to G
be applied by way of reference to the Sixth Schedule. But the type of asset
for which depreciation has to be computed is not to be gathered from the
Sixth Schedule. It has to be gathered from the very first part of Section
7-A(2)(i), namely, only self-financed fixed assets whose book value is to be
computed by the Special Officer for payment to the licensee and from that
amount depreciation is to be deducted which would necessarily mean H
350 SUPREME COURT REPORTS (1996) SUPP. 7 S.C.R.

A depreciation on the very same asset which has undergone the book valua-
tion as per Section 7-A (2)(i). If for calculating the book value of such
assets the works paid for by the consumers are to be excluded they
necessarily cannot be included for the purpose of ascertaining deductible
depreciation on such assets. Consequently reference to paragraph XII
B Schedule VI would be totally out of picture and redundant so far as the
scheme of Section 7-A sub-sectio'l (2)(i) is concerned. It may be that the
licensee might have obtained benefit of such depreciation on consumer
paid assets under Income Tax Act or any other statutory provision but that
is totally irrelevant for deciding the question whether the deduction of
depreciation on the concerned assets whose book value is to be computed
C as per Section 7-A(2)(i), paragraph XII of Sixth Schedule could at all be
pressed in service. It is, therefore, no possible to agree with the submission
of learned senior counsel for the respondents and also the learned counsel
who appeared for the State of U.P. that for the purpose of deducting the
depreciation the assets which are not included in computing the book value
D as per Section 7-A(2)(i), namely, the consumer-financed assets also could
be taken into consideration. In our view the Special Officer was patently
in error when he computed the depreciation on the assets under Section
7-A(2)(i) by adding the amount of depreciation on the service lines which
were paid for by the consumers. Reference to paragraph XII of Sixth
Schedule in this connection was wrongly made and the said paragraph was
E wrongly pressed in service by the Special Officer. In this connection it has
also to be kept in view that the amount of Rs. 2,48, 718 being the deprecia-
tion amount on the works constructed at the cost of consumers was not
disputed by the Board and the only contention of the Board before Special
Officer was that as per paragraph XII of Sixth Schedule the said amount
F of depreciation was also to be deducted from the book value of the assets
acquired by the Board under Section 6-A read with Section 7-A. As the
reliance placed on paragraph XII of Sixth Schedule by the Special Officer
is found by us to be unjustified and as the amount of depreciation deducted
from the book value on this score is undisputedly Rs. 2,48,718.81 this
amount must be treated to have been wrongly deducted from the book
G value by way of depreciation on consumer-financed assets, namely, service
lines.

Before parting with the discussion on this claim we may mention one
impermissible exercise undertaken by the Special Officer. At page 40 of
H the impugned Award it has been mentioned that the Special Officer having
PILIBHITEIBCTRJCSUPPLYCO. (P) LID. v. SPL OFFICER (EIECIRICITY) [S.B. MAJMUDAR,J.) 351

found that as the matter was of considerable judicial importance it was A
considered prudent to take legal advice from Legal Rememberancer to
U.P. Government and as the Legal Rememberancer opined that clauses
XI and XII of the Sixth Schedule to the Electricity (Supply) Act would
seem to provide an answer to the question raised they had to be kept in
view and that Special Officer agreed with the said opinion of the Legal B
Rememberancer. It has to be kept in view that the Special Officer exercis-
ing quasi-judicial functions under Section 7-A of the Act who has the same
powers as are vested in a Civil Court under the Code of Civil Procedure,
. 1908 when trying a suit, in respect of the matters enumerated in Section
7-A sub-&ection 7(7)(b) could not have called for such an opinion of Legal
Rememberancer and even though Section 7-A clause (7)(a) permits the C
Special Officer to have the assistance of such officers and staff of the State
Government or the State Electricity Board or the licensee as he may deem
fit in assessing the net amount payable, it had to be done in presence of
the licensee and an opportunity should have been given to the licensee to
meet such an opinion. As that has not been done in the present case such D
an exercise on the part of the Special Officer and the reliance placed by
him on the opinion of the Legal Rememberancer obtained behind the back
of the licensee must be treated to be totally an incompetent and uncalled
for exercise and such an opinion should have been completely ignored by
the Special Officer. The second claim has, therefore, got to be accepted.
We accordingly hold that the Special Officer has wrongly deducted from E
the book value of the assets as computed under Section 7-A(2)(i) an
amount of Rs. 2,48,718.81 and that amount is required to be added back
to the book value of the assets which is to be made payable to the
appellant-licensee by way of additional compensation.
F
Claim No.3

So far as this claim is concerned, as noted earlier, the appellant
ultimately confined the claim on this head to Rs. 60.603.78. This claim
refers to the electricity dues on the electricity supplied by the Board to the
licensee during the period prior to the appointed day. The fuel escalation G
clause binding on the licensee entitled the Board to claim this amount.
These amounts pertain to the period from October 1972 to November 1975.
It is true that in connection with these amounts of claim various bills were
issued by the Electricity Board to the appellant. At page 69 of the im-
pugned Award the entire table has been extracted by the Special Officer. H
352 SUPREME COURT REPORTS (1996] SUPP. 7 S.C.R.

A The said table shows that at serial nos.1 to 8 different bills were issued by
the Board to the appellant between 25th July 1974 and 12th November
1975. But there are last two bills dated 24th March 1976 and 2nd Septem-
ber 1976 which were obviously issued after the appointed day. It was,
therefore, contended by the learned senior counsel for the appellant that
B for at least the amounts covered by these two bills which consisted of Rs.
51,286.70 and 9,317.08 respectively totalling to Rs. 60,603.78 the appellant
could not have been made responsible as the bills were issued after the
take-over. Learned senior counsel for the respondent-Board on thl! other
hand submitted that the respondent-Board on the other hand submitted
that ???? these two bills referred to the period prior to the take-over,
C namely, bill dated 24.3.1976 was for a period from October 1974 to Novem-
ber 1975 and bill dated 2.9.1976 was for October and November 1975. In
this connection he invited our attention to Section 7-A(5)(b) which in terms
provided that from the amount of compensation payable to the licensee the
Special Officer was entitled to deduct the amount due to the State
D Electricity Board which was predecessor of the undertaking for energy
supplied by the Board to the licensee before the vesting date. That as this
energy was admittedly supplied to the licensee by the Board which was the
predecessor of this undertaking before the vesting date, that is, 1.12.1975
the predecessor Board was entitled to deduct the said sum from the
E amount payable to the licensee for such acquisition and purchase as
computed under Section 7-A(l) read with sub-section (2). In our view the
afores'lid contention of learned senior counsel for the respondent is well
sustained on the statutory scheme of Section 7-A(5)(b). The Special Of-
ficer was certainly entitled to deduct from the amount payable to the
F licensee for the acquisition of his undertaking the amount due to the Board
by way of supply of energy to the Hcensee. Even though the bill might have
been issue,d after the acquisition and the appointed day as the bills referred
to the period prior to the appointed day in connection with the electricity
admittedly supplied by the Board to the licensee, the licensee was statutori-
ly bound to reimburse the Board to the extent of these bills and that
G amount could be legitimately deducted from the computed amount of
compensation by the Special Officer as enjoined by Section 7-A sub-section
(5)(b). Consequently learned senior counsel for the appellant was not
justified in submitting that in such a case the Board should have been asked
to file a separate suit and as such suit was not filed the Board could not
H have deducted that amount from the amount payable to the licensee under
PILIBHITEl.ECTRICSUPPLYCO. (P) LID. v. SPL. OFFICER (El.ECTRICITY) (SB. MAJMUDAR,J.) 353

Section 7-A{2){i). This claim; therefore, is found to have been rightly A
refused by the Special Officer and accordingly it stands rejected. That takes
us to the consideration of the last claim.

Claim No. 4

B
As noted earlier this claim now is confined to Rs. 76,423. It consists
of deduction of Rs. 38,212 by way of Tariffs & Dividends Control Reserve.
This deduction is effected by the Special Officer as per Section 7-A
sub-section (5){h). A mere look at the said provision shows that from the
amount of compensation payable to the purchaser the Special Officer can C
deduct the amounts remaining in Tariffs and Dividends Control Reserve.
Contingencies Reserve and the Development Reserve, insofar as such
amounts have not been paid over by the licensee to the purchaser. It is
obvious that these are trust amounts in the hands of the licensee which are
ultimately to be paid over to the consumers and at the time of acquisition D
of its undertaking the said Reserves have to be handed over to the pur-
chaser, namely, the Board. But what is to be handed over to the Board by
the licensee is the amount remaining in the Tariffs and Dividends Control
Reserve. So far as the figures of the outstanding amounts in these reserves
were concerned they were supplied by the licensee to the Special Officer.
Accordingly an amount of Rs. 8,615 stood credited to the Tariffs and E
Dividends Control Reserve while an amount of Rs. 54,560 stood in the
Consumer Rebate Reserve which was also part and parcel of Tariffs and
Dividends Control Reserve. However by a very curious piece of reasoning
the Special Officer artificially inflated the balances of these reserves and
held that Tariffs and Dividends Control Reserve should be treated to be F
showing the balance of Rs. 46,826 instead of Rs. 8,615 while the Consumer
Rebate Reserve balance should be inflated to Rs. 97,727 instead of Rs.
54,560. The process by which this inflation was done for the purpose of
deduction under Section 7-A{5){h) also makes in interesting reading. The
Special Officer agreed with the appellant that for the purpose of computing
depreciation of assets financed by the appellant which had to be deducted G
from the book value of these assets as per Section 7-A{2){i) extra deprecia-
tion charged by the licensee on these assets and which was effectively got
considered by the Income Tax authorities could not be taken into con-
sideration for the purpose of Section 7-A{2){i) as such excess depreciation
was not contemplated or covered by the Sixth or the Seventh Schedule. H
354 SUPREME COURT REPORTS [1996) SUPP. 7 S.C.R.

A Having accepted this contention, the Special Officer reduced the figure of
deductible depreciation on these self-financed assets under Section 7-
A(2)(i) and to that extent the book value of the self-financed assets got
inflated and that benefit became available to the appellant. But the Special
Officer thereafter proceeded to hold that because the appellant had ob-
B tained this excess depreciation from the Income Tax authorities that would
have got added to its revenue in the relevant years and this additional
benefit would have got added to its reserves and, therefore, the amount of
excess depreciation which was not deducted from the book value of the
acquired assets as per Section 7-A(2)(i) had to be added back to the
concerned Tariffs and Dividends Control Reserve and Consumer Rebate
C Reserve and that is how he ploughed back these extra depreciation
amounts which could not be deducted under Section 7-A(2)(i) by way of
depreciation on these assets by treating them as deductible under Section
7-A(5)(h). In our view on the clear language of Section 7-A(5)(h) such an
exercise is not contemplated. While deducting the depr_eciation from the
D book value of the concerned assets as per Section 7-A(2)(i) the amount of
extra depreciation which is de hors the permissible scheme of the Sixth
Schedule read with Seventh Schedule of the Supply Act has to be ignored.
Once that is done Section 7-A(2)(i) gets completely exhausted and com-
plied with. Upto that stage the Special Officer was with the appellant, but
E then he thought that this extra benefit of additional depreciation which was
already earned by the appellant from the Income Tax Department must be
deducted from the purchase price as per Section 7-A(5)(h) by artificially
inflation the balance of the concerned Reserves. So far as this exercise,
undertaken by the Special Officer, is concerned it is not permissible on the
F express language of Section 7-A(5)(h). The said provision clearly indicates
that whatever amounts have remained in the concerned Reserve Accounts
with the licensee on the date of acquisition have to be paid over to the
purchaser. Thus actual balances of these Reserves as reflected from the
books of accounts of the licensee, had to be handed over to the Board. The
said provision nowhere permits an exercise of artificially inflating the
G balances of these Reserves which are not reflected by the books of accounts
of the licensee, on the supposition that these extra depreciations which the
licensee must have earned from year to year on these assets and which is
not covered by the Sixth or Seventh Schedule of the Supply Act'must have
swelled the revenues of the licensee under Income Tax Act and, therefore,
H must necessarily have gone to the concerned Reserve Accounts. Before
PJLIBHITE!ECTRICSUPPLYCO. (P)LTD.v.SPLOFFICER(E!ECTRICITY)[S.R MAJMUDAR,J.] -355

that stage is reached it is just possible that the licensee might have utilised A
the extra depreciation earned according to the Income Tax Act provisions
for swelling its own profits which might not have been diverted to Reserves
bu.Lmight have been utilised for other purposes including giving dividends
to its shareholders or in purchasing other assets which would naturally get
accounted for under Section 7-A(2)(i) itself. There are number of contin-
B
gencies contemplated in the accounting practices followed by the licensee
in connection with its business activities which might have utilised in
diverse ways these extra depreciation amounts earned by the licensee from
Income Tax authorities. Therefore, it was not permissible for the Special
Officer to conclude that necessarily these extra depreciations earned by the
licensee must have been utilised for swelling the balances of the concerned C
Reserves and, therefore, the actual balances did not reflect the real balan-
ces. It is also to be kept in view that balances in these concerned Reserves
would rise over number of years during which the licensee carries on its
business and they are not necessarily confined to only one year or the last
year when the acquisition takes place. They are a product of working of D
the concern over years and also get reflected by the accounting practices
and the business practices resorted to and adopted by the licensee over
years. Consequently there was no material with the Special Officer to come
to a definite conclusion that the extra depreciations earned by the licensee
over years from the Income Tax Department must have got channelised E
into these Reserves and, therefore, the apparent balances in these Reserves
were not the real balances and had to be inflated accordingly with a view
to seeing that what does out from the deductible depreciation under
Section 7-A(2)(i) must necessarily get deducted under Section 7-A(5)(h).
In our view, therefore, the Special Officer was clearly in error in deducting
the total amount of Rs. 76,423 consisting of the artificially inflated balances F
in the aforesaid two Reserves from the amount of compensation payable
to the licensee as per Section 7-A(5)(h). The fourth claim, therefore, is
found to be well sustained and must be accepted by holding that the
appellant was entitled to an additional compensation of Rs. 76,423 on this
count. G
In view of the aforesaid discussion on the main claims for additional
compensation as canvassed before us it must be held that the appellant
would ·be entitled to additional compensation on Claim no.2 amounting to
Rs. 2,48,718 and Claim No. 4 amounting to Rs.76,423. The total of these
H
356 SUPREME COURT REPORTS [1996] SUPP. 7 S.C.R.
A two figures works out to Rs. 3,25,141. We are informed by the learned
senior counsel for the appellant that even the awarded amount has still not
been paid by the respondents. To recapitulate the award was passed as
early as on 31st March 1980. As per Section 6-A sub-section (3)(h) of the
Act, the Electricity Board is enjoined to pay the licensee an amount
B determined in accordance with the provisions of Section 7- A and as per
the proviso to that Section the licensee shall in addition to the said amount,
be entitled to interest thereon at the Reserve Bank rate ruling at the
appointed day plus one per centum for the period from the appointed day
to the date of payment of the said amount. As even the awarded amount
as per the Award of 31st March 1980 is still not paid to the appellant the
C Board has to be directed to pay up to the appellant the amount as awarded
by the Special Officer by his Award with interest thereon at the relevant
Reserve Bank rate ruling at the appointed day, that is, 1.12.1975 plus one
per cent for the period from the date of award to the date of actual
payment to the appellant-licensee. In addition thereto the additional
D amount awarded by our present order, namely, Rs. 3,25,141 will als~ have
to be paid by the respondent-Board to the appellant-licensee with interest
thereo~ at the Reserve Bank rate also from the appointed date, that is,
1.12.1975 plus one per cent interest on the said amount for the period from
1.12.1975 till the date of actual payment of this additional amount of Rs ..
3,25,141. All the aforesaid amounts with interest as directed hereinabove
E shall be paid by the respondent- Board to the appellant-licensee on or
before 31st March 1997. The demand for additional amount as reflected
by claims nos. 1 and 3 will stand rejected. The appeal is accordingly
allowed to the aforesaid extent. As out of the four claims for additional
compensation as pressed for this appeal two are granted by us and two are
p rejected and as the success is equally shared by both the sides there will
be no order as to costs.

R.A. Appeal allowed.

f