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Delhi Cloth And General Mills Co. Ltd. And Another v. Rajasthan State Electricity Board And Another
Supreme Court Of India
Mar 12, 1986
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Factual and Procedural Background
An agreement dated 28 July 1961 between the Rajasthan State Electricity Board (“the Board”) and the appellant industrial consumer granted the appellant a concessional rate for supply of electricity. Clause 18 of that agreement provided that the “rate of supply” would be reviewed every five years, starting 1 January 1971, if the component of the cost of generation varied by 25 % or more. After 1 January 1971 the Board framed uniform tariffs for all large industrial consumers, thereby eliminating the appellant’s concessional rate and imposing additional charges described as “surcharge”.
The appellant challenged: (i) the Board’s interpretation of clause 18, (ii) the legality of the uniform tariffs and surcharges framed under newly-inserted Sections 49-A and 49-B of the Electricity (Supply) Act, 1948 (introduced by the Rajasthan Amendment Act, 1976 with retrospective effect), and (iii) the constitutional validity of the statutory changes. The present opinion resolves those challenges.
Legal Issues Presented
- Whether clause 18 of the 1961 agreement is an “escalation clause” limiting the Board to proportionate increases correlated to cost of generation, or merely a price review clause permitting complete revision of rates.
- Whether the Board could, by invoking Sections 49-A and 49-B (Rajasthan Amendment Act, 1976), unilaterally impose uniform tariffs and eliminate the contractual concession without violating Section 49-A(2) or the agreement.
- Whether clause 34(b) of the agreement validly subjects the parties’ rights to future legislation, thereby bringing Sections 49-A and 49-B into the contractual framework.
- Whether the retrospective application of Sections 49-A and 49-B and the resultant demands violate Articles 14, 19(1)(f) & (g), 31(2) of the Constitution of India or the doctrine of promissory estoppel.
- Whether any liability could be fastened on the appellant for the period 1 January 1971 to 7 February 1976 in the absence of a demand raised before 7 February 1976.
- Whether the Board possesses statutory authority to levy a “surcharge” as part of the uniform tariff structure.
Arguments of the Parties
Appellants’ Arguments
- Clause 18 is an escalation clause; hence any increase must be proportionate to the rise in cost of generation, and the Board cannot replace the concessional rate with uniform tariffs unrelated to such costs.
- Complete abolition of the concessional rate violates the guiding principles in Section 49(3) and is contrary to Section 49-A(2).
- Clause 34(b) can operate only in respect of valid future legislation; retrospective alteration of contractual rights through Sections 49-A and 49-B is impermissible and renders clause 34(b) uncertain.
- Retrospective elimination of the concession constitutes acquisition of property without compensation (Article 31(2)), violates equality (Article 14), freedom of occupation and property rights (Article 19(1)(f) & (g)), and offends the doctrine of promissory estoppel.
No separate, detailed account of the Board’s arguments is provided in the opinion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Indian Aluminium Company v. Kerala State Electricity Board, (1975) 2 SCC 414 | Held that existing contractual concessions could not be overridden under unamended Section 49. | Noted as the “difficulty” the 1976 Rajasthan Amendment sought to remove; distinguished in light of new Sections 49-A and 49-B. |
| Bisra Stone Lime Co. Ltd. v. Orissa State Electricity Board, (1976) 2 SCC 167 | Meaning of “surcharge” and the Board’s power to impose additional charges. | Relied on to affirm that “surcharge” is an additional payment and that the Board’s tariff-fixing power includes power to impose a uniform surcharge. |
| Titagarh Paper Mills Ltd. v. Orissa State Electricity Board, (1975) 2 SCC 436 | Prior interpretation of tariff-fixing powers under Section 49. | Referred to in support of the Board’s competence to frame tariffs for bulk consumers. |
| Madan Mohan Pathak v. Union of India, (1978) 2 SCC 50 | Scope of Article 31(2) regarding extinction of contractual rights. | Distinguished; court held no “acquisition” took place in the present case. |
| H.H. Maharajadhiraja Madhav Rao Scindia v. Union of India, (1971) 1 SCC 85 | Principles on acquisition of property and compensation. | Distinguished to reinforce that extinguishment of a defeasible contractual right is not an acquisition under Article 31(2). |
| State of M.P. v. Ranojirao Shinde, (1968) 3 SCR 489 | Constitutional protection against deprivation of property. | Distinguished on identical grounds as above. |
Court's Reasoning and Analysis
1. Nature of Clause 18
An “escalation clause” concerns automatic adjustments tied to market prices. Clause 18 instead uses the word “review”, which the Court interpreted as conferring a discretionary right on the Board to have “a second look” and revise the tariff every five years, subject only to the proviso that at least a 25 % variation in cost of generation must trigger the review. Therefore, the clause permits complete revision, not merely proportionate escalation.
2. Effect of Sections 49-A and 49-B (Rajasthan Amendment Act, 1976)
The State Legislature was competent under Entry 38, List III to enact the amendment with retrospective effect. Sections 49-A and 49-B expressly override earlier agreements and empower the Board to apply uniform tariffs to all bulk consumers, including those enjoying pre-1964 concessions. The provisions advance the public interest by preventing the Board from operating at a loss.
3. Clause 34(b) and Incorporation of Future Legislation
Clause 34(b) stipulates that contractual rights are subject to “any legislation” enacted during the agreement period. The Court held that this clause validly incorporates future legislation, and that reading Sections 49-A and 49-B into the contract does not amount to an impermissible retrospective conferment of power.
4. Surcharge
Relying on Bisra Stone Lime, the Court defined “surcharge” as an “additional or extra charge”. Since the power to fix uniform tariffs necessarily includes the power to increase them uniformly, the Board may impose a surcharge.
5. Liability for 1 January 1971 – 7 February 1976
While Section 49-A removes the contractual concession from 16 September 1966, the Court held that, for the period before the Ordinance dated 7 February 1976, liability would arise only if the Board had raised a demand prior to that date—a requirement of Section 49-B.
6. Constitutional Challenges
• Article 31(2): Extinction of a defeasible contractual right is not “acquisition” or “requisition”; no compensation is therefore required.
• Articles 14 and 19(1)(f) & (g): Uniform tariffs apply equally to all large industrial consumers, are based on cost considerations, and are not confiscatory; hence they are reasonable and non-discriminatory.
• Promissory Estoppel: The appellants did not establish that they set up the industry on the faith of any specific promise by the Board; multiple governmental incentives existed; estoppel therefore does not arise.
Holding and Implications
The Court upheld the Board’s power to revise tariffs, impose uniform rates and levy surcharges; the appellant’s challenges were rejected.
Implications: The decision affirms that (i) contractual concessions for electricity supply can be overridden by subsequent legislation expressly authorised to operate retrospectively, (ii) tariff-fixing powers under Sections 49, 49-A and 49-B include imposition of surcharges, and (iii) constitutional objections based on property rights, equality and promissory estoppel will not prevail where the legislation pursues the public interest of preventing operational losses by the Electricity Board.
TERMS OF AGREEMENT
Contracts — Price review clause — Different from price escalation clause Words and Phrases — “Escalation clause”
Clause 18 of the agreement between the State Electricity Board and the appellant was in the following terms:
“18. ... The rate of supply as determined in clause 17 above shall be reviewed every fifth year starting from the date of first supply provided the component of cost of generation out of total cost varies by 25% or more from the cost last fixed. Further the rate fixed by this agreement shall be reviewed only on or after January 1, 1971.”
The appellant contended that clause 18 was an escalation clause and therefore the Board was not entitled to unilaterally frame uniform tariffs as due and payable by the appellants but the rate of increase must be in proportion to, or correlated with, the actual rise in the cost of generation.
Held :
Clause 18 cannot be regarded to be in escalation clause. An “escalation clause” according to its accepted legal connotation means a clause which takes care of the rise and fall of prices in the market, whereas the right to review confers the power to revise the rate, of supply. The word “review” in clause 18 necessarily implies the power of the Board to have a second look and to so adjust from time to time its charges as to carry on its operations under the Act without sustaining a loss. The parties clearly contemplated by clause 18 for a fresh revision of the rate once in a block of five years. The only fetter on the power of review is that contained in the proviso to clause 18. There is, therefore, no basis for the submission that there could only be proportionate increase keeping in view the increase in the component of cost of generation.
(Para 30)
Butterworths' Encyclopaedia of Forms & Precedents, 4th Edn., vol. 3, page 148 : Hudson's Building & Engineering Contracts, 10th Edn.; Keating's Building Contracts, 4th Edn., page 498 : Black's Law Dictionary, 4th Edn., page 639; American Jurisprudence, 2nd Edn.. vol. 17, page 786 and Corpus Juris Secundum, vol. 17 page 806, referred to
Electricity (Supply) Act, 1948 — Sections 49-A and 49-B [as introduced by Electricity (Supply) (Rajasthan Amendment) Act, 1976] — Uniform tariffs made applicable to all large industrial consumers totally eliminating prevailing concessional rate granted to a consumer under an agreement — Held, not violative of Section 49-A(2)
The appellant contended that while the concessions stipulated by the agreement under Section 49(1) could have been altered in proportion to the rise in the cost of generation, such concession could not have been altogether eliminated as that would amount to a total disregard of the guiding principles contained in Section 49(3) and thus contrary to the mandate of Section 49-A(2) of the Act.
Held :
The contention is not well founded. The true object and purpose of the enactment should lie kept in mind and due effect should be given to Sections 49-A and 49-B with a retrospective effect which clothed the Board with power to make the uniform tariffs applicable to bulk consumers like the appellants who under agreements entered into with the Board on July 28, 1961 i.e before April 1, 1964, the cut out date mentioned in Section 49-A(1) had been, to the great financial detriment of the Board, enjoying a concessional rate of supply which had no relation to the existing cost of generation, with the result that the burden of this cost had to be passed over to other consumers. The legislative mandate contained in Sections 49-A and 49-B as introduced by the Rajasthan Electricity (Supply) Amendment Act, 1976 subserves the public interest to ensure that the Board shall not, as far as practicable, after taking credit for any subvention from the State Government under Section 63 carry on its operations under the Act at a loss.
(Para 38)
Contracts — Clause making contract subject to future legislations valid — Future legislations, if any, have to be read into the contract so as to incorporate them in contractual terms — That would not amount to retrospective conferment of prospective power under those legislations — Electricity (Supply) Act, 1948, Sections 49-A and 49-B [as introduced by Electricity (Supply) (Rajasthan Amendment) Act, 19761]
Clause 34(b) of the agreement between the Rajasthan State Electricity Board and the appellant read thus:
“34. (b) Nothing contained in this agreement or any amendment thereof shall restrict any rights, obligations and discretions which the Board or the consumer has derived under any legislation relating to supply and consumption of electricity enacted during the period of this agreement.”
The appellants contended that by clause 34(b) the parties contemplated that the mutual rights and obligations would be subject to future legislations on supply and consumption of electricity but such legislations necessarily had to be valid legislations and if clause 34(b) was to be treated as a contractual stipulation providing that the rights stipulated in the agreement were subject to any modification by any legislation, valid or invalid, clause 34(b) will have to be struck down as a totally uncertain clause which cannot find place in any contract. The appellant submitted that in no case clause 34(b) can possibly be made applicable to any purported alteration of contracting parties' rights for a past period by means of retrospective legislation.
Held :
The right of the appellants to the supply of electricity at a concessional rate under the agreement entered into by the Board with them under Section 49 was defeasible inasmuch as on a fair construction of the terms of clause 34(b) taken in conjunction with the conduct of the parties, it is clear that the parties had contemplated that the mutual rights and obligations under the contract would be subject to alteration by future legislation. That being so Sections 49-A and 49-B have to be read into the contract and these provisions by virtue of clause 34(b) became a contractual stipulation.
(Paras 34 and 37)
SECTIONS 49-A AND 49-B
Electricity (Supply) Act, 1948 — Sections 49 and 49-A & 49-B [as Introduced by Electricity (Supply) (Rajasthan Amendment) Act, 1976] — Board's power to unilaterally frame uniform tariffs in derogation of existing agreement with industrial consumer granting concessional rate — Cannot be questioned under Section 49 relying upon Indian Aluminium Co. case in view of introduction of Sections 49-A and 49-B by the Rajasthan Amendment
Held :
The State legislature, under Entry 38 of List III of Seventh Schedule to the Constitution was competent to enact the Rajasthan Electricity (Supply) Amendment Act, 1976 and introduce the impugned Sections 49-A and 49-B with retrospective effect to overcome the difficulty created by the decision of Supreme Court in Indian Aluminium Co. case. There being a change in the law brought about by the introduction of Sections 49-A and 49-B by the Amendment Act, the Court is bound to give effect to these provisions notwithstanding anything contained in the Act or in any agreement, undertaking, commitment or concession to the contrary made by the Board before the first day of April 1964, or the decision in Indian Aluminium Co. case.
(Para 39)
Indian Aluminium Co. v. Kerala State Electricity Board, (1975) 2 SCC 414 : (1976) 1 SCR 70 : AIR 1975 SC 1967, referred to
Electricity (Supply) Act, 1948 — Sections 49-A and 49-B [as introduced by Electricity (Supply) (Rajasthan Amendment) Act, 1976] — Liability of consumer paying agreed rate to pay uniform tariffs framed by Board from time to time under Section 49-A read with Section 49-B for period between January 1, 1971 to February 7, 1976 would not arise unless Board makes a demand prior to February 7, 1976
Held :
The Board is relieved of the shackles of the contractual obligations flowing from the agreements relatable to Section 49(3), and the Board is empowered in terms of Section 49-A to revise the tariffs or frame uniform tariffs with respect to consumers enjoying special benefits as from September 16, 1966. However, the Board could not on the strength of Section 49-A alone recover the difference between the uniform tariffs fixed from time to time and the agreed rate of supply from the appellants for the period from January 1, 1971 to February 6, 1976 without the aid of Section 49-B. Section 49-B on its terms has no application unless there was a demand raised or created prior to February 7, 1976, the date of promulgation of the Ordinance.
(Paras 43 and 44)
Electricity (Supply) Act, 1948 — Sections 49 and 49-A & 49-B [as introduced by Electricity (Supply) (Rajasthan Amendment) Act, 1976] — Board has power to impose surcharge also
Words and Phrases — “surcharge” — Meaning of
Held :
Plainly, the word “surcharge” means an additional or extra charge or payment. A surcharge is thus in substance an addition to the stipulated rates of tariff. Under Section 49, as substituted by the Amendment Act 30 of 1966, the Board can fix uniform tariffs. The power to fix uniform tariffs must necessarily include power to make uniform increase in tariffs. Section 49-A had the effect of removing the Board from the shackles of the agreement to supply electricity at a concessional rate entered into under Section 49. The effect of the non obstante clause in Section 49-A(1) was to nullify the agreement.
(Paras 45 and 46)
Bisra Stone Lime Co. Ltd. v. Orissa State Electricity Board, (1976) 2 SCC 167 : (1976) 2 SCR 307 : AIR 1967 SC 217, relied on
Shorter Oxford English Dictionary, p. 2199, relied on
Indian Aluminium Co. v. Kerala State Electricity Board, (1975) 2 SCC 414 : (1976) 1 SCR 70 : AIR 1975 SC 1967 and Titagarh Paper Mills Ltd. v. Orissa State Electricity Board, (1975) 2 SCC 436, referred to
CONSTITUTION OF INDIA, ARTICLES 31(2), 14 AND 19(1)(f) & (g) AND PROMISSORY ESTOPPEL — APPLICABILITY
Electricity (Supply) Act, 1948 — Sections 49-A and 49-B [as introduced by Electricity (Supply) (Rajasthan Amendment) Act, 1976] — Extinguishment of right to get electricity at agreed concessional rate by reason of Sections 49-A and 49-B for the period subsequent to January 1, 1971 would not attract Article 31(2)
Constitution of India — Article 31(2) — Applicability
Held :
Where a law does not, in reality, affect a transfer of ownership or possession, Article 31(2) cannot be attracted. In order to constitute acquisition within the meaning of Article 31(2), there must be transfer of ownership of property to the State or to a corporation owned or controlled by the State. Unless the taking of property had taken place in either of the two ways, viz. “acquisition or requisitioning”, there was no obligation to pay compensation under the Constitution. The extinction of the right of the appellants under the contract with the Board to get electric supply at a concessional rate under clause 18 of the agreement for the period after January 1, 1971 when revision of tariff was due under clause 18 thereof, had not amounted to acquisition of property under Article 31(2). Further, there was no question of any transfer of money representing any debt owed by the Board from the appellants which stood extinguished by reason of Sections 49-A and 49-B of the Act. All that the appellants had under their contract with the Board was a defeasible right by reason of clause 34(b) of the agreement and Section 49-A of the Act struck at the agreement. The Board was competent to review the tariff in terms of clause 18 of the agreement as from January 1, 1971. Section 49-A liberates the Board from the constraints of the agreed rate under the agreement entered into by the Board with the appellants under Section 49 and empowers the raising of demand according to the uniform tariffs. Here, there was no debt due or owing to the State or a corporation owned or controlled by the State. Article 31(2) was thus not attracted.
(Paras 49 and 50)
Indian Aluminium Co. v. Kerala State Electricity Board, (1975) 2 SCC 414 : (1976) 1 SCR 70 : AIR 1975 SC 1967; Madan Mohan Pathak v. Union of India, (1978) 2 SCC 50 : 1978 SCC (L&S) 103 : (1978) 3 SCR 334 : AIR 1978 SC 803; H.H Maharajadhiraja Madhav Rao Jiwaji Rao Scindia Bahadur v. Union of India, (1971) 1 SCC 85 : (1971) 3 SCR 9 : AIR 1971 SC 530 and State of M.P v. Ranojirao Shinde, (1968) 3 SCR 489 : AIR 1968 SC 1053, distinguished
Electricity (Supply) Act, 1948 — Sections, 49-A and 49-B [as introduced by Electricity (Supply) (Rajasthan Amendment) Act, 1976] — Imposition of uniform tariff on all large industrial consumers under — Consumer who was getting electricity at a concessional rate under agreement with Board cannot allege violation of Articles 14 and 19(1)(f) & (g) as a result of the uniform tariff — Constitution of India, Articles 14, 19(1)(f) and (g)
Held :
The contention based on Article 10(1)(f) and (g) cannot prevail. The present case concerns only with sale of goods i.e electricity and the price to be paid therefor, for “tariff” is nothing but the price. The contract itself provided for revision of the rate under clause 18 of the agreement after January 1, 1971. The Board was within its powers in applying the uniform tariffs to the appellants after the period stipulated for had expired. There was nothing unreasonable for the Board to have enforced the uniform tariffs as against the appellants as from January 1, 1971. Reasonableness of the increase in tariff is established by the fact that the Board was not bound to supply electricity to the appellants at a concessional rate by incurring operational losses beyond that date. The appellants have not shown nor produced any material to show that they have suffered any loss on account of the increase in tariff. There is nothing to show that the appellants had not the capacity to bear the burden of uniform tariffs. It cannot be said that the impugned demands made by the Board as against the appellants were confiscatory in nature. When all the large industrial undertakings including the public sector undertakings of the Government of India and the State Government were paying for the supply of electricity at uniform tariffs fixed from time to time, the appellants had no right to claim immunity.
(Para 53)
There was no reason why the appellants should not be treated alike with all other large industrial undertakings which were all subjected to payment of the uniform tariffs fixed from time to time. The contention based on Article 14 must therefore fail.
(Para 52)
Electricity (Supply) Act, 1948 — Sections 49-A and 49-B [as introduced by Electricity (Supply) (Rajasthan Amendment) Act, 1976] — Discontinuance of concessional rate fixed for an industrial consumer under agreement with Board and fixation of uniform tariff — Held on facts, applicability of doctrine of promissory estoppel against Board not made out — Administrative Law — Promissory estoppel
Held :
There was no question of any estoppel against the Board inasmuch as the appellants did not open their factory on account of any assurance or promise by the Board. The appellants approached the Board for supply of high tension power for their industrial complex and the Board complied with the request. Even otherwise, the appellants failed to make out that but for the statutory contract for supply of electricity at a concessional rate under Section 49 they would not have established their industry. There were a number of incentives offered by the State Government to entrepreneurs to set up their industries in the State. The Board is not the Government and the appellants cannot rely on promissory estoppel for the incentives offered by the Government.
(Para 54)
R-M./7267.C
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