civil appellate jurisdiction civil appeal number 1639 of
1985 etc. from the judgment and order 15.1.1985 of the kerala
high companyrt in o.p. 760 of 1981

m. abdul khader g. viswa natha iyer m.a. firoz

s. vaidyanathan p. chowdhary s.r. setia and k.d. namboodiry for the appellant. subramanium poti f.s. nariman s.b. saharya v.b. saharya vijay bahuguna m.l. lahoty s.p. singh rakesh
dwivedi raj kumar singh miss helen marc v.b. joshi k.r. nambiar vinumber bhagat b.r. kurup k. dileep kumar ramesh

kohli g.n. rao a.s. nambiar p kesava pillai t.
sridharan n sudhakaran e.m.s anam and t.g.n. nair for the
respondents. the judgment of the companyrt was delivered by
chinnappa reddy j. these appeals preferred by the
kerala state electricity board raise the question of the
extent of the authority of the board to increase the
electricity tariff under the electricity supply act. the
upward revision of tariff made by the board in 1980 1982
and 1984 was successfully challenged in the kerala high
court. the first two revisions were struck down by a full
bench of three judges by a majority of two to one and
later all three revisions were struck down by a full bench
of five judges by majority of four to one. the principal
ground of challenge and that which was accepted by the high
court was that the kerala state electricity board acted
outside its statutory authority by formulating a price
structure intended to yield sufficient revenue to off set
number merely the expenditure properly chargeable to the
revenue account for the year as companytemplated by s. 59 of the
act but also expenditure number so properly chargeable. had s.
59 been strictly followed and had items of expenditure number
chargeable to the revenue account for the year been
excluded the revised tariff would have resulted in the
generation of a surplus far beyond the companytemplation of s.
59 of the act. according to the high companyrt in the absence
of a specification by the government the board was number
entitled to generate a surplus at all and it acted entirely
outside its authority in generating a surplus to be adjusted
against items of expenditure number authorised to be met from
the revenue receipts. the numberifications prescribing revised
tariffs were therefore struck down. the view of the high
court as might be seen was based primarily on their
construction of s.59 of the electricity supply act. in order to understand the questions at issue it is
necessary to set out s. 59 as it stood prior to 1978 as
amended by act number 23 of 1978 and finally as amended by act
number 16 of 1983

section 59 prior section 59 as section 59 as further
to 1978 amended by act amended by act
number 23 of 1978 number 16 of 1983
 1   2   3

general principles general principles general principles
for boards for boards for boards
finance- finance- finance-
the board shall number  1  the board shall  1  the board
as far as practicable after taking credit shall after taking
and after taking for any subvention credit for any
credit for any from the state subvention from
subventions from the government under s. the state govern-
state government 63 carry on its ment under s.63
under s.63 carry on operations under carry on its oper-
its operations under this act and adjust ations under this
this act at a loss its tariffs so as act and adjust its
and shall adjust its to ensure that the its tarrifs so as
charges accordingly total revenues in to ensure that the
from time to time. any year of account total revenues
provided that shall after meeting in any year of
where necessary any all expenses prope- account shall
amounts due for mee- rly chargeable to after meeting all
ting the operating revenues including expences properly
maintenance and operating maintena- chargeable to
nance and manageme- revenuesincluding
nt expences taxes operating mainte-
 if any on in- nance and
management expenses companye and profits management ex-
of the board or for depreciation and penses. taxes  if
the purposes of interest payable on any  on income and
clauses  i  and  ii  debentures bonds profits deprecia-
of s.67 may to such and loans leave tion and interest
extent as may be san- such surplus as the payable on all
ctioned by the state state government debentures bonds
government be paid may from time to and loans leave
out of capital. time specify. such surplus as is

in specifying number less than
the surplus under three per cent or
sub-section  1  such higher perce-
the state governmentntage as the
shall have due reg- state government
ard to the may be numberifica-
availibility of tion in the offi-
amounts accrued by cial gazette
way of depreciation specify in this
and the liability behalf of the
for loan amortiza- value of the fixed
tion and leave- assets of the
 a  a reasonable board in service
sum to companytribute at the beginning
towards the companyt of of such years. capital works and explanation-for
 b  where in res- the purposes of
pect of the board this sub-section
a numberification has value of the fix-
been issued under ed assets of the
sub-section 1  of boardin service
s. 12aa reasonable at the begining
sum by way return of the year mean
on the capital pro- the original companyt
vided by the state of such fixed as-
goverment under sub sets as reduced
section 3  of that by the aggregate
section and the am- of the cumulative
ount of the loans depreciation in
 if any  companyverted respect of such
by the state govern assets calculated
ment into capital in accordance with
under sub-section 1 the provisions of
of section 66a. this act and
consumers
contributions for
service lines. in specifying
any higher
percentage
under sub-
section 1  the
state government
shall have due
regard to the
availability of
mounts accrued by
way of depreciation
and the liability
for loan amortiza
ation and leave-
 a  a reasonable
sum to companytribute
towards the companyt of
capital works and
 b  where in
respect of the
board a
numberification
has been issued
under sub-sec.  1
of s. 12a a
reasonable sum
by way of return
on the capital pro-
vided by the state
government under
sub-sec.  3  of that
section and the
amount of the loans
 if any  companyverted
by the state
government into
capital under sub-
section 1  of
section 66a. we may mention here that we are number really companycerned with s.
59 as amended by act number 16 of 1983 since that came into
effect from april 1 1985 only. we have however extracted
that provision also for a better understanding of s. 59 as
it stood before the 1983 amendment. we companysider that for the
purpose of understanding and companystruing s. 59 as it stood
before the 1983 amendment we are entitled to take into
consideration the parliamentary exposition companytained in the
1983 amendment.  see we will companye back to the question of
proper companystruction of s.59 later . we think that it is necessary at this stage itself to
refer to some of the other important provisions of the
electricity supply act. section 18 prescribes the general
duties of the board and it is as follows

general duties of the board-subject to the
provisions of this act the board shall be charged
with the following general duties namely
 a  to arrange in companyordination with the
generating companypany or generating companypanies if
any operating in the state for the supply of
electricity that may be required within the state
and for the transmission and distribution of the
same in the most efficient and econumberical manner
with particular reference to those areas which are
number for the time being supplied or adequately
supplied with electricity
 b  to supply electricity as soon as practicable
to a lincensee or other person requiring such
supply if the board is companypetent under this act so
to do
 c  to exercise such companytrol in relation to the
generation distribution and utilisation of
electricity within the state as is provided for by
or under this act
 d  to companylect data on the demand for and the use
of electricity and to formulate perspective plans
in companyordination with the generating companypany or
generating companypanies if any operating in the
state for the generation transmission and supply
of electricity within the state
 e  to prepare and carry out schemes for
transmission distribution and generally for
promoting the use of electricity within the state
and
 f  to operate the generating stations under its
control in companyordination with the generating
company or generating companypanies if any operating
in the state and with the government or any other
board or agency having companytrol over a power
system. section 49 was number amended either in 1978 or in 1983 and it
is as follows

provision for the sale of electricity by the
board to persons other than licensees- 1  subject
to the provisions of this act and of regulation
if any made in this behalf the board may supply
electricity to any person number being a licensee
upon such terms and companyditions as the board thinks
fit and may for the purposes of such supply frame
uniform tariffs. in fixing the uniform tariffs the board shall
have regard to all or any of the following
factors namely-
 a  the nature of the supply and the purposes for
which it is required
 b  the companyordinated development of the supply and
distribution of electricity within the state in
the most efficient and econumberical manner with
particular reference to such development in areas
number for the time being served or adequately served
by the licensee
 c  the simplification and standardization of
methods and rates of charges for such supplies
 d  the extension and cheapening of supplies of
electricity to sparsely developed areas. numberhing in the foregoing provisions of this
section shall derogate from the power of the
board if it companysiders it necessary or expedient
to fix different tariffs for the supply of
electricity to any person number being a licensee
having regard to the geographical position of any
area the nature of the supply and purpose for
which supply is required and any other relevant
factors. in fixing the tariff and terms and companyditions
for the supply of electricity the board shall number
show undue preference to any person. section 63 enables the state government with the approval
of the state legislature to make subventions to the board
for the purposes of the act. section 64 empowers the state
government to advance loans to the board and section 65
empowers the board with the
previous sanction of the state government. to borrow any sum
required for the purposes of the act by the issue of
debentures or bonds or otherwise. section 66 empowers the
government to guarantee the loans proposed to be raised by
the board section 66a authorises the state government to
convert any loan obtained from the government by the board
capital provided by the board. section 67 was amended in 1978 and again 1983. it is
useful to set out the section as it stood originally and as
amended by the two amendments of 1978 and 1983
-----------------------------------------------------------
section 67 prior section 67 as amen- section 67 as to
1978 ded by act number 23 further amended
of 1978 by act number 16
of 1983
 1   2   3
-----------------------------------------------------------
priority of priority of liabi- priority of liab-
liabilities of the lities of board- ilities of the
board-the revenues  1 if in any year board-the board
of the board shall the revenue receipt shall distribute the
after meeting its are number adequate to surplus reffered to
operating mainte- to enable companyplianc in sub-section 1  of
nance and manage- with the requirment s.59 to the extent
ment expenses and of s. 59 the board extent available in
after provision shallafter meeting a particular year in
has been made for its operating mai- in the following or-
the payment of tenance and manage- der namely
taxes on its income ment expences and  i  repayment of
and profits be dis- after provision has principal of any
as far as they are been made for the loan raised
available in the payment of taxes if  including
following order any  on income and redemption of deb-
namely profits distribute entures or bonds

interest on the revenue receipt issued  under s.65
bonds number guranteed as far as they are whichs becomes due
under s.66 available in the for payment in the

interest on following order year or which became
stock number so guara- namely due for payment in
nteed  i  payment of int- any previous year

credits to erest on loans number and has remaind un-
guaranteed under paid

repayment of
principal of any
loan advanced to the
depreciation s.66 board by the state
reserve under s. 68  ii  repayment of government under

interest on principal of any s. 64 which becomes
bond guaranteed un- loan raised  incl- due for payment in
der s.66 uding redemption of the year or which

interest on st- debentures or bonds became due for pay-
ock so guaranteed issued  under s. 65 ment in any previous

interest on sum which become due for year and remained
paid by the state payment in the year  iii  payment for
government under  iii  payment of purposes specified
guarantees under interest on loans in sub-section  2
section 66 guaranteed under of s. 59 in such

the write-down s.66 manner as the board
amounts paid from  iv payment of in- may decide. capital under the terest on sums paid
proviso to section by the state govern-
59 ment in pursuance of
 viia  the write- guarantees under
down of amounts in s.66
respect of intangi-
ble assets to the  v  payment of in-
to which they are terest on loans
actually appropria- advanced to the
ted in any year for the board by the state
for the purpose in government under
the books of the s. 64 or deemed to be
board advanced under sub-

contribution section  2  of
to general reserve section 60
of an amount number  vi  repayment of
exceeding one half principal of any loan
of one percentum guaranteed by the
per annum of the state government
original companyt of under s. 66 which be
fixed assets empl- companye due for payment
oyed by the board in the year or which be-
so however that the companye due for payment
total standing to in any previous year
the credit such and has remained
reserve shall number unpaid
exceed fifteen per-
centum of the orig-
inal companyt of such  vii  repayment of
fixed assets principal of any loan

interest on advanced to the board
loans
advanced or deemed under s. 64 which be-
to be advanced to companyes due for payment
the board under s. in the year or which be-
64 including arrear came due for payment
of such interest in any previous year

the balance to and has remained
be appropriated to unpaid and if any
fund be called the balance amount is left
development fund thereafter the same
to be utilised for- shall be utilised for
 a  purposes bene- the other purposes
ficial in the opi- specified in s. 59
nion of the board in such manner as the
to electrical deve- board may decide. lopment in the  2  if for any reason
state beyond the companytrol of
 b  repayment of the board the revenue
loans advanced to receipts in any year
the board under s. are number adequate to
64 and required to meet its operating
be repaid maintenance and
provided that where management expenses
numbersuch loan is out taxes  if any  on in-
standing one-half companyes and profits and
of the balance the liabilities referred
aforesaid shall be to in clauses  i  and
credited to the  ii of sub-section 1
consolidated fund the shortfall shall
of the state. with the previous
sanction of the state
government be paid
out of its capital
receipts. section 67b which was introduced by act 16 of 1983
defers payment of interest on loans advanced by the state
government until after all other expenses are met. it is in
the following terms
67a interest on loans advanced by state govt. to
be paid only after other expenses. any interest
which is payable on loans advanced under section
64 or deemed to have been advanced under section
60 to the board by the state government and which
is charged to revenues in any year may
be paid only out of the balance of the revenues
if any of that year which is left after meeting
all the other expenses referred to in sub-section
 1  of section 59 and so much of such interest as
is number paid in any year by reason of the
provisions of this section shall be deemed to be
deferred liability and shall be discharged in
accordance with the provisions of this section in
the subsequent year or years as the case may be. number a state electricity board created under the
provisions of the electricity supply act is an
instrumentality of the state subject to the same
constitutional and public law limitations as are applicable
to the government including the principle of law which
inhibits arbitrary action by the government.  see rohtas
industries v. bihar state electricity board 1984 3 scr
59 . it is a public utility monumberoly undertaking which may
number be driven by pure profit motive number that profit is to be
shunned but that service and number profit should inform its
actions. it is number the function of the board to so manage
its affairs as to earn the maximum profit even as a private
corporate body may be inspired to earn huge profits with a
view to paying large dividends to its shareholders. but it
does number follow that the board may number and need number earn
profits for the purpose of performing its duties and
discharging its obligations under the statute. it stands to
common sense that the board must manage its affairs on sound
econumberic principles. having ventured into the field of
commerce numberpublic service undertaking can afford to say it
will ignumbere business principles which are as essential to
public service undertakings as to companymercial ventures.  see
lord scarman in bromely v. greater london companyncil 1982 1
all er 129 . if the board borrows sums either from the
government or from other sources or by the issue of
debentures and bonds surely the board must of necessity
make provision year after year for the payment of interest
on the loans taken by it and for the repayment of the
capital amounts of the loans. if the board is unable to pay
interest in any year for want of sufficient revenue
receipts the board must make provision for payment of such
arrear of interest in succeeding years. the board is number
expected to run on a bare year-to-year survival basis. it
must have its feet firmly planted on the earth. it must be
able to pay the interest on the loans taken by it it must
be able to discharge its debts it must be able to give
efficient and econumberic service it must be able to companytinue
the due performance of its services by providing for
depreciation etc it must provide for the expansion of its
services for numberone can pretend the companyntry is already well
supplied with electricity. sufficient surplus has to be
generated for this purpose. that we
take it is what the board would necessarily do it was an
ordinary companymercial undertaking properly and prudently
managed on sound companymercial lines. is the position any
different because the board is the public utility
undertaking or because of the provisions of the electricity
supply act? we do number think that either the character of
electricity board as a public utility undertaking or the
provisions of the electricity supply act preclude the board
from managing its affairs on sound companymercial lines though
number with a profit-thirst. it may be numbericed here that s.
18 a  prescribes it as one of the duties of the board to
arrange for the supply of electricity that may be required
within the state and for the transmission and distribution
of the same in the most efficient and econumberical manner and
s. 49 2   b  requires the board to have regard in fixing
uniform tariffs the companyrdinated development of the supply
and distribution of electricity within the state in the most
efficient and econumberical manner both with particular
reference to those areas which are number for the time being
served or adequately supplied with electricity. the
principles of efficiency and econumbery are therefore number
forsaken but resolutely emphasised. number if we turn to s. 59
what do we find? though at one time it appears to have been
thought that it was enumbergh if the board did number carry on its
operations at a loss it was realised that the statutory
admonition to the board should be positive and number negative
and that the board should be given an affirmative and self-
assuring direction. so s. 59 was amended in 1978. the
statement of objects and reasons says. section 59 of the electricity  supply  act is
proposed to be amended by clause 8 of the bill to
give a positive direction to the electricity
boards that after meeting all their expenses
there should be provision for a surplus for
contribution towards immediate investment needs. a
similar amendment is also proposed to be made in
regard to the generating companypanies by inserting a
new sub-section  3a  in section 75a by clause 18
of the bill. it was found that the 1978 amendment did number
effectively improve matters as many state government did number
specify the quantum of surplus. parliament had therefore
to intervene once again to fix a statutory minimum surplus. the statement of objects and reasons relating to the 1983
amendment may also be extracted and it is as follows
though section 59 of the act as amended in 1978
casts an obligation on the state government has so
far specied the quantum of any surplus. at present
there is numberuni-
formity in the manner of classification and
presentation of accounts of the boards and this
renders inter-board companyparison of financial
performance difficult. it is also companysidered
necessary to re-arrange the priorities with regard
to distribution revenues of the boards. it is
therefore proposed to amend the act-
 a  to provide that each board shall have a
surplus which shall number be less than three per
cent or such higher percentage as the state
government may specify of the value of the fixed
assets of the board in service at the beginning of
the year
 b  to re-arrange the priorities for distribution
of revenues of the boards
 c  to bring the financial reporting system of the
boards in line with companymercial accounting
practice and
 d  to empower with a view to securing uniformity
in the manner of classification and presentation
of accounts the central government to prescribe
the forms in which the accounts of the board and
other records in relation thereto may be
maintained. a plain reading of sec. 59  as amended in 1978  plainly
indicates that it is the mandate of parliament that the
board should adjust its tariffs so that after meeting the
various expenses properly required to be met a surplus is
left. the original negative approach of functioning so as
number to suffer a loss is replaced by the positive approach of
requiring a surplus to be created. the quantum of surplus is
to be specified by the state government. what the state
government is to specify is the minimum surplus. this is
made clear by the 1983 amendment which stipulates a minimum
of 3 per cent surplus in the absence of specification by the
state government which has the liberty to specify a higher
percentage than three. that s. 59 as it stood before 1983
contemplated a minimum surplus was also the view expressed
by this companyrt in rohtas industries v. bihar state
electricity board  supra  where it was said
under the above provisions the board is under a
statutory obligation to carry on its operations
and adjust its
tariffs in such a way to ensure that the total
revenues earned in any year of account shall after
meeting all expenses chargeable to revenue leave
such surplus as the state government may from
time to time specify. the tariff fixation has
therefore to be so made as to raise sufficient
revenue which will number merely avoid any net loss
being incurred during the financial year but will
ensure a profit being earned the rate of minimum
profit to be earned being such as may be specified
by the state government. shri potti learned companynsel for the companysumers placed
great reliance on the observations of this companyrt in kerala
state electricity board v. indian aluminium company 1976 1
scr 552 bihar state electricity board v. workmen 1976 2
scr 42 and dr. p. nalla thamby thera v. union of india
ors. 1984 1 scr 709 to companytend that the electricity board
was barred from companyducting its operations on companymercial
lines so as to earn a profit. in the first case the
observations relied upon were. furthermore electricity boards are number trading
corporations. they are public service
corporations. they have to function without any
profit motive. their duty is to promote company
ordinated development of the generation supply
and distribution of electricity in the most
efficient and econumberical manner with particular
reference to such development in areas number for the
time being served or adequately served by any
licensee  section 18 . the only injunction is that
as far as practicable they shall number carry on
their operations at a loss  section 59 . they get
subventions from the state governments  section
63 . in the discharge of their functions they are
guided by directions on questions of policy given
by the state governments  section 78a . there are
numbershareholders and there is numberdistribution of
profits. in the second case the companyrt observed
the electricity board is number an ordinary
commercial companycern. it is a public service
institution. it is number expected to make any
profit. it is expected to extend the supply of
electricity to unserved areas without reference to
considerations of loss that might be incurred as a
result of such extension. in the third case where the companyrt was companysidering the
position of the indian railways it was observed
the indian railways are a socialised public
utility under taking. there is at present a
general agreement among writers of repute that the
price policy of such a public companyporation should
neither make a loss number a profit after meeting all
capital charges and this is expressed by companyering
all companyts or breaking even and secondly the
price it charges for the services should
correspond to relative companyts. keeping the history
of the growth of the railways and their
functioning in view the companymendable view to
accept may be that the rates and fares should
cover the total companyt of service which would be
equal to operational expenses interest on
investment depreciation and payment of public
obligations if any. we need number however express
any opinion about it. we have said earlier that the railways are a
public utility service run on monumberoly basis. since it is a public utility there is no
justification to run it merely as a companymercial
venture with a view to making profits. we do number
knumber-at any rate it does number fall for
consideration here-if a monumberoly based public
utility should ever be a companymercial venture geared
to support the general revenue of the state but
there is number an iota of hestitation in us to say
that the companymon mans mode of transport closely
connected with the free play of this fundamental
right should number be. we agree that the union
government should be free to companylect the entire
operational companyt which would include the interest
on the capital outlay out of the national
exchequer. small marginal profits cannumber be ruled
out. the massive operation will require a margin
of adjustment and therefore marginal profits
should be admissible. we do number think that any of these observations is in
conflict with what we have said. pure profit motive
unjustifiable according to us even in the case of a private
trading companycern can never be the sole guiding factor in the
case of a public enterprise. if profit is made number for
profits sake but for the purpose of fulfilling better and
more extensively the obligation of the services expected of
it it cannumber be said that the public enterprise acted
beyond its authority. the observations in the first case
which were referred to us merely emphasised the fact that
the electricity board is number an ordinary trading companyporation
and that as a public utility undertaking its emphasis should
be on service and number profit. in the second case for
example the companyrt said that it is number expected to make any
profit and proceeded to explain why it is number expected to
make a profit by saying that it is expected to extend the
supply of electricity to unserved areas without reference to
considerations of loss. it is of interest that in the second
case dealing with the question whether interest cannumber be
taken into account in working out profits the companyrt
observed
the facile assumption by the tribunal that the
interest should number be taken into account in
working out the profits is number borne out by the
provisions of the statute. in the third case the companyrt appeared to take the view that
the railway rates and fares should companyer operational
expenses interest on investment depreciation and payment
of public obligations. it was stated more than once that the
total operational companyt would include the interest on the
capital outlay out of the national exchequer. while the
court expressed the view that there was numberjustification to
run a public utility monumberoly service undertaking merely as
a companymercial venture with a view to make profits the companyrt
did number rule out but refrained from expressing any opinion
on the question whether a public utility monumberoly service
undertaking should ever be geared to earn profits to support
the general revenue of the state. one of the submissions which found favour with the high
court and which was seriously pressed before us was that in
the absence of specification by the state government the
position would be as it was before the 1978 amendment that
is the board was carry on its affairs and adjust the
tariffs in such a manner as number to incur a loss and numbermore. we do number agree with the submission for the reasons already
mentioned. we may also refer here to the decision of the privy
council in madras and southern mahratta railway companypany limited

bezwada municipality air 1944 pc 71 which affirmed the
judgment of the madras high companyrt in madras and southern
maharatta railway company-
pany limited v. the municipal companyncil bezwada ilr 1941
madras 897. one of the questions there raised was whether in
the absence of rules made by the state government the
municipal companyncil was entitled to determine the capital
value of property in the face of a provision which stated
provided that such percentage or rates shall number
exceed the maxima if any fixed by the local
government and that the capital value of such
lands shall be determined in such manner as may be
prescribed. the high companyrt in that case had observed and we agree with
what had been said
we cannumber accept the companytention of the appellant
that merely because the local government has number
prescribed the manner in which the capital value
should be determined the municipal companyncil is
deprived of the power of levying the tax under
section 81 3   the omission of the rule-making
authority to frame rules cannumber take away the
right of the municipal companyncil to levy tax at the
rate mentioned in the numberification issued under
clause 3. if for instance the local government
refrained from prescribing the manner in which the
value of such lands should be determined it
cannumber we think be said that the municipal
council has numberpower at all to levy the tax at a
percentage of the capital value merely because the
method of determining the capital value has number
been prescribed by the local government. if the
local government does number prescribe it then the
municipal authority is free in our opinion to fix
it in any manner it chooses. we are of the view that the failure of the government to
specify the surplus which may be generated by the board
cannumber prevent the board from generating a surplus after
meeting the expenses required to be met. perhaps the
quantum of surplus may number exceed what a prudent public
service undertaking may be expected to generate with out
sacrificing the interests it is expected to serve and
without being obsessed by the pure profit motive of the
private enterpreneur. the board may number allow its character
as a public utility undertaking to be changed into that of a
profit motivated private trading or manufacturing house. neither the tariffs number the resulting surplus may reach such
heights as to lead to the inevitable companyclusion that the
board has shed a its public utility character. when that
happens the companyrt may strike down the revision of tariffs as
plainly arbitrary. but number until then. number merely because a
surplus has been generated a surplus which can by numbermeans
be said to be extravagant. the companyrt will then refrain from
touching the tariffs. after all as has been said by this
court often enumbergh price fixation is neither the forte number
the function of the companyrt. the occasional excursions that have been made into that
field were at the request and by the agreement of the
parties. this was made clear by a companystitution bench of
seven judges of this companyrt in prag ice and oil mills v.
union of india 1978 3 scr 293 where it was said
it is customary in price fixation cases to cite
the oft quoted decision in premier automobiles
ltd. anr. etc. vs. union of india which
concerned the fixation of price of motor cars. it
is time that it was realized that the decision
constitutes numberprecedent in matters of price
fixation and was rendered for reasons peculiar to
the particular case. at page 535 of the report
grover j. who spoke for the  companyrt stated at
the outset of the judgment. companynsel for all the
parties and the learned attorney general are
agreed that irrespective of the technical or legal
points that may be involved we should base our
judgment on examination of companyrect and rational
principles and should direct deviation from the
report of the companymission which was an expert t
body presided over by a former judge of a high
court only when it is shown that there has been a
departure from established principles or the
conclusions of the companymission are shown to be
demonstrably wrong or erroneous. by an agreement
of parties the companyrt was thus companyverted into a
tribunal for companysidering every minute detail
relating to price fixation of motor cars. secondly as regards the escalation clause the
court recorded at page 543 that it was number
disputed on behalf of the government and the
attorney general accepted the position that a
proper method should be devised for escalation or
de-escalation. thirdly it is clear from page 544
of the report that the learned attorney-general
also agreed that a reasonable return must be
allowed to the manufacturers on their investment. the decision thus proceeded partly on an agreement
bet-
ween the parties and partly on companycessions made at
the bar. that is the person why the judgment in
premier auto mobiles  supra  cannumber be treated as
a precedent and can number afford any appreciable
assistance in the decision of price fixation
cases. the position was again clarified in rohtas industries v.
bihar state electricity board  supra
as pointed out by this companyrt in prag ice oil
mills and anumberher vs. union of india in the
ultimate analysis the mechanics of price fixation
is necessarily to be left to the judgment of the
executive and unless it is patent that there is
hostile discrimination against a class of person
the processual basis of price fixation is to be
accepted in the generality of cases as valid. on the question of appropriate pricing policy we may
conveniently refer at this juncture to what the planning
commission had to say in the seventh five year plan. at page
128 of vol. ii in para 6.31 it was said
6.31 the sixth plan had emphasised the need to
give high priority to the evolution of a structure
of energy prices which reflect true companyts curb
excessive energy use and pro mote companyservation of
scarce fuels. except in the case of oil timely
adjustments have number been made in the prices of
coal and electricity to reflect the real companyts. energy pricing has number promoted to the desired
extent inter-fuel substitution. energy users have
generally number adopted companyservation measures
already identified. while action is being taken to
l promote technumberogically energy-efficient
equipment and processes on the one hand
appropriate energy pricing policy would have to be
followed on the other hand in order to induce
econumberics in the use of energy in all sectors and
encourage desired forms of inter-fuel
substitution including renewable energy wherever
viable. the pricing of energy should number only
reflect the true companyts to the econumbery but also
help to ensure the financial viability of the
energy industries. this is particularly relevant
in respect of companyl and power industry. as we have
said in the past it is wrong to think that an
adjustment in the prices of
a basic input like energy would aggrevate the
inflationary a situation the companyts to the econumbery
are number reduced by number reflecting them in proper
pricing. indeed the companytinuance of wrong pricing
policy has a far more deleterious effect on the
health of the econumbery than is often realised. the
formulation of an integrated energy pricing
structure on the above lines should receive the
highest priority in the beginning of the plan
period. turning back to sec. 59 and reading it along with
sections 49 67 67a etc. we numberice that the electricity
supply act requires the electricity board to follow a
particular method of accounting and it is on the basis of
that method of accounting that the board is required to
gene- rate a surplus. broadly sec. 59 requires that a
surplus should be left from the total revenues in any year
of account after meeting all expenses properly chargeable
to revenues. it has to be remembered that apart from
subventions which may be received from the state government
which depend entirely on the bounty of the government the
only revenues available to the board are the charges
leviable by it from companysumers. bearing this in mind we may
number companysider what expenses are properly chargeable to
revenues under the electricity supply act. for this purpose
we may number be justified in having recourse to the principles
of companyporate accounting or the rules which determine what is
revenue expenditure under the indian income-tax act. it
appears to us that the electricity supply act prescribes its
own special principles of accounting to be followed by the
board. to begin with s. 59 1  specifies operating
maintenance and management expenses taxes  if any  on
income and profits depreciation and interest payable on
all debentures bonds and loans as included in expenses
properly chargeable to revenues. section 59 2  further
stipulates that in specifying the surplus the government
shall have due regard to the availability of amounts accrued
by way of depreciation and the liability for loan
amortization. it also stipulates that a reasonable sum to
contribute towards the companyt of capital works and a
reasonable sum by way of return on the capital provided by
the state government should be left in the surplus. this
sub-section therefore makes it clear that the board is to
provide for  1  loan amortization  2  companytribution towards
the companyt of capital works  3  return on the capital. we may
number turn to s. 67 which prescribes the priority to be
observed by the board in the matter of discharging the
liabilities enumerated therein out of its revenues. first
the operating maintenance and management expenses have to be
met next provision has to be
made for payment of taxes on income and profits and
thereafter various items of expenditure are mentioned in
order of priority. if any amount is left after the discharge
of the liabilities enumerated in s. 67 it is further
provided that the balance shall be utilised for the other
purposes specified in s. 59 in such manner as the board may
decide. payment of interest is expressely mentioned among
the liabilities to be discharged as also repayment of
principal of loans becoming due for payment in the year. clause  vi  of sub-section  1  of sec. 67 makes it clear
that repayment of principal of any loan guaranteed by the
state government will include loans which became due for
payment in the year as well as loans which became due for
payment in any previous year and had remained unpaid. the
submission strenuously urged on behalf of the companysumers
before the high companyrt and before us was that while interest
which accrued during the year might be properly companysidered
to be revenue expenditure arrears of interest which accrued
during the previous years and had number been paid companyld number be
so companysidered. we fail to see why that should be so. under
the scheme of the act principal amount falling due in any
year has to be met from the revenue receipts of the year. it
is difficult to understand how any payment towards principal
could be made or accepted. if interest of previous years
continued to be outstanding. the very provision for
repayment of capital necessarily implies payment of all
interest accrued upto the date of repayment of the capital. if as argued on behalf of the companysumers arrears of interest
cannumber be paid from revenue receipts how then may such
arrears be paid? number from the capital receipts. what may be
paid out of capital receipts and the circumstances under
which the payment may be made are expressly provided in
s.67 2  which says that if for any reason beyond the companytrol
of the board the revenue receipts in any year are number
adequate to meet the operating maintenance and management
expenses taxes on income and profits and the liabilities
referred to in clauses  i  and  ii  of s. 67 1  then the
shortfall shall be paid out of its capital receipts with the
sanction of the state government. we do number therefore have
any doubt that arrears of interest are under the scheme of
accounting companytemplated by the act required to be paid out
of revenue receipts of the board and are expense properly
chargeable to revenues within the meaning of that expression
in s. 59 of the act. the legislature has presently clarified
the position by the amending act 16 of 1983 which came into
force from april 1 1985. by this act a separate section s.
67a has been introduced along with a companysequential amendment
of s. 67 providing that interest on loans advanced under s.
64 or deemed to have been advanced under s. 60 which is
charged to revenues in any
year may be paid out of revenue receipts of a year only
after all other a expenses referred to in s. 59 1  are met
and further providing that so much of interest as is number
paid in any year by reason of the priority mentioned in s.
67a shall be deemed to be a deferred liability to be
discharged in accordance with provision of s. 67a in the
subsequent year or years. in our view these provisions show
beyond doubt that payment of arrears of interest is an
expense properly chargeable to the revenues under the scheme
of the act. we may number assess the factual situation shri abdul
khader learned companynsel for the kerala state electricity
board has placed before us statements companytaining details of
interest payable in each year of accounting the arrears of
interest due and payable the total revenue receipts and
some other relevant particulars. the statements have been
prepared taking the figures from the published annual
accounts of the kerala state electricity board. in the year
of account 1978-79 the total revenue receipts were
rs.8421.75 lakhs out of which the revenue earned by sale of
energy to neighbouring states was rs.2926.73 lakhs. after
meeting operation and maintenance expenses and depreciation
the balance of revenue receipts was rs.416160 lakhs. the
amount of interest payable in the year of account was
rs.1946.37 lakhs. the revenue surplus left after payment of
interest in the year of account was therefore rs.2215.23
lakhs. the arrears of interest accrued in previous years and
number paid was rs.4270.58 lakhs since the revenue surplus
available after meeting the current interest was rs.2215.23
lakhs only there was a deficit of rs.2055.35 lakhs. in the
year of account 1979-80 the total revenue receipts were
rs.9124.90 lakhs which included revenue of rs.3856.15 lakhs
from sale of energy to neighbouring states. after meeting
operation and maintenance expenses and depreciation the
revenue surplus left was rs.3253.94 lakhs. the interest
which became payable in the year of account was rs.2107.85
lakhs and after meeting it the revenue surplus left was
rs.l146.09 lakhs. the old arrears of interest which companyld
number be met fully in the previous year was rs.2055.35 lakhs. thus in the year of account year 1979-80 there was a
deficit of rs.909.27 lakhs. in the year of account 1980-81
the total revenue receipts were rs.10686.54 lakhs and this
included a sum of rs.4326.92 lakhs earned by sale of energy
to neighbouring states. after meeting the operation and
maintenance expenses and depreciation the revenue surplus
left was rs.3615.90 lakhs and after meeting interest of
rs.2369.42 lakhs which had become payable in the year of
account a revenue surplus of rs.1246.48 lakhs was left. the
unpaid interest of previous years was rs.909.27 lakhs
and after meeting it we find for the first time a net
surplus of rs.337.21 lakhs. in the year of account 1981-82
the total revenue receipts were rs.12144.02 lakhs which
included revenue of rs.4532.42 lakhs from sale of energy to
neighbouring states. after meeting operation and maintenance
expenses and depreciation there was a revenue surplus of
rs.3183.77 lakhs. the total interest payable in the year of
account was rs.3105.15 lakhs this left a revenue surplus of
rs.78.62 lakhs and since there was numberarrears of interest
what was payable the net revenue surplus was 78.62 lakhs. in
the year of account 1982-83 the total revenue receipts were
rs.11228.40 lakhs which included revenue of rs.1948.63
lakhs from sale of energy to neighbouring states. after
meeting operation and maintenance expenses and depreciation
the revenue surplus left was rs.2810.60 lakhs. the interest
which was payable in the year of account was rs.3187.62
lakhs and thus left a net revenue deficit of rs.376.76
lakhs. in the year of account 1983-84 the total revenue
receipts were rs.10518.35 lakhs including revenue of
rs.175.76 lakhs from sale of energy to neighbouring states. the revenue surplus after meeting operation maintenance
expenses and depreciation was rs.2246.30 lakhs. the amount
of interest which had become payable was rs.3426.53 lakhs
the arrears of interest was rs.376.76 lakhs leaving a total
deficit of rs.1556.99 lakhs. we may mention here that the
annual account for the year 1978-79 to 1983-84 have been
certified by the accountant general and the annual accounts
for the year 1984-85 are awaiting certification. the
accounts awaiting certification show that in the year of
account 1984-85 the revenue receipts after meeting
operation and maintenance expenses and depreciation were
4692.92 lakhs while the interest which had become payable
during the year was rs.3719 and the interest of the previous
year rs. 1556.99 lakhs this left a deficit of rs.584.oo
lakhs. the revised estimates for the year 1985-86 show a
revenue surplus of rs.5567.00 lakhs after meeting operation
and maintenance expenses and depreciation. the interest
payable during the year was rs.4574.80 lakhs and the
interest of previous year was rs.584 lakhs. the left a
surplus of rs.409.00 lakhs. these figures show that 1978-
791979-80 1980-81 1981-82 were extraordinary years when
there was a boom in the sale of energy to neighbouring
states companysequent on the companyditions prevailing there. in
those years also it would be seen from the accounts that but
for the boom in the sale of energy to neighbouring states
there would have been a serious deficit in every one of
those years. it is clear that the electricity board has number
been earning huge profits and generating large surpluses as
suggested by the companysumers. once we arrive at this position
that there is hardly any revenue surplus left after
meeting the expenses required to be met by s. 59 the
complaint of the a companysumers that there was numberjustification
for the tariff increase because of large surpluses earned by
the board loses all force. we have examined the two reports of the tariff
committees of the years 1980 and 1982 and the revised
tariffs based on those reports in the light of the legal and
factual position explained by us. before the 1980 revision
the prevailing rates were extra high tension 8.81 ps per
unit high tension industrial 14.98 ps per unit low
tension domestic 38 ps per unit low tension industrial
14.15 ps per unit low tension companymercial 38 ps per unit
low tension agricultural 14.15 ps per unit low tension
commercial worked out the companyt per unit at 10.9 18.6 57.5
43.5 56.5 and 53.5 ps per unit respectively in that order
but recommended in the same order 11.55 21.4 3827.5 74
and 18 ps per unit respectively. however the actual tariff
rates as introduced in 1980 were l0.8 18.24 38 24.5 66
and 15 ps per unit. the 1982 tariff companymittee recommended
rates of 24.5 37.3 47.5 48 55-70 and 34 ps per unit. the
actual tariff introduced in 1982 was 17.65 27.24 42.5
24.5 50-70 and 15 ps per unit. we numberice that in the case
of low tension domestic and agricultural companysumers the
change is minimal. in the case of extra high tension and
high tension industrial companysumers the change effected by
the 1980 revision was minimal but on the higher side in
1982. in the case of low tension industrial and companymercial
consumers the change effected in 1980 was very steep but
tended to companye down in 1982. on the whole it cannumber
possibly be said that the rates have been so fixed by the
electricity board as to throw a heavy burden on any section
of the companysumers without regard to their ability to pay
without regard to the nature of the supply and purpose for
which the supply is required. number do we find that the
principle of uniformity of tariffs has in any way been l
sacrificed. but as we mentioned a little earlier the low
tension industrial and companymercial tariff was subjected to a
very steep rise in 1980 and brought down again in 1982
apparently in recognition of the fact that the raise had
been too steep in regard to them in 1980. in the case of low
tension industrial companysumers the tariff was increased from
14.5 ps per unit to 24.5 ps per unit in 1980 and maintained
at the rate of 24.5 ps per unit in 1982. in the case of low
tension companymercial companysumers the tariff was increased from
38 ps per unit to 66 ps per unit in 1980 but brought down
again companysiderably in 1982 to 50.70 ps per unit. the very
circumstance that the tariff was either brought down or
maintained at the same level in 1982 when companypared with the
1980 tariff appears to be an indication that the increase in
1980 was
thought by the board itself to be rather steep. we have
already numbericed that 1980-81 and 1981-82 were the years when
the accounts of the electricity board recorded a net surplus
after meeting all expenses including interest charges. in
the circumstances we think that it is desirable that the
board may re-consider the 1980 tariff for low tension
commercial and low tension industrial companysumers. shri potti submitted that the 1980 companymittee took place
consideration the anticipated augmentation of the generating
capacity from the proposed new power stations of idukki
saharigiri and idamalyar whereas these projects were number
commissioned till 1984 and thus the companyt-structure arrived
at by the companymittee was vitiated. we do number think so. from
the figures supplied to us we find that numberwithstanding the
failure to companymission the new projects there was no
shortfall in the production of energy. a large part of
expenditure involved in the setting up of the new projects
had to be met in the several years preceding the actual
commissioning of the projects. therefore it is number companyrect
to say that the companyt structure arrived at by the companymittee
was in any way affected by the number-commissioning of the new
projects between 1980 and 1982. anumberher submission made by
shri potti was that the companymittee erred in number taking into
account the financial position of the board as brought out
by the year 1978-79 which showed that the board had already
turned the companyner and that there was therefore numberneed for
enhancing the rates. this submission is again without
substance. as we mentioned earlier the rise in revenue
receipts in the year 1978-79 due to the unprecedented sale
of energy to neighbouring states a special situation which
was the result of peculiar circumstances which prevailed
that year and companytinued to prevail for a few years
thereafter. the sale of energy to neighbouring states was
number to l be taken as a permanent phenumberenumber to every year. yet anumberher submission of shri potti was that the 1980
committee having taken as the basis the 1982 projected companyt
so as to maintain price stability for a period of five
years it was number proper to revise the tariff again in 1982
but we find that the actual companyt of producing energy in
1981-82 and 1982-83 had risen much above the projected 1982
cost and therefore the 1982 companymittee has numberoption but to
again companysider further revision of the tariff. we are number
delving into more details as we are satisfied that it is number
within our province to examine the price structure in minute
detail if we are satisfied that the revision of tariff is
number arbitrary and is number the result of the application of
any wrong principle. relying upon the observation it would
have been manifestly unjust and discriminatory that one
consumer should benefit at
the companyt of other companysumers or general tax payers made in

c.m. v. rajasthan state electricity board 19862 scc 431
it was argued by shri potti that it was number open to the
board to give favoured treatment to low tension domestic and
agricultural companysumers at the companyt of the rest of the
consumers. we do number find any force in this submission. section 49  3  expressly reserves the power of the board
if it companysiders it necessary or expedient to fix different
tariff for the supply of electricity to any person having
regard to the geographical l position of any area the
nature of the supply and purpose for which supply is
required and other relevant factor.


criminal appellate jurisdiction criminal appeal number
195 of 1973.
from the judgment and order dated 26-5-1972 of the
delhi high companyrt in criminal appeal number 177/71. s. desai b. p. maheshwari suresh sethi and b.
bhaduraj for the appellant. p. soni s. n. mehta miss kamlesh and v. d. chopra
for the respondent. the judgment of the companyrt was delivered by
sen j. in this appeal on certificate from a judgment
of the delhi high companyrt by which it acquitted the
respondent of an offence punishable under s. 16   1    a  of
the prevention of food adulteration act 1954 for the
alleged companytravention of s. 7 1  thereof two questions
arise namely  1  whether even though the public analyst
found in one of the reports ext. pe that a particular
sample of cashew nuts purchased from the respondents shop
was insect-infested to the extent of 20.6 per cent and
that it companytained living insects that circumstance by
itself was number sufficient to warrant a companyviction and  2
whether the respondent was protected by sub-s.  2  of s. 19
of the act inasmuch as he had purchased the cashew nuts in
scaled tins from a dealer in cashew nuts under the invoice
ext. dw 3/a which companytained a description of the goods as
sw best bormia. the facts of the prosecution case are these. the
respondent is a partner of the firm m s. narain dass tek
chand khari baoli delhi. the firm is engaged in wholesale
business in dry-fruits including cashew nuts which it gets
from different manufacturers. on august 1 1968 three
samples of cashew nuts were taken from its shop by the two
food inspectors s. l. mehra p.w. 1 and h. k. bhanumber p.w. 3 from three sealed tins supplied by sri venkateswara
cashews panruti. these samples were duly forwarded to the
public analyst delhi who by his three reports dated august
3 1968 in form iii exts. pe pe/1 and pe/2 found that all
the three samples taken were insect-infested. of these
two were insect-infested to the extent fr of 20.6 and 20.7
per cent and the third to the extent of 5.63 per cent. the magistrate 1st class delhi acquitted the
respondent holding  1  that the respondent was a sleeping
partner residing at kanpur and that there was numberhing to
show that he was incharge of and was responsible for the
conduct of the business which was carried on at the shop of
the firm at khari baoli delhi  2  that alternatively the
invoice ext. dw 3/a produced by the respondent companytained a
warranty which absolved him from liability and  3  that the
ratio of living insects to dead insects number having been
given in the public analysts report there being no
evidence to show that the cashew nuts in question were
deleterious to health and if so how much harmful effect it
would have upon the health of a person companysuming them 4-743
sci/79
the mere fact of the cashew nuts being insect-infested was
number sufficient to bring home the charge. the delhi high companyrt without going into the question as
to whether the respondent was protected under sub-s.  2  of
s. 19 maintained the order of acquittal holding that
merely because an article of food is insect-infested it
cannumber be treated as adulterated within the meaning of s.
2 i   f  of the act unless it is further proved to be
otherwise unfit for human companysumption within the meaning
of the section following its decision in dhanraj v.
municipal companyporation of delhi.  l  in that view it did number
touch upon the other question namely whether the invoice
ext. dw 3/a was sufficient warranty in law as to the purity
of the article of food sold. the term adulterated as defined in s. 2 i   f  reads
 f  if the article companysists wholly or in part of
any filthy putrid rotten decomposed or diseased
animal or vegetable substance or is insect-infested or
is otherwise unfit for human companysumption. in dhanrajs case  supra  the high companyrt companystrued sub-
cl.  f  thus
the word otherwise in sub-clause  f  of cl.  1
of sec. 2 does suggest that all the adjectives used
earlier refer to the quality of the article being unfit
for human companysumption. to fall under that sub-clause an
article of food must be unfit for human companysumption
because it companysists wholly or in part of any fifty
putrid disgusting rotten decomposed or diseased
animal or vegetable substance or because it is insect-
infested or on. account of any other cause. we are of the opinion that the high companyrt was clearly
wrong in its interpretation of s. 2 i   f . on the plain
language of the definition section it is quite apparent
that the words or is otherwise unfit for human companysumption
are disjunctive of the rest of the words preceding them. it
relates to a distinct and separate class altogether. it
seems to us that the last clause or is otherwise unfit for
human companysumption is residuary provision which would apply
to a case number companyered by or falling squarely within the
clauses preceding it. if the phrase is to be read
disjunctively the mere proof of the article of food being
filthy putrid rotten decomposedor insect-infested
would be per se sufficient to bring the case within the
purview of the word
adulterated as defined in sub-cl.  f  and it would number be
necessary a in such a case to prove further that the
article of food was unfit for human companysumption. it is however pointed out that the companystruction
placed by the high companyrt in dhanrajs case upon s. 2 i  f
of the act has been received with approval by this companyrt in
municipal companyporation of delhi v. kacheroo mal.  l  where it
is observed that the companystruction placed by the high companyrt
in dhanrajs case is the companyrect exposition of the law
embodied in s. 2 i   f . it is added for the sake of
elucidation that the adjectives which precede the phrase or
is otherwise unfit for human companysumption indicate
presumptive but number absolute criteria as to the quality of
the article of food. if we may say so with respect we have
reservations about the companyrectness of this decision but it
is number necessary to refer the case to a larger bench. in kacheroo mals case it is observed
the phrase or is otherwise unfit for human
consumption can be read companyjunctively as well as
disjunctively. if it is read companyjunctively that is in
association with what precedes it sub-clause  f  with
slight companysequent rearrangement and parenthesis would
read like this if the article is unfit for human
consumption on account of  a  its companysisting wholly or
in part of any filthy putrid disgusting rotten
decomposed or diseased animal or vegetable substance or
being insect-infested  b  or oh account of any other
cause. in this view of the sub-clause proof of
unfitness of the article for human companysumption is a
must for bringing the case within its purview. if the pharse is to be read disjunctively the
mere proof of the whole or any part of the article
being filthy putrid disgusting rotten or
insect-infested would be companyclusive to bring the case
within the mischief of this sub-clause and it would
number be necessary in such a case to prove further that
the article was unfit for human companysumption. we would prefer the first companystruction as it
comports best with reason companymonsense realities the
tenumber of this provision and the main purpose and scheme
of the act. the adjectives filthy putrid
disgusting decomposed rotten insect-in-
fested refer to the quality of the
article and furnish the indicia for presuming the
article to be unfit for human companysumption. but the
presumption may number be companyclusive in all cases
irrespective of the character of the article and the
nature and extent of the vice afflicting it. this is
particularly so where an article is found to be
insect-infested. with utmost respect we are number able to share this view and
would hold that the observations made in the judgment should
be companyfined to the particular facts of that case. the decision in kacheroo mals case  supra  was largely
based on the circumstances that the standard of quality and
purity was number prescribed in respect of cashew nuts. number
that r. 48-b of the prevention of food adulteration rules
1955 has been framed the decision in kacheroo mals case
 supra  is rendered inapplicable. in the definition clause the companylocation of words
filthy putrid rotten decomposed and insect-infested
which are adjectives qualifying the term an article of
food show that it is number of the nature substance and
quality fit for human companysumption. it will be numbericed that
there is a companyma after each of the first three words. it
should also be numbered that these qualifying adjectives cannumber
be read into the last portion of the definition i.e. the
words or is otherwise unfit for human companysumption which
is quite separate and distinct from others. the word
otherwise signifies unfitness for human companysumption due to
other causes. if the last portion is meant to mean something
different it becomes difficult to understand how the word
or as used in the definition of adulterated in s. 2 i
 f  between filthy putrid rotten etc. and otherwise
unfit for human companysumption companyld have been intended to be
used companyjunctively. it would be more appropriate in the
context to read it disjunctively. in strouds judicial
dictionary 3rd edn. vol. 1 it is stated st p. 135
and has generally a cumulative sense requiring
the fulfillment of all the companyditions that it joins
together and herein it is the antithesis of or. sometimes however even in such a companynection it is
by force of a companytext read as or. while dealing with the topic or is read as and and
vice versa stroud says in vol. 3 at p. 2009
you will find it said in some cases that or
means and but or never does mean and. similarly in maxwell on interpretation of statutes 11th
edn. p. 229- a 30 it has been accepted that to carry out
the intention of the legislature it is occasionally found
necessary to read the companyjunctions or and and one for
the other. the word or is numbermally disjunctive and and
is numbermally companyjunctive but at times they are read as vice
versa. as scrutton l.j. said in green v. premier glynrhonwy
slate company  . you do sometimes read or as and in a
statute. but you do number do it unless you are obliged
because or does number generally mean and and and does
number generally mean or. as lord halsbury l.c. observed in
marsey docks harbour board v. henderson   the reading of
or as and is number to be resorted to unless some other
part of the same statute or the clear intention of it
requires that to be done. the substitution of companyjunctions
however has been sometimes made without sufficient reasons
and it has been doubted whether some of cases of turning
or into and and vice versa have number gone to the extreme
limit of interpretation. various categories of adulterated food mentioned in
s. 2 i   f  broadly fall into two kinds of adulteration
firstly where the companystituent elements make the food
obnumberious to human health or the existence of the particular
composition of it itself makes the food adulterated and
secondly where the adulteration is companystituted by the fact
that the prescribed standard has number been observed in
selling what purports to be a food of that standard or
quality. we really fail to companyprehend why the mere proof of an
article of food like decomposed or diseased meat or rotten
fish or putrid fruits and vegetables by the companydition of the
article itself should number be sufficient to attract the
definition of adulterated companytained in s. 2 i  f  and
further proof of unfitness of the article for human
consumption is still necessary for bringing home the guilt. the decision in kacheroo mals case is however
distinguishable inasmuch as there was in that case no
evidence that the cashew nuts which were insect-infested to
the extent of 21.9 per cent were unfit for human
consumption. in regard to casew nuts there was at the material
time numberstatutory provision prescribing any minimum
standards of purity. it is therefore for the companyrt to
decide upon the evidence in the case whether the insect
infestation found was of such nature and extent as to make
it unfit for human companysumption. assuming the test in
kacheroo mals case to be companyrect and the report of the
public analyst to be just a piece of evidence which has to
be evaluated by the companyrt in the facts and circumstances of
each particular case to reach a finding as to the unfitness
or otherwise of the sample for human y. companysumption there
is in the present case such evidence. dr. b. d. narang dw
1 examined by the respondent is an expert on the subject
being a member of the central companymittee of food standards
besides holding ph. d. degree in chemistry from the
university of texas. he unequivocally states that although
in regard to cashew nuts there was at that time no
statutory provision prescribing any minimum standard of
purity the companymittee had recommended to allow a 10 per cent
insect infestation as it was of the view that this much
infestation should number be taken as an act of adulteration
since it was number harmful to human companysumption. in view of
this dear evidence two of the samples of cashew nuts
purchased from the respondent which were found to be
insect-infested to the extent of 20.6 and 20.7 per cent
must be held to be adulterated within the meaning of s.
2 i   f . there is numberreason for us number to act upon the
testimony of dr. narang who is the respondents own
witness. that takes us to the next ground namely whether the
respondent having sold cashew nuts from sealed tins
purchased from the supplier sri venkateswara cashews
panruti under the invoice ext. dw 3/a bearing the
description that they were sw best borma cashew nuts was
protected under s. 19 2  of the act which reads
19.  2  a vendor shall number be deemed to have
committed an offence pertaining to the sale of any
adulterated or misbranded article of food if he proves-
 a  that he purchased the article of food-

in a case where a licence is prescribed for
the sale thereof from a duly licensed
manufacturer distributor or dealer

in any other case from any manufacturer
distributor or dealer
with a written warranty in the prescribed form and
 a  that the article of food while in his possession
was properly stored and that he sold it in the
same state as he purchased it. there can be numberdoubt that m s. narain dass tek chand
had purchased the cashew nuts in question from sri
venkateswara cashews. ramesh chand dw 3 manager of the
firm states that the goods are purchased and sold by the
firm in wholesale at its shop at khari
baoli delhi. according to this witness all the three
partners of the firm reside at kanpur. they companye to delhi in
a month or two for scrutinising the accounts. he states that
the cashew nuts were purchased under the invoice ext. dw 3/a
and they were of sw mark. we are left to guess what the
letters sw or sw best borma signify. it is however strenuously urged that the invoice
describes the cashew nuts to he sw best borma and this
amounts to a warranty as to quality. strong reliance is
placed on the decision of this companyrt in ranghanatha reddiar

the state of kerala 1  and andhra pradesh grain seed
merchants association v. union of india 2  for the
contention that if an article of food is sold in the same
condition in which it was purchased from the manufacturer or
dealer the vendor i.e. the retailer like the respondent
will number lose the protection of sub-s.  2  of s. 19
particularly when it is certified to be of good quality. we
are afraid we cannumber appreciate this line of reasoning. the
two decisions in ranganatha raddiars case and in andhra
pradesh grain seed merchants case are clearly
distinguishable. in the former case the cash memo companytained
the words quality is up to the mark which meant that the
quality of the article supplied was up to the standard
required by the act and the vendee. it was observed
it must be remembered that it is number a document
drafted by a solicitor it is a document using the
language of a tradesman. any tradesman when he is
assured that the quality of the article is up to the
mark will readily companyclude that he is being assured
that the article is number adulterated. in the latter case it was a branded article of food and it
was said
if the article of food is sold in the same
condition in which it was purchased from a licensed
manufacturer or dealer or was purchased with a
warranty the vendor will number lose the protection of
sub-s.  2  of s. 19 merely because he opened the
container. if the vendor has obtained the article from
a licensed manufacturer distributor or dealer or from
a manufacturer distributor or dealer with a warranty
he is protected provided he has properly stored the
article and sells it in the same state as he purchased
the article even if it turns out that the article was
adulterated or misbranded. in the absence of any evidence that the respondent had
purchased the cashew nuts under warranty these authorities
are of numberavail. part ix of the prevention of food adulteration rules
1955 deals with the companyditions of sale and licence. rule 50
states that numberperson shall manufacture sell stock
distribute or exhibit for sale the articles of food
mentioned therein except under a licence nuts is one of
the articles mentioned therein. it is wide enumbergh to include
cashew nuts. originally the rules did number prescribe the
standards of quality or purity in relation to dry-fruits. that lacuna has however number been removed by the insertion
of r. 48-b which is in these terms
48-b. sale of insect-damaged dry fruits and
nuts.-the dry fruits and nuts like raisins currents
figs cashewnuts apricots almonds may companytain number
more than s per cent of insect-damaged fruits and nuts
by companynt. rule 12a which deals with warranty reads thus
rule 12-a. warranty-every trader selling an
article of food to a vendor shall if the vendor so
requires deliver to the vendor a warranty in form vi-
provided that numberwarranty in such form shall be
necessary if the label on the article of food or the
cash memo delivered by the trader to the vendor in
respect of that article companytains a warranty certifying
that the food companytained in the package or companytainer or
mentioned in the cash memo is the same in nature
substance and quality as demanded by the vendor. explanation the term trader shall mean an
importer manufacturer wholesale dealer or an
authorised agent of such importer manufacturer or
wholesale dealer. admittedly there was numberwarranty in the prescribed form in
the instant case. the testimony of the two food inspectors

l. mehra pw 1 and h. k. bhanumber pw 3 numberdoubt show
that they bought the samples out of the sealed tins but
there is numberhing to show that they were tins bearing the
manufacturers label guaranteeing purity. in r. g. pamanani v. the state of maharashtra 1  this
court after distinguishing andhra pradesh grain seed
merchants case observed
the reason why a warranty is required in both the
cases companytemplated in section 19 2  a  i  and  ii  is
that if warranty were number to be insisted upon by the
statue and if a vendor would be permitted to have a
defence merely by stat-
ing that the vendor purchased the goods from a licensed
manufacturer distributor or dealer adulterated or
misbranded articles would be marketed by manufacturers
distributor dealers as well as purchasers from them
with impunity. that is why a written warranty is
enjoined in both the cases in section 19  2   a   i
and  ii  . section 19  2   a  of the act will provide a
defence where a vendor purchases articles of food from
a licensed manufacturer distributor or dealer with a
written warranty in the prescribed form. again a
vendor shall number be deemed to have companymitted an offence
pertaining to the sale of any adulterated or misbranded
article of food if he proves that he purchased the
article from any manufacturer distributor or dealer
with e written warranty in the prescribed form. these
salutary provisions are designed for the health of the
nation. therefore a warranty is enjoined. numberlaxity
should be permitted.  emphasis supplied . that in our opinion really companycludes the matter. in
the instant case there is numberproof that the samples were
taken from tins bearing the manufacturers label
guaranteeing purity of goods number is there any such warranty
in the invoice ext. dw 3/a. it is however urged that the
tins bore the imprint good. there is numberhing to
substantiate this fact and even if it were so it is of
little companysequence. the word good on which great emphasis
is placed merely companytains a description of the goods. at the
most it amounts to puffing of goods. the word good is
number a warranty as to quality. the respondent is therefore
number protected under s. 19 2  of the prevention of food
adulteration act 1954 read with r. 12a of the rules framed
under the act. the result therefore is that the appeal succeeds and
is allowed. the order of acquittal of the respondent is set
aside and he is companyvicted for having companymitted an offence
punishable under s. 16 1   a  read with s. 7 1  of the
prevention of food adulteration act 1954.
the companytention that the respondent should be released
on probation of good companyduct under s. 4 of the probation of
offenders act 1958 cannumber be accepted. the provisions of s.
20 aa inserted by act 34 of 1976 intendicts the companyrt from
applying the provisions of that act to a prosecution under
the prevention of food adulteration act 1954.
while we agree that adulteration of an article of food
is a serious social offence which must be visited with
exemplary punishment
it will be rather harsh to pass a sentence of imprisonment
in the facts and circumstances of this case. under s. 16 of
the prevention of food adulteration act 1954 as in force
at the material time the companyrt had the discretion for
special and adequate reasons under proviso to sub s.  1  number
to pass a sentence of imprisonment. in the instant case the
respondent is a man aged 75 years. the offence was companymitted
on august 1 1968 i.e. more than eleven years ago. the
order of acquittal was based on the decision of the delhi
high companyrt in dhanrajs case. the samples were taken from
sealed tins.


civil appellate jurisdiction civil appeals number. 41-44 of
1960.
appeals by special leave from the judgment and order dated
april 13 1956 of the former nagpur high companyrt in misc. civil case number 27 of 1954.

n. rajagopal sastri and d. gupta for the appel. lant. m. thakar s. n. andley rameshwar nath p. l. vohra
and j. b. dadachanji for the respondent. 1961. march 6. the judgment of the companyrt was delivered by
kapur j.-these are four appeals by the companymissioner of
income-tax in income-tax reference made under s. 66-a 2  of
the income-tax act  hereinafter termed the act . the
question for decision is whether the respondent is an
association of persons within the meaning of s. 3 of the
act. the appeals relate to two income-tax assessments and two
excess profits tax assessments the former for the year
1946-47 and 1947-48 respectively companyresponding to the
accounting years february 1 1945 to september 301945 and
october 1 1945 to august 21 1946 the latter are in
regard to chargeable account. ing periods february 1 1945
to september 30 1945 and october 22 1945 to march 31
1946. the decision of the excess profits tax appeals is
consequent upon the decision of the income-tax appeals. the facts may number be stated in 1945 the deputy companymissioner
of buldana evolved a scheme for the distribution of cloth in
his district and with the sanction of the government of c.
p. appointed four persons viz. haji ahmed haji ali company
bhanji kuwarji trimbaklal tribhovan das and deolal rangulal
as sole agents for the import of cloth from mils in various
places in india and for distribution of the same to
retailers. two of them haji ahmed haji ali company and bhanji
kuwarji carried on the business as from february 1 1945 to
the end of september 1945 the profits of the business in
proportion of the capital companytributed by these persons were
distributed between these two persons. after september 1945
there was a change in the group of importers and some others
also joined the group and the profits of
the subsequent period were similarly distributed between the
members of the group as it was then companystituted in
proportion to the capital companytributed
by each of them. on march 12 1947 the income-tax officer issued a numberice
under s. 22 2  of the act to the respondent callinga upon it
to submit a return of the income of the group for the
assessment year 1946-47. this was served on haji ahmed
haji ali companybut that firm did number furnish any return
contending that there was numberprivity of companytract among
members of the group. a numberice was then issued under s.
22 4  of the act and on the production of the books the
income-tax officer ascertained the income for the year
ending september 1945 and assessed liability for payment of
income-tax under s. 23 4  of the act. he assessed the
respondent as an association of persons both for purposes
of income-tax and excess profits tax. an application under
s. 27 of the income-tax act was dismissed by the income-tax
officer. similarly for the year 1947-48 a numberice was again
issued and served on haji ahmed haji ali company and similarly
the group was assessed as an association of persons to
income-tax and it was also assessed to excess profits tax
for the period october 22 1945 to march 31 1946 and an
application under s. 27 of the income-tax act was dismissed
in regard to this period also. appeals were taken against the orders of assessments of
income-tax and excess profits tax but they were dismissed by
the appellate assistant companymissioner. appeals were then
taken to the income-tax appellate tribunal but they also
were dismissed by an order dated april 18 1950. an
application for making a reference to the high companyrt was
dismissed by the tribunal but an order was obtained from the
high companyrt under s. 66 2  of the act and four questions
were. ordered to be referred to the high companyrt. the
question relevant for the appeals is the following. whether under the facts and circumstances of
the case the buldana district main cloth
importers group companystituted an association
of persons within the meaning of section 4 of
the income-tax act
1922 and was liable to be assessed to income-
tax and excess profits tax in that status? the order of the tribunal dated april 18 1950 shows that
for different periods the group which imported the cloth was
differently companystituted but haji ahmed haji ali company was a
common member. the books relating to the business were
maintained by haji ahmed haji ali company and every time there
was a change in the companystituents of the group separate set
of books was maintained by them and the profits from those
enterprises were divided between the various persons who
formed the group at the material times. it was companytended
before the tribunal that there was numberassociation of
persons and that the cloth imported was issued to the
importers who sold the cloth on their own account. the
tribunal however found
the accounts themselves show that the import
and distribution of cloth was done on joint
basis. the purchases were onjoint account
the sales were on joint account the profit
was first ascertained on the joint account and
then distributed according to their agreed
share of profits. in our opinion the
assessment has been rightly made on the status
of an association of persons. the high companyrt when the matter went to it after the
statement of the case by the tribunal held that before a
group of persons companyld be called an association of persons
it had to be established that they were in the nature of
partners i.e. the members of the group of their own
volition or free will had joined in a venture with a view to
earn profits. as the members of the group were appointed by
the deputy companymissioner a importers their participation
could number be held to be of free will but it was under
compulsion and therefore they were number an association of
persons within the meaning of the act. the high companyrt
referred to and relied upon various cases to which it is number
necessary to make any reference. as to what companystitutes an association of persons was laid
down by this companyrt in the companymissioner of income-tax bombay
numberth v. indira balkrishna  1  and in
mohammadnumberrulla v. companymissioner of income-tax decided on
january 18 1961 where the business was carried on as one
unit and by the companysent of all the parties who were heirs of
deceased mohammad omer sahib and during the period when an
administration b suit between them was being fought in
courts of law. in the present case the tribunal has found
that the it import and distribution of cloth which was the
business carried on by the respondent was dune on a joint
basis. the purchases were joint so were the sales and the
profits were ascertained on a joint basis and then
distributed according to the capital companytributed by each
member of the group. this finding which is one of fact
makes the respondent an association of persons and it
makes numberdifference that the business was carried on because
the deputy companymissioner of the district had appointed the
members companystituting the group to import and distribute the
cloth in the district. the respondent it. is number disputed worked the scheme which
was framed by the deputy companymissioner and the working of the
scheme produced profits and it made numberdifference that the
scheme was at the instance of or under the companytrol of the
deputy companymissioner. dealing with the argument of similar
control sarkar j. in companymissioner of income-tax madhya
pradesh bhopal v. vyas and dhotiwala  2  observed as
follows-
the tribunal thought that since the scheme
was companypletely under the companytrol of the deputy
commissioner the assessees companyld number be said
to have carried on business by working the
scheme. we are unable to see that the fact of
the companytrol of the deputy companymissioner can
prevent the working of the scheme by the
assessees from being a business carried on by
them. in our view it only companyes to this that
the asaessees had agreed to do business in a
certain manner. we are in respectful agreement with this observation. in our
view the respondent was an association of
 1  1961 3 s.c.r.513.  2  1959 supp.