STATE OF U.P. AND ORS. v. RENUSAGAR POWER CO. AND OTHERS

The following Judgments of the Court were delivered: G SABYASACHI MUKHARJI, .J. This appeal by special leave is directed against the judgment and order of the High Court of Allahabad dated 26th September, 1984. The first appellani is the State of Uttar Pradesh impleaded through the Chief Secretary to the Government of Uttar Pradesh, Lucknow. The second appellant is the H Secretary to the Government of Uttar Pradesh, Department of

STATE OF U.P. v. RENUSAGAR POWER CO. IMUKHARJI, J.] 635

Ene.rgy, Lucknow. The third appellant is one Shri Yogendra Narain, presently acting as Secretary to the Chief Minister, State of Uttar A Pradesh, Lucknow. At a particular point of time Shri Yogendra Narain was the Secretary to lhe Department of Energy. The fourth appellant is the Assistant Electrical Inspector, a functionary under· the U .P. Electricity (Duty) Act, 1952, Mirzapur Zone, Rani Patti, Mirzapur. The fifth appellant is the Collector of Mirzapur. B

There are four responden!'S in this appeal. The first respondent is Renusagar Power Company Ltd. The second respondent is M/s Hindustan Aluminium Corporation Ltd. Respondent No. 3 is Shri D .M. Mimatramka who resides at Hindalco Administrative Colony, Renukut, Mirzapur. The fourth respondent is Shri Rajendra Kumar Kasliwal 'who·. resides at Hindustan Aluminium Corporation Ltd., c 'R'enukur;"District·Mirzapur. Respondents 3 and 4 mentioned above are the shareholders of the first respondent and !he second tespon· dent, that is, Renusagar Power Company and M/s. Hindustan Aluminium Corporation Ltd. respectively. It is stated that Mis ·Hindustan Alulllinium Corporation Ltd;·, established and aluminium D factory at Renukut inMirzapur District, U."P. in 1959. It is the case of the respondents that it was induced to do so on the assurance that cheap electricity and power would be made available at the relevant time. In 1962, a plant of Hindustan Aluminium Corporation Ltd. for manufacture of aluminium, was commissioned. M/s Renusagar Power Co. Ltd. a wholly owned subsidiary of Mis Hindustan Aluminium E Corporation Ltd, was incorporated in 1964. Mis Reriusagar Power Company Ltd. was incorporated separately and had its own separate · Memorandum and Articles of ,Association. On 9th September, 1967, the first generating unit of 67.5 MW in-·Renusagar was commissioned by Mis Renusagar Power'Company Ltd. The second generating unit of the company was commissioned oh 5th October, 1968. The U .P F Electricity {Duty) Act, 1952 (hereinafter ca~led· 'the Act') came into force from 15th January, 1953 and it sf5ught to levy a duty on the consumption of electrical energy in the State ofUttar Pradesh.

In the Statement of Objects and Reasons, which was published in U .P. Gazette;it was stated that the programmes of development of the G State involved enormous ell:penditure and• thus additional resources had to be raised, the bulk of which could only be raised by means of fresh taxation. It was stated that the object of the Bill, inter alia, provided as_follows:

"A tax on the consumption of electrical energy will impose H

p. 636 Copy page pinpoint

a negligible burden on the consumer and is a fruitful source A of additional revenue. The Bill has been so prepared as to ensure that the tax payable by a person will be. rela(ed to the quantity of eleciricity consumed by him. The Bill is being introduced with the above object."

B By virtue of the provisions of the U .!;'. Electricity (Duty) (Amendment) Ordinance, 1959 various amendments were carried otit in the said Act. In section 2 of the principal Act, a new clause, clause (hh) describing a scheduled industry was inserted. By virtue of the aforesaid newly inserted clause, the expression 'scheduled industry' meant any of the industries specified in the schedule. In the proviso to section 3 of the principal Act, after clause (d), a new clause (e) was c inserted which provided for non-levy or exemption from the payment of electricity duty on the energy consumed by a consumer in a scheduled industry. The expression which was added was "by a con- sumer in a scheduled industry". By virtue of section 8 of the Amending Act, a schedule was added to the principal Act. In the schedule, non- D ferrous metals and alloys were placed at serial No. 1 in Part B of the schedule under a broad heading 'Metallurgical Industries'. It appears, therefore, that by virtue of the aforesaid provisions electricity duty on the energy consumed by M/s Hindustan Aluminium Corporation Ltd. was exempted from 1st April, 1959, the date on which the Ordinance came into force. It was further stated that the U .P. Electricity (Duty) E (Amendment) Ordinance, 1959 was repealed and the provisions were incorporated into an amending Act, viz,, 0.P. Act No. 12 of 1959 and termed as the U.P. Electricity (Duty) (Amendment) Act, 1959. By virtue of sub-section (2) of section 1, the Amendment Act provided that the Act would be deemed to have come into force with effect from 1st April, 1959. The amendment Act repealed the provisions of the U.P. Electricity (Duty) (Amendment) Ordinance, 1959. In section 2, after clause (d), the clause which was inserted as a new clause (e) provided that electricity duty would not be leviable on the consump- tion of energy by a consumer in any industry engaged in the manu- facture, production, processing, or repair of goods. Ordinance No. 14 of 1970 was promulgated on 5th August, 1970. The provisions con- G tained in the Ordinance were subsequently incorporated in U .P. Act No. 2 of 1971. The amended provisions of U.P. Act No. 2of1971 came into force from 1st April, 1970. The Amendment Act was preceded by U.P. Ordinance No. 14 of 1970. The Ordinance was described as "the Uttar Pradesh Taxes and Fees Laws (Amendment) Ordinance 1970." By virtue of Chapter III of the said Ordinance, amendments were sought to be made to the Act. Section 3 of the principal Act was

STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.[ 637

substituted by a new section which provided that there wpuld be levied and paid to the State Government a duty called electricity duty on the energy sold to a consumer by a licensee/Board/the State Government the Central Government; there would be a duty on the consumption of energy by a licensee or the Board in or upon the premises used for commercial or residential purposes, or in or upon any other premises except "in the construction, maintenance or operation of his or its works", and there would be a duty upon the consumption of electricity by any other person from "his own source of generation." It was provided that a duty was to be determined at such rate or rates as may, from time to time, be fixed by the State Government by notification in the official gazette. Sub-section (2) of section 3 provlded that in respect of certain classes of consumption the electricity duty would not exceed 25% of the raie charged. c ~.- It may be expedient to rekr 1o the Prefatory Note of the Act which, inter alia, is as follows:

"Prefatory Note: The minimum programme of develop- D ment which this St.ate mµst carry out within the next three or four years for ti)e 11ttaiI!f11ent of the objective of a welfare State is set out in the Five Year Plan drawn up by the Planning Commission. This plan provides for an expen- diture of 13.58 crores--of rupees on power development projects. Such a huge expenditure cannot be met from our E present resources. It is, however, eJiSential for the welfare of the people that the expenditure should be incurred and that nothing should be allowed to stand in the way of the progress of the plan. Additional resoµrces have therefore to_ be found, the bulk, ofwhi~h can be raised only by means of fresh taxation." F

Section 3 of the Act provides as follows:

"3. Levy of electricity duty.-(1) Subject to the provisions hereinafter contained, there shall be levied for and paid to the State Government on the energy: G

(a) sold to a consumer by a licensee, the Board, the State Government or the Central Government; or

(b) consumed by a licensee or the Boari) in or upon PT!'· mises used for commercial or residential purposes, or in or H

p. 638 Copy page pinpoint

A upon any other premises except in the construction, maintenance or operation of his or its works; or

(c) consumed by any other person from his own source of generation; a duty (hereinafter referred to as 'electricity duty') determined at such rate or rates as may from time to B time be fixed by the State Government by notification in the Gazette, and such rate may be fixed either as a speci- fied percentage of the rate charged or as a specified sum per unit.

Provided that such notification issued after October 1, 1984 but not later than March 31, 1985 may be made c effective on or from a prior date not earlier than October 1, 1984.

(2) In respect of clauses (a) and (b) of sub-section (1), the electricity duty shall not exceed thirty-five per cent D of the rate charged.

Provided that in the case of one-part tariff where the rate charged is based on units of consumption, the electri· city duty shall not be less than one paisa per unit or more • than eight paisa per unit. E Explanation-For the purposes of the calculation of electricity duty as aforesaid, energy consumed by a licensee or the Board or supplied free of charge or at the conces- sional rates to his or its partners, directors, members, officers or servants shall be deemed to be energy sold to consumers by the licensee or the Board, as the case may be, at the rates applicable to other consumers of the same category.

(3) In respect of clause (c) of sub-section (1), the electricity duty shall not be less than one paisa or more than six paisa per unit.

(4) The State Government may, in the public in- terest, having regard to the prevailing charges for supply of energy in any area, the generating capacity of any plant, ., the need to promote industrial production generally or any specified class thereof and other relevant factors, either fix

STATE OF U,P. v. RENUSAGAR POWER CO. [MUKHARJI, J.) 639

different rates of electricity duty in relation to different classes of consumption of energy or allow any exemption from payment thereof.

(5) No electricity duty shall be le.vied on-

(a) energy consumed by the Central Government or sold to the Central Government for consumption by that Government; or

{b) x x x

(c) energy consumed in the construction, mainte- nance or operation of any railway by the Central Govern- c ment or sold to that Government for consumption in the construction, maintenance or operation of any railway;

(d) by a cultivator in agricultural operations carried on in or near his fields such as the pumping of water for D irrigation, crushing, milling or treating of the produce of those fields or chaffcutting.

(e) Energy consumed in light upon supplies made under the Jania Service Connection Scheme. E Explanation.-For the purposes of clause (e) "Jania Service Connection Scheme" means a scheme approved by the State Electricity Board for supplying- Energy to Hari- jans, landless labourers, farmers (hola1Ilg land not exceed- ing one acre), members of armed forces (whether serving or retired), war widows and other weaker sections in dis- F trict notified by the State Government."

Section 4 of the Act read as follows:

"4. Payment of electricity duty and interest thereon.-(!) The electricity duty shall be paid, in such manner and G within such period as may be prescribed, to the State Government.

{a) where the energy is supplied or consumed by a licen- see,-by the licensee; H

640 SUPREME COURT REPORTS I1988] Surp. 1 S.C.R. (b) where the energy is supplied by the State Government A or the Central Government or is supplied or consumed by the Board,-by the appointed authority; and

(c) where the energy is consumed by any other person from his own source of generation,-by the person generat- B ing such energy.

(2) Where the amount of electricity duty is not paid by the State Government within the prescribed period as aforesaid, the licensee, the Board or other person mentioned in clause (c) of«ub-section (1), as the case may be, shall be liable. to pay within such period as may be c prescribed, interest at the rate of eighteen per cent per annum on the amount of electricity duty remaining unpaid until payment thereof is made."

Section 9 of the Act provides as follows: D "Exemptions. Nothing in this Act shall apply to any energy generated by a person for his own use or consump- tion or to energy generated by a plant having a capacity not ' exceeding two and a haH killowatts."

E M/s. Renusagar Power Company Ltd. had in the meantime obtained a sanction under section 18 of the Indian Electricity Act, 1910 to engage in the business of supply of electricity to the second respondent, M/s. Hindustan Aluminium Corporation Ltd. By virtue of section 2(f) which defines a licensee for the purposes of the Duty Act to mean any person licensed under Part II of the Indian Electricity F Act, 1910 and includes any person who has obtained sanction from the State Government under section 28. Renusagar Power Company Ltd., The first respondent herein, was deemed to be a licensee for the purposes of the U.P. Electricity (Duty) Act. By virtue of section 2(d) of the Act, M/s. Hindustan Aluminium Corporation Ltd. was a con- sumer since it was supplied energy by the licensee, M/s. Renusagar G Power Company Ltd., the first respondent. Thus, the consumption of electricity by M/s. Hindustan Aluminium Corporation Ltd. under a contract of sale by the licensee was exigible to duty. In other words, clause (a) of sub-section (1) of section 3 of the Act, as amended, came into operation arid a levy of duty would take place on the energy sold, to a consumer by a licensee. Clause (a) of sub-section (1) of section 4 H as newly added provided that where the energy was supplied by a

STATE OF U.P. v. RENUSAGAR POWER CO. {MUKHARJl, J;J 641

licensee, the licensee would be liable to pay electricity duty. Thus, by A virtue of the amended provisions of the Electrieity (Duty) Act, M/s. Renusagar Power Co. Ltd. the first respondent herein was liable to pay electricity duty in respect· of its supplies lo M/s. Hindustan Aluminium Corporation Ltd.

In exercise of the powers conferred by- the Amendment Ordi- B nance (U.P. Ordinance No. 14 of 1970, the provisions of which were re-enacted in U.P: Act No. 2 of 1971), the Governor on o.r about 25th August, 1970 passed an order that with effect from 1st September, 1970 the electricity duty on industrial consumption would be levied at one paisa per unit. On 28th August, 1970, the Governor ordered in supersession of all the previous orders that with effect from 1st September, 1970 electrieity duty on the energy consumed by the con- c sumers would be levied at the rates specified therein. There was further notificati9n dated 30th Septembq, 1970, issued in the name of the Governor modifylng the terrns of the notifications dated 25th August, 1970 and 28th August, 1970. D On or about 4th December, 1952 after the inauguration of the First Five Year Plan, electricity duty was imposed to gather additional revenue fot attaining the objectives set out in the plan. The U .P. Electricity (Duty) Act, 1952 was enacted on 4th December, 1952. On 1st April, 1959 in order to mitigate the hardship which might be caused to certain industries in the.State, the U.P. Electricity (Duty)'(Amend- E ment),Ordiflance, 1959 (U.P. Ordinance No. 3 of 1959) was promul- gated by the Governor of U.P. By the aforesaid Ordinance it was provided in the first proviso to section 3 of the principal Act that no duty shall be leviable on the energy consumed by a consumer in a Scheduled Industry, including Non-ferrous Industries manufacturing Aluminium like that of respondent No. 2, Hindalco. The aforesaid F Ordinance was substituted by the U.P. Electricity (Duty) (Amend- ment) Act, 1959 (U.P. Act No. 12 of 1959). It substituted sub-clause ( e) in the first proviso of section 3 which reads as follows:

"(e) by a consumer in any. Industry engaged in the manufacture, production, processing or repairs of goods". G

In the year 1959 respondent No. 2 looking to the profitability of establishing a factory for manufacture of aluminium, set up a plant at Rennkut, District Mirzapur in the State of U .P. On or about 29th October, 1959 an agreement was arrived at with the State Government and the Hindustan Aluminium Corporation Ltd. (Hindalco) for supply H

642 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.

A of 55 M.W. electrical power at the rate of 1.997717 paise per unit inclusive of all charges, duties and taxes of whatever nature on electri- city for 25 years.

In the year 1962 Hindalco, respondent No. 2, started production of aluminium. On 14th October, 1964 respondent No. 2 requested the B State Government to grant sanction to the Renusagar Power Company Ltd., to supply electricity to respondent No. 2. On 12th November, 1964 respondent No. 1 Renusagar Power Company Ltd. was granted sanction under section.28 of the Indian Electricity Act, 1910, to engage in the business of supply of electricity to respondent No. 2 Hindalco. -There was an'agreement on 29th December, 1967 with Hindalco and U.P. State Electricity Board to supply 5.5 M.W. and 7.5 M.W. of C power. The rate of charges along with levy of sales tax, etc. were to be paid by the consumer. On 1st July, 1970, there was an agreement between Hindalco and State. Electricity Board to supply 7 .5 M. W. of power. The rate of charges including levy such as Sales Tax etc. were to be paid by the consumer. On 5th August, 1970, the U.P. Ordinance D No. 14 of 1970 was promulgated further to amend the U.P. Electricity (Duty) Act, 1952 which came into force from 1st September, 1970. By the aforesaid amendment orovisions of sections 3, 4 and 7 were sub- stituted by new sections, sections 3A and 9 were omitted and there were several amendments in various sections of the original Act. As a result of the promulgation of the Ordinance, electricity duty became E leviable on the industrial consumptiOn as well as on the energy con- sumed by any person from his own source of generation. The provi- sions of section 3 have been set out before. Thereafter notification was issued on 25th August, 1970 under which rate of electricity duty on the energy consumed for industrial purposes was presctibed at one paisa per unit on consumption cif electricity with effect from 1st September,

F 1970. On 1st September, 1970, the provisions of the Ordinance amend- ing U.P. Electricity (Duty) Act, 1952 came into force. Electricity duty became leviable on the respondent No. I on the energy supplied to Hindalco, respondent No. 2 for the industrial purposes. On 28th September, 1970 respondent No. 2, Hindalco, made an application under sub-section (4) of section 3 of the Act to the State Government G to grant exemption on the energy supplied by respondent No. 1 to respondent No. 2 for industrial purposes. On 17th January, 1971 Ordi- nance No. 14 of 1970 was substituted by the U.P. Electricity (Duty) / (Amendment) Act, 1970. On 26th February, 1971 report was made by the Three-Men Committee appointed to examine the request of Hindalco for grant of exemption from payment of electricity duty on H the energy supplied by Renusagar Power Company Ltd. According to

ST~TE OF U,P. v. RENUSAGAR POWER CO. [MUKHARJ!, J.J 643 A the Committee the burden as a result of the imposition of electricity duty did not result in substantial or insufferable increase of the rate of duty for Hindalco. On 27th August, 1971 a demand for payment of electricity duty amounting to Rs-.59,13,891.80 was raised on respon- dent No. 1. On 29th March, 1972 applicatiori of respondent No. 2 for grant of exemption was rejected by the State Government on the B following reasons:

"(a) That the intention ofthe legislation was clear to with- draw the exemption from payment of electricity duty on the industrial consumers with effect from 1.9.1970 the facility of which was being availed for a period of more than 11 years. c (b) That the applicant was never given any assurance that he will be exempted from electricity duty nor the applicant is entitled for any exemption as a matter of right under the provisions of the amended Act. D . (c) That it was not in public interest io grant them exemp- tion from electricit}' duty.

(d) That the electricity duty is also being levied on the Aluminium Industries in other States also. E

(e) That the additional resources are taken into account to give the final shape of the State Development Plans and with a view to fulfil the requirement of these Development Plans the Electricity Duty Act was amended in 1970. The expected income from this duty is essential for the execu- p tion of State Government plans.

(f) It ca1mot be inferred that the imposition of electricity duty will be an unbearable burden on Hindalco,"

Aggrieved by the aforesaid rejection, the respondents filed Writ G . Petition No. 4521 of 1972 before the High Court of Allahabad. On 17th March, 1973 the State Government granted exemption from pay- ment of electricity duty on the energy consumed by any person from his own source of generation. Exemption was also granted on the energy sold to a consumer establishing a factory having capital invest- ment upto Rs.25 laks in the backward district for five years. H

644 SUPREME COURT REPORTS (1988] Supp. 1 S.C.R.

A The High Court by its judgment on 17th May, 1974 in the Writ Petition No. 4521of1972 quashed the order of the State Government and directed the State Government to reconsider the application of the respondents for exemption in the light of the observations made in that · judgment. On 6th September, 1975 Hindalco submitted an application again to the State Government for reconsideration of their previous B application for exemption from payment of electricity duty. In the meanwhile, the State Government filed a special leave petition to this Court against the judgment and order of the High Court of Allahabad dated 17th May, 1974 in Writ Petition No. 4521 of 1972. In the meantime of 13th November, 1976 an agreement was entered .into,.. between the State Electricity Board and Hindalco for supply of g5 :. M .W . main supply. The rate fixed was 11 paise per unit inclusive of all\ c taxes of whatever nature on electricity. Special leave petition was, however, dismissed on 28th March , 1977. In compliance with the High Court's judgmnet dated 17th May, 1974, on 5th April, 1977 respon- dents were given an opportunity of hearing by the State Government. For the purpose of considering the representation and to verify the D correctness of the data and the profit and loss accounts furnished by Hindalco in their printed Balance Sheets .the matter was got examined by Shri B.B. Jindal, Controller of Banking Operations, U.P . State Electricity Board who submitted his report in 1977. The State Govern- ment, however, was not satisfied with the report of Shri B.B. Jindal. On 6th September, 1978 the matter was got re-examined by the Chief E Electrical Inspector to Government, Uttar Pradesh. He submitted his report. The Chief Electrical Inspector in his report compared the cost of power of Hindalco with similar industries in other States. On 5th December, 1978 Secretary of Power discussed the matter with Dr. R. Rajagopalan, Chief Advisor (Costs), Government of India. Then a note was prepared by the SecJ;"etary, Power, Government of U.P. in F which reference was made to the above report of Chief Electrical Inspector to the Government of U.P. Thereafter the Chief Secretary . to the Government of U .P. on 26th December, 1978 wrote a letter to the Secretary, Ministry of Finance , Government of India, requesting him that the matter may be got examined by the Chief Advisor (Costs), Government of India, expeditiously. After examination on G 29th January, 1979 Dr. R. Rajagopalan, Chief Advisor (Costs), Government of India, submitted his report that the effect of imposi- · tion of electricity duty on the margin of profit available to Hindalco has been very insignificant. It did not have any adverse effect on the profitability of H;indalco since such a leV'y has been included in the cost in fixing the selling prices of Hindalco's products by the Government H of India. Imposition of electricity duty did not result in reducing the

STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHAR.JI, J.] 645

normal profits of Hindalco to either an absolute loss or such a small margin of profit that Hindalco was turned into an uneconomic unit. According to him the claim of Hindalco for exemption from levy of electricity duty is not based on justifiable grounds of either low pro­ fitability or incapacity of resources with which to pay. Personal hearing was given to the respondents in view of the directions given by the Higb Court. Report of Dr. Rajagopalan was made available to the respondents. On 28th January, 1980 rate of electricity duty on the energy consumed for industrial purposes was revised from one paisa to two .paise per unit applicable from the date of notification, that is, from 16th February, 1980. There was an agreement on 24th April, 1980 between the State Electricity Board and the Hindalco regarding 85 M.W. main supply and 60 M.W. stand by Emergency Supply. Rate c of28.42 paise per unit was fixed. A personal hearing was given to the respondents in compliance with the directions issued by the High Court. Respondents were allowed to inspect the report of the Chief Electrical Inspector and other reports available with the State Govern­ ment were shown to them and they submitted their comments on the report of Dr. Rajagopalan which were duly considered by the State D Government. A personal hearing was again given to the respondents to submit their submissions in support of their application for exemp­ tion. Respondents were represented by counsel during the course of hearing. After giving full consideration to the submissions made in the original and additional representations and the comments dated 23rd August, 1980 on the report of Dr. Rajagopalan and to the entire E material placed before the State Government, the State Government came to the conclusion that the claim for exemption from levy of electricity duty was not at all justified on any ground whatsoever. Accordingly the request for exemption was disallowed. On 3rd March, · 1982 respondent No . 1 was asked to pay Rs.11,96,83,153.80 as the amount of electricity duty on the energy supplied by it to respondent F No.. 2 for industrial purposes. Respondent No. 1, however, failed to pay the aforesaid amount within the stipulated time. On 22nd March, 1982, the District Magistrate, Mirzapur, was requested to recover the said amount as arrears of land revenue. Being aggrieved by the de­ cision of the State Government, the respondent filed a Writ Petition No. 3921 of 1982 in the High Court of Allahabad and the High Court G issued stay order directing the petitioners not to take any proceedings for the recovery of the impugned electricity duty. On 26th September, 1984 the High Court allowed the Writ Petition No. 3921 of 1982 and nek! tnat tll.e impugned order of the State Government was not main­ tainable in law and hence quashed the order of the State Government as well as the notice of demand dated 3rd March, 1982. The State H

646 SUPREME COURT REPORTS , [1988] Supp. 1 S.C.R.

Government was also directed to consider the request of the res­ A pondents for exemption in accordance with the directions issued by the Division Bench in Writ Petition No. 4521of1972 and also in the light of the observations made in the judgment after affording an oppor­ tunity of personal hearing to the respondents. Being aggrieved thereby the appellants have come up in appeal to this Court. B In the background of the facts and the circumstances set-out herein before, we have now to examine the correctness of the judgment and order of the High Court which is under appeal. There are two different m1pects. One is whether the Renusagar Power Co. Ltd., was 'own' source of generation of electricity for the Hindalco, in the facts and circumstances of the case. The second aspect is whether the order c passed by the State Government, having regard to the nature of the order passed, was in accordance with the principles of natural justice insofar as the same were applicable to the facts of this case. As it is apparent on the state of law mentioned hereinbefore from1952 to1970 no duty was payable if electricity was generated from own source of energy. From 1970 to 1973 duty of one paisa was payable in respect of electricity supplied from own source of generation. However, after 1973 no duty was payable in respect of electricity supplied from own source of generation.

'Own source of generation is an expression connected with the question of lifting .or piercing the corporate veil. It is well-settled that in interpreting items in statutes whose primary object is to raise revenue and for which purpose they classify diverse products, articles and substances, resort should be had not to the scientific and technical meaning of the terms or expressions used but to the meaning attached to them by those dealing in them. See the observations of this Court in F Chiranjit Lal.Anand v. State of Assam & Anr., [1985] Suppl 2 SCR 385.

As mentioned hereinbefore, the application for exemption was made after disposal of the first writ petition No. 4521/72 by the High Court on 17th May, 1974. Thereai:ter, the respondent made another G application for exemption under section 3(4) of the Act. The said application was ultimately rejected, which rejection was subsequently challenged. The High Court in the judgment under appeal on 26th September, 1984 has set aside the order of rejection passed by the State Government.

H Was the High Court right, is the question involved in this appeal.

STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.] 647

Examination of this question involves two aspects, namely, what is the rate of duty under which various notifications were applicable to the energy consumed by Hindalco from Renusagar. Is Renusagar "own source of generation" of Hindalco within the meanipg of section 3(1)(c) of the Electricity Duty Act, 1952 and the various notifications issued thereunder. The question whether Renusagar was "own source of generation" of Hindalco, is a mixed question of law and facts as correctly contended by Shri Palkhiwala as well as by Shri Sen appear- ing..on behalf of the respondents. Shri Palkhiwala appearing for the respondents submitted before us the historical back.ground of the set- ting up of Renusagar Power Plant. It was urged that for producing aluminium by Hindalco, electricity is a raw-material.· The Hindalco was set up with a capacity of 20,000 tons per annum on the basis of sole assurance according to the respondent, given by· the State of U .P. that c adequate power would be given at a very cheap and economical rate. The Government of U.P. in 1959 agreed to give 55 m.w. of power@

1. 99 paise per unit. This, according to the respondents, was in accord- ance with the policy of Central Government and on the basis of the report of the various Committees set up by the Government. Our D attention was drawn to certain facts appearing in Vol. A pages 8-9 which set out the averments made in the writ petition filed in the instant case. It was stated therein that aluminium is an essential raw- material in a large number of industries of strategic national impor- tance and its production is of vital public interest. 60% of the produc- tion of Renusagar goes to the electric industries and an extra 16% of the production goes to the utensils manufacturing unit and all the remaining production goes to defence, ordnance, mint, transportation and packaging industry. Aluminium is, therefore, a commodity of national importance and, as such, is mentioned in Schedule 1 of the Industries (Development and Regulation) Act, 1951 which contains only such industries which have been declared by the Parliament to be of public interest. The Union Government was anxious to set up new units in private sector as for want of sufficient foreign exchange such units could not be set up in the public sector. In this connection reliance was placed on the report of the Industrial Licensing Enquiry Commitee known as 'Data Committee'. In this background Shri G.D. Birla who eventually floated the Corporation was prevailed upon to explore the possibility of setting up of aluminium plant. The Govern- ment of India appointed a Committee of Experts headed by Shri Nagarajarao in the year 1956 for recommending the location of a new Aluminium Plant.

In that report Shri Nagarajarao recommended Rihand as one of H

648 SUPREME COURT REPORTS [1988) Supp. 1 S.C.R.

A the places for setting up the Aluminium Plant. The U.P. Government was also keen to have the industry located in the State and persuaded Shri G.D. Birla to set up the plant with the assurance that sufficient electricity at constant and concessional rate would be available. Here, I it was reiterated that the· agreement dated 29th October, 1959 was entered into called the parallel agreement so that at any time any one B of the Thermal Power Stations could be maintained independently.

• Hindalco was allowed to expand its aluminium production capa- city from time to time on the condition that it would instal its own power plant subject to the further condition that this power plant could be taken over by the State at a later date. To avoid take-over c complications Hindalco decided to set up captive power house through the instrumentality of Renusagar Power Co., a 100% subsidiary of · Hindalco fully controlled by Hindalco in all respects to supply power to Hindalco only. Reference may be made to page 28 of Vol. XVI which is .a letter dated 13th February, 1963 written by the Deputy Secretary, Govt. of India, Ministry of Commerce & Industry, to Shri D D.P. Mandelia of Hindustan Aluminium Corporation, New Delhi, where on the question of power plant it was suggested that as stated by Shri Mandelia a separate Company may be formed with the power plant project and the major portion of the capital subscribed by Hindalco. It was highlighted that setting up of a power plant project was part of the scheme for meeting the. needs of Hindalco for E electricity.

All planning, designing, engineering, purchase of equipments financing was done by Hindalco exclusively for Renusagar. See Vol. XVI Pages 20, 33, 49, 58 & 62 of the paper-book.

F The only object and purpose of power plant was to supply power and suit the requirements of Hindalco. Reference may be made to pages 36 & 37 of V-01. XVI of the Paper Book. According to Shri Palkhiwala and Shri B. Sen from the aforesaid background the follow- ing facts emerge:

G (a) 1967/1968 Unit 1 & 2 of Renusagar went into operation.

(b) Renuagar was set up as part and parcel of Aluminium Ex- pansion Scheme.

(c) All steps to set up Renusagar including ex!Jansion were taken H by Hindalco.

STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.'J 649

(d) Agency of Renusagar was set up by Hindalco because of A Take Over option by the State.

(e) Renusagar is 100% subsidiary of Hindalco.

(f) Borrowings of Renusagar arranged and guaranteed by Hindalco. B

(g) Renusagar supplies power to Hindalco only.

(h) There is only one transmission line from Renusagar to Hindalco.

(i) Renusagar generates power only to the extent required by c Hindalco.

(j) Hindalco has complete control over Renusagar. Hindalco has undertaken various obligations for the running of Renusa- gar. D

(k) The· agreement between Renusagat and Hindalco is not a normal· sale purchase agreement. This agreement shows comp- lete control of Hindalco over Renusagar.

THE CONDITIONS UNDER THE INDIAN ELECTRICITY E ACT, 1910 APPLICABLE TO NORMAL SANCTION HOLDERS AND LICENSEES WERE NOT APPLIED TO RENUSAGAR BECAUSE !TWAS HINDALCO'S CAPTIVE SOURCE OF GEN- ERATION. For Instance:

(a) After the incorporation in 1964 Renusagar was granted F sanction u/s 28 of the Electricity Supply Act, 1910 to supply power to Hindalco only. See Vol. XVI page 64 of the Paper Book.

(b) Since Renusagar was not public utility but a captive plant of Hindalco certain conditions applicable to normal sane- G tion holders in the nature of public utilities but inapplicable to Renusagar were deleted from the sanction. See Vol. XVI page 74 of the. Paper Book.

FOR THE PURPOSE OF EXPANSION OF HINDALCO AS WELL. AS RENUSAGAR THE GOVT. OF INDIA AND THE H

650 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.

STATE OF U .P. SPECIFICALLY PROCEEDED ON THE FOOT- A ING THAT HINDALCO HAD ITS "OWN SOURCE OF GENERATION" IN RENUSAGAR, SINCE RENUSAGAR WAS THE CAPTIVE POWER PLANT OF HINDALCO.

(a) Hence, for all practical purposes Renusagar was treated as .B part and parcel of the Hindalco's expansion programme. In 1962 Hindalco decided to expand capacity to 60,000 tons per annum. This meant need of extra power. The U .P. Government and the UPSEB expressed inability to gjve the extra power. The U .P. Govt. had no objection if Hindalco set up its own power-house with an option to the U.P. Govt. to take over the power plant later. On this important basis Hindalco was granted permission to set up captive power plant. C Reliance was placed in this connection on Vol. XVI, pages 4, 6, 7,.15 and 16 of the Paper Book. Also see sections 34, 36, 37, & 44 of the Electricity Supply Act, 1910.

(b) Thus Hindalco was allowed to expand its aluminium produc- D tion on the condition of its setting up its own power plant which was part and parcel of the expansion scheme. See in this connection Vol. XVI, pages 22 & 25 of the Paper Book.

(c) When Hindalco decided to expand its aluminium plant again from 60,000 to 1,20,000 tons per annum, the expansion of the power- E house was a condition precedent to aluminium expansion. All negotia- tions, requests for permission, correspondence with authorities, in- timation from Government were done and received by Hindalco. In this connection reference may be made to Vol. XVI, pages 129 to 134, 151, 157 & 180 of the Paper Book.

p ( d) Renusagar was allowed expansion limited to power require- ment of Hindalco for captive µse of Hindalco. See Vol. XVI, pages 145, 159, 161, 185, 187and 189ofthePaperBook.

(e) All Government authorities including Central Govt., State of U.P. and U.P. State Electricity Board have always treated G Renusagar to be "Captive Plant" as either "Self Generation" or "Own generation" or "Own Plant" or "Own Source of generation" or "Generation for self-use" or "Own use" etc. of Hindalco. In this connection reference may be made to Vol. XVI, pages 81, 90-91, 112, 135A, 139-140, 146, 150, 152, 160, 163, 167, 169, 172, 183A & 184 of the Paper Book. It further appears that 100% power-cuts-stoppage H. of electricity from the State grid-were imposed on those who had

STATE OF U.P. v. RENUSAGAR POWER CO. (MUKHARJI, J.] 651

A 50% or more of their "own source of generation''. Hindalco suffered 100% power cuts pre~isely on this account. It was submitted on behalf of the respondents ,and in our opinion rightly that the words "own source of "generation" could not have one meaning for power cuts and ·"· another meaning for concession/exemptions under the same law. B It further.appears that the Secretary, Power, U.P. Govt. submit- ted a note to the Advisory Council for recommending 100% power- cuts on Hindalco as Hindalco had more than 50% power supply from its own source of generation i.e. Renusagar. See Vol. XVI, page 163 of the Paper Book.

Notification under section 22B of the Act as appearing in Vol. c XIII of the Paper Book was accordingly issued·.

The U.P.S.E.B. served notice on Hindalco to reduce drawal to zero. See Vol. XVI, page 167 of the Paper Book. D The U .P. Government refused exemption from power-cut to Hindalco on the ground that it had its own source of generation. See Vol. XVI, page 172.

In Court proceedings Hindalco challenged power-cut. The Government filed affidavits, always asserting Renusagar to be "own source of generation" of Hindalco. See Vol. XXIV, page~ 68 to 75 of the Paper Book.

Indeed, it appears from the observations of this-Court in State of U.P. v. Hindustan Aluminium Corpn. Ltd., [1979) 3 SCR 709 that this Court proceeded on the basis that Renusagar had its own source of generation.

It is further said that the appellants have also admitted in the present proceedings the position that Hindalco had in Renusagar its ow11 source of generation. Reliance has been placed on: G (a) Section 9 of the Duty Act as it existed upto 1970. See Vol. XVIII, page 5 of the Paper Book.

(b) Three men Committee Report on exemption treated Renusagar as own generation. See Vol. A page 158 at 163 of the Paper Book. H

652 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.

A (c) The Government of U.P. rejected exemption application. Vol. A page 3 of the Paper Book.

(d) Counter-affidavit in the first petition. Vol. X, pages 26, 27 & 32 of the Paper Book. ·

B (e) Counter-affidavit in second petition. Vol. XI, pages 93 & 130 of the Paper Book. . . (f) See the Judgment of the Allahabad High Court. Vol. A, pages 7, 10-11, 13 & 19.

(g) Petition of the U.P. Government under Article 138. Vol. XI, c page 134.

(h) It is also significant to note the special leave petition filed by the U.P. Government. Reference may be made to Vol. XI, pages 139 to 141. D (i) Reference may be made to Rajagopalan Report, Vol. A pages 237 & 265 of the Paper Book.

(j) See the affidavit of State of U.P. in Allahabad High Court in ,_ present proceedings. Vol. A, pages 71-72, 76 & 84. · E (k) The High Court's Judgment dated 26.9.84 in the present proceedings. Vol. B, pages 391-397.

All these factors have to be borne in mind in considering whether Renusagar was Hindalco's own source of generation. Counsel for the respondents drew our attention to the fact that in the manufacture of aluminium, electrical energy is raw-material and between 16,000 to 20,000 units of energy are required for the production of 1 ton of aluminium. The impact of the imposition of duty on energy © 1 paise per unit would he an increase in the cost of production of aluminium by Rs.160 to Rs.200 per 'ton. The impact of the imposition of duty on energy @ 6 paise per unit will be an increase in the cost of aluminium by Rs.960 to Rs.1,200 per ton.

Hindalco was incorporated in 1959 and its aluminium plant com- menced production in 1962 with a capacity of 20,000 tons of aluminium. ingots p.a. Hindalco obtained electrical energy required for the manufacture of aluminium to the extent of 55 MW from the State/

. STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.I 653

A Board Hydle power under an agreement dated 29. 10.59 @ 1.997717 paise per unit inclusive of all charges, duties and taxes of whatever nature on electricity. Hindalco's plant was located at Renukut because of their assurances for power supply at economical rates.

The first expansion of Hindalco from 20,000 to 60,000 tons p.a. B required further electricity. According to the respondent the basic planning of the power plant at Renusagar, the arrangement for its design, engineering, purchase and for importing the plant and for financing the whole project were done by Hindalco.

Renusagar, which is a 100% subsidiary of Hindalco, wholly owned and controlled by Hindalco, was incorporated in March 1964. c Hindalco established the power plant through the agency of Renusagar in order to avoid complications in the case of a take over of the power plant by the State/Board of which there could be a possibility as power generation is generally not permitted in normal conditions in private sector. D

In this background what was highlighted on behalf of the res- pondent was that the sanction under section 28 of the 1910 Act given to Renusagar and its amendment established that Renusagar was not a normal type of sanction under section 23 of the 1910 Act as the holder could supply power only to Hindalco. E

The first generating unit in Renusagar commenced on 9.9.67 and the second one commenced on 5.10.68. All steps for the expansion of the power in Renusagar so as to match the power requirement of Hindalco's expansion were taken by Hindalco even though Renusagar had been incorporated. Applications for all the necessary sanctions F .and permissions were made by Hindalco.

Permissions aild sanctions were first intimated to Hindalco even though Renusagar was in existence. See Vol: XVI, pages 129-134 & 149 of the Paper Book. Changes in the sanctions and/or permissions granted were obtained by Hindalco and not by Reizusagar. See Vol. G XVI, pages 157, 180 of the. Paper Book. The expansion of the power plant in Renusagar was to exactly match the requirements of Hindalco for the production of aluminium. The expansion of the power plant in Renusagar was part and parcel of the expansion of the aluminium plant of Hindalco. See Vol. XVI, pages 145, 159, 161, 185, 187 & 189 of the Paper Book. H

654 SUPREME ,COURT REPORTS I1988] Supp. 1 S.C.R. The third generation unit in Renusagar commenced in Novem- A ber 1981 and the fourth generating unit in April 1983. Hindalco c9n- sumes about 255 MW power out of which 250 MW comes from Renusagar and 5 MW by way of main supply and 15 MW by way of emergency supply is made by the Board.

B It was emphasised on behalf of Hindalco that the power plants at Renusagar were set up as part and parcel of the aluminium expansion scheme of Hindalco and the only object and purpose of the power plants in Renusagar was to supply power to suit the needs of Hindalco.

All steps to set up the power plant in Renusagar and its further expansion were taken by Hindalco. The power plant was set up by c Hindalco through the agency of Renusagar (100% subsidiary and wholly owned and controlled by Hindalco) to avoid complicdtions in the event of take over by the State/Board.

All the borrowings of Renusagar were arranged and guaranteed D by Hindalco. Further, there is only one transmission line going out of Renusagar and the same goes to Hindalco. Renusagar can supply power only to Hindalco. Renusagar generates power only to the extent required by Hindalco. Hindalco has complete control over Renusagar iucluding its day-to-day operations. This will be evident from the applications with regard to running of Renusagar Power Plant Statiop E undertaken by Hindalco to the Board. See Vol. XV, pages 104, 118, 124 of the Paper Book.

The agreement between Renusagar and Hindalco indicates this was not a normal sale-purchase agreement between two independent persons at arms length. The price of electricity is determined according F to the cash needs of Renusagar. This covenant also shows complete control of Hindalco over Renusagar. ":''-t ..

It was submitted before us that if looked at. properly, Renusagar was Hindalco's own source of generation and according to the res- pondent an analysis of the different provisions of the Amendment Act, G makes the position clear. Submissions were made on the construction of section 3 of the Act and also that the difference in language of section 2(g)(c) and old section 9 is significant. Ambit of section 3(1)(c) is wider than the old section in view of the addition of the words 'source of generation' which must be given their full meaning. We have set-out hereinbefore the provisions of sections 3(1)(c) and 9 of the H Act. Rule 2(g) referred to "irrthe order shows that the expression 'any

STATE OF U.P. v. RENUSAGAR POWER CO. IMUKHARJI, J.] 655

person' in.section 3'1)(c) would mean a person other than licensee or a A Board who consumes energy from his own source of generation. Hindalco fixes in the expression 'any other person' under section 3(l)(c) and it consumes energy from its own source of generation. Generation being done by Renusagar, it was pointed out that Rule 2(g) of the U.P. Electricity Duty Rules, 1952 supports this plea of the respondents. It should be borne in mind that the expression 'own B source of generation' which has not been defined in the Duty Act or 1910 Act, cannot be regarded as a term of art.

The various documents and letters placed before the Court and referred to hereinbefore indicate that all persons and authorities deal- ing and conversant with this matter had consistently treated Renusagar as own source of generation of Hindalco. In the power-cuts matter c under section 22B of 1910 Act, 100% cut was imposed on Hindalco on the footing that it has its own source of generation. Ali the authorities including the State and the Board have all along treated Renusagar as own source of generation of Hindalco. The High Court as well as this Court had proceeded on that basis. In a note with the Advisory D Counsel dated 31.5. 77 the Secretary, Power Deptt. ·of the State Govt. treated Rennsagar as own source of generation of Hindalco.

In the proceedings under the Electricity Duty act itself, it was the case of the State that Renusagar generation was by Hindalco for its own use within the meaning of section 9 of the Duty Act. It was also the case of the State that Renusagar was own source of generation of Hindalco and since by its amendment in 1952 the Legislature had shown an intention to levy duty on own source of generation, Hindalco was not entitled to exemption. It was, therefore, submitted that Renusagar must-be regarded as alter ego of Hindalco i.e., own source of generation of Hindalco within the meaning of section 3(1)(c) of the F Duty Act.

The word "own" is a generic term, embracing within itself several gradations of title, dependent on the circumstances, and it does not necessarily mean ownership in fee simple; it means, "to possess to have or hold as property". See Black's Law Dictionary, 5th Edn. p. G

996. It was further submitted that by the 1970 Amendment Act, the Legislature intended to cover a wide area under section 3(l)(c) than under the old section 9. If Renusagar is the own source of generation of Hindalco then the consumption clearly falls within section 3(1)(c). The three clauses of section 3(1), it was submitted, had to be read together by way of harmonious construction. Section 3(1)(a) should H

656 SUPREME COURT REPORTS I19881 Supp. 1 S.C.R. A not be so construed as to defeat the aim of section 3(1)(c). In the case of harmonious construction what needs to be looked at, is the domin- ant or the primary element in the provisions. Thus section 3(1)(c) should I]Ot be interpreted to cover all the cases of own generation notwithstanding the fact that a sale may be involved and to that extent the transaction should be excluded from the operation of section B 3(l)(a). Alternatively, it was submitted that if the three clauses were to be treated as independent of each other then the result of construe~ tion that each provision would yield to special provisions applied should be applied as a part and parcel of hannonious construction of this section.

C In this approach clause (c) of section 3( l) ought to be regarded as dealing with the special situation, namely, a person consuming from its own source of generation while provisions of clause (a) of section 3(1) should be regarded as general provisions dealing with the cases of sale and consumption generally. The aforesaid construction would be in harmony, it was urged, with the object and purpose of the legislation. D Reliance was placed on the observations of this Court in J. K. Cotton Spinning & Weaving Mills Co. Ltd. v. State of U.P. & Ors., [1961] 3 SCR 185, where at page 193 this Court insisted on hannonious con- struction and not on literal construction. Also see Mis Girdhari Lal & Sons v. Balbir Nath Mathur & Ors., [1986] 2 SCC 237 at 241 & 246; State of Tamil Nadu v. Kodaikanal Motor Union (P) Ltd., [1986] 3 E SCC 91 at 100 and D. Sanjeevayya v. Election Tribunal, A.P. & Ors., [ 1967] 2 SCR 489 at 492.

On behalf of the respondents and in support of their contention, it "'.as urged that the hannonious construction would advance purpose and object of the legislation inasmuch as it was clearly one of the purposes of the legislation to treat captive generation or self-genera- tion as a separate category and to confer benefits on the same in public interest. Our attention was drawn to the notification dated 17th March, 1973 which appears at Vol. XVIII, page 34. It was further contended on behalf of the respondents that interpretation of section 3(l)(c) of the Act would not depend on the manner in which a person might choose to organise his affairs. Further that there was no rational dis- tinction having a nexus with the object of ihe Duty Act, where a person generating electrical energy himself was consuming the same and a person who engaged another person t.o generate electrical energy exclusively for and on behalf of his complete control and who consumes all the electrical energy so <reneratcd. Accordingly it was Fl urged that such a distinction being arbitrary ;rnd irrational, it would be

STATE OF U.P. v. RENUSAGAR POWER CO. (MUKHARJI, J.] 657

violative of Article 14 of the Constitution. Hence, it was contended that a construction of the Duty Act, which would make such a distinc­ tion, must be avoided.

This naturally brings us to the question of lifting the corporate veil or piercing the corporate veil as we often call it. On behalf of the appellants, however, it was very strongly urged that in this case there was no ground for lifting the corporate veil and Shri Trivedi, learned Additional Advocate-General, State of U .P., who was assisted by Shti Gopal Subramaniam, submitted before us elaborate argument� and made available to us all the relevant documents, urged that there was no warrant either in law o; in fact to lift the corporate veil and to treat Renusagar's plant as Hindalco's own source of generation. Shri c Trivedi urged that facts in this case do not justify such a construction and the law does not warrant such an approach. We may say that Shri Trivedi mainly relied on the proposition that normally the Court has disregarded the separate legal entity of a Company only where the Company was formed or used to facilitate evasion of legal obligations. He referred us to the observations of this Court in Western Coalfields D Ltd. v. Special Area Development Authority, Korba & Anr., [1982] 2 SCR 1 at 17. The facts of that case were, however, entirely different and it is useless to refer to them but at page 17 of the report, Chandrachud, C.J. speaking· for the Court quoted the observations in Andhra Pradesh State Road Transport Corpn. v. The I. T.O. & Anr., I 1964 I 7 SCR 17, where this Court had held that though the Transport E Corporation was wholly controlled by the State Government it had a separate entity and its income was not the income of the State Govern­ ment. While delivering the Judgment in that case Gajendragadkar, C.J., referred to the observations of Lord Denning in Tamlin v. Hannaford, [1950] KB 18 where Lord Denning had oblierved that the Crown and the corporation were different and the servants of the corporation were not civil servants.

Chandrachud, C.J., relied ort the aforesaid observations and re­ ferred to P'enningtoii's Company Law 4th Edn., pages 50-51, where it was stat�d that there were only two cases where the Court had dis­ regarded the separate legal entity of a Company and that was done because the company was formed or used to facilitate the evasion of legal obligations.

1'he \earned editor of Penningtori1s Company Law, 5th Edn., at page 49 has recognised that this principle has been relaxed in subse­ quent cases. He states that the principle of company's separate legal H

658 SUPREME COURT REPORTS · 119881 Supp. 1 S.C.R.

entity has on the whole been fully applied by the Courts since Salo- A mon's case. Corporate veil has been lifted where the principal question before the court was one of company law, and in some situations where the corporate personality of the company involved was really of secondary importance and the application of the old principle has ..,., worked hardship and injustice. In England, there have been only a few B cases where the ·court had disregarded the company's corporate entity and paid attention to where the real control and beneficial ownership of the company's undertaking lay. When it had done this, the court had relied eitheron a principle of public policy, or on the principle that devices vsed to perpetrate frauds or evade otiligations will be treated as nullities, or on a presumption of agency or trusteeship which at first sight Salomon's case seems to prohibit. Again at page 36 of the same c Book, the learned author notes a few cases where the courts have disregarded separate. legal entity of a comp~ny and investigated the personal qualities of the shareholders or the' persons in control of it because there were overriding. public interests to be served by doing so. D Indubitably, in this case there was no qu~stion of evasion of taxes but the manner of treatment of the power plant of Renusagar as the power plant of Hindalco and the Government taking full advantage of the same in the case of power cuts and denial of supply of 100% power to Hindalco, in our opinion, underline the facts and, as such, imply acceptance and waiver of the position that Renusagar was a power plant owned by Hindalco. Shri Trivedi natually relied on several de- cisions which we shall briefly note in aid of the submission that Renusagar's power plant could not be treated as Hindalco's power plant. He referred us to the well-known case of Aron Salomon v. A. Salomon & Co. Ltd., [18971 AC 22 at 27, 30131, 43. 56 to emphasise the distinction between the shareholders and the company. This point of view was emphasised by this Court also in which Chandrachud, CJ., relied on Western Coalfields Ltd. in Rustom Cavasjee Cooperv. Union of India, [19701 3 SCR 530 at 555, where ,this Court held that a Company registered under the Companies Act was a legal person, separate and distinct from its individual members. Property of the G Company was not the property of the shareholders. These proposi- tions, in our opinion, do not have any application to the facts of the instant case. Shri Trivedi also drew out attention to the Bank Voor Handel En Scheepvaart N. V. v. Stalford, [1953'] 1 QB 248, where in the context of the international law property belonging to or held on behalf of a Hungarian national came up for consideration and the H distinction between a shareholder and a company was emphasised and highlighted.

STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.J 659

In Kodak Ltd. v. Clark, [1903] 1 KB 505, the Court of Appeal in A England while dealing with an English company carrying on business in the U.K. owned 98% of t)le shares in aforeign company, which gave it a preponderating influence in t.he control, erection of•directors etc., of the foreign company. The remaining shares in the foreign company were, however, held by independent persons, and there was no evidence that the El\glish company had ever attempted to control or interfere with the management of the foreign company, or had any power to do so otherwise than by voting as shareholders. It was held that the foreign company was not carried on by the English company, nor was it the agent of the English company, and that the English company was not, therefore, assessable to income tax. Renusagar was not the alter ego of Hindalco, it was submitted. On, the other hand these English cases have often pierced the veil to serVe the real aim of the parties and for public purposes. See in this connection the observa- tions of the Court of Appeal in DHN Food Distributors Ltd. & Ors v. London Borough of Tower Hamlets, [1976] 3 AER 462. It is not neces- sary to take into account the facts of that case. We may, however, note that in that case the corporate veil was lifted to confer benefit upon a D group of companies under the provisions of the Land Compensation Act, 1961 of England. Lord Denning at page 467 of the report has made certain interesting observations which are worth repeating in the context of the instant case. The Master of the Rolls said at page 467 as follows: E "Third, lifting the corporate veil. A further very interesting point was raised by counsel for the claimants on company law. We all know that in many respects a group of com- panies is treated together for the purpose of general accounts, balance sheet and profit and loss account. They are treated ~s one concern. Professor Gower in his book on F company law says: 'there is evidence of a general tendency to ignore the separate legal entities of various companies within a group, and to look instead at the economic entity of the whole group'. This is especially the case when a parent company owns all the shares of the subsidiaries, so much so that it can control every movement of the sub- G sidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says. A striking instance is the dP,cision of the House of Lords in Harold Holdworih & Co. (Wakefield) Ltd v. Cad' dies. So here. This group is virtually the same as a partner- ship in which all the three companies are partners. They H

660 SUPREME COURT REPORTS [1988) Supp. 1 S.C.R.

A should not be treated separately so as to be defeated on a technical point. They should not be deprived of the com- pensation which should justly be payable for disturbance. The three companies should, for present purposes, be treated as one, and the parent company, DHN, should be treated as that one. So that DHN are entitled to claim com- B pensation accordingly. It was not necessary for them to go through a conveyancing device to get it.

I realise that the President of the Lands Tribunal, in view of previous cases, felt it necessary to decide as he did. But now that the matter has been fully discussed in this court, we must decide differently from him. These companies as a c group are entitled to compensation not only for the value of the land, but also compensation for disturbance. I would allow the appeal accordingly."

Lord Justice Goff proceeded with caution and observed as fol- D lows at pages 468 & 469 of the report:

"Secondly, on the footing that that is not in itself sufficient, still, in my judgment. this is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil. I wish to safeguard myself by saying that so far as this ground is concerned, I am relying on the facts of this particular case. I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case the two sub- sidiaries were both wholly owned; further, they had no separate business operations whatsoever; thirdly, in my judgment, the nature of the question involved is highly relevant, namely whether the owners of this business have been disturbed in their possession and enjoyment of it. I find support for this view in a nuinber of cases, from which I would make a few brief citations, first from Harold Hold- worth & Co (Wakefield) Ltd. v. Caddies where LorJ Reid G said: ..._

'It was argued that the subsidiary companies were separate legal entities, each under the control ofits own board of directors, that in law the board of the appellant company could not assign any duties to anyone in relation to the management of the subsidiary companies, and that, there-

STATE OF U.P. v. RENUSAGAR POWER CO. (MUKHARJI, J.J ·661

fore, the agreement cannot be construed as entitling them to assign any such duties to the respon.dent. My Lords, in my judgment, this is too technical an argument. This is an agreement in re mercatoria, and it must be construed in the light of the facts and realities of.the situation_.. The appel- lant company owned the whole share capital of British Tex- tile Mfg., Co. and, unde.r tl]~ agreem~nt of 19'\7, the directors of this company were to be the nominees of the appellant 'company. So, in fact, the appellant company could control the internal management of their subsidiary companies, and, in the unlikely event of there being any difficulty, it was only necessary to go through form.al pro- . cedure in order to make the decision of the appellant com- C pany's board fully effective.

That particular passage is, I think, especially cogent having regard to the fact that counsel for the local authority was constrained to admit that in this case, if they had thought of it soon enough, DHN could, as it were, by mov- D ing the pieces on their chess board, have put themselves in a position i.n which t.he questi<;>n wo.ul.d J:i~ve been wholly unarguable.

lalso refer to Scottish Co-operative Wholesa(e society Ltd. v. Meyer. That was a case under s. 210·of the Com- E panies Act, 1948 and Viscount Simonds said:

'I do not think that my own views could be stated better than in the late Lord President Cooper's words on the first hearing of this case. He said: "In my view, the section warrants the court in looking at the 'business F realities of a situation and does not confine thent to a nar- row legalistic view."

My third citation is from the judgment ofD.anckwerts LJ in Merchandise rransport Ltd. v. British' Transport Commission where he said that the cases:.... G

'Show thafwherethe character of a company, or the nature of the persons who control it, is a relevant fea.ture the court will go behind the mere status· of the company as a l.egal <ontity, and will consider who are the p_e_r~oµs as shar.~­ sholders or even as agents who dir.t;ct. anfi' c_ontwl. the 1:1;

662 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.

activities of a company which is incapable of doing any- A thing without human assisiance.'

The third ground, which I place last because it is longest, but perhaps ought to come first, is that in my judg- ment, in truth, DHN were the equitable owners of the B property. In order to resolve this· matter, it will be neces- sary for me to refer in some detail to the facts."

Shaw L.J. also observed at page 473 as follows:

"Even if this were not right, there is the further argu- ment advanced on behalf of the claimants that there was so c complete an identity of the different companies comprised in the so-called group that they ought to be regared for this purpose as a single entity. The completeness of that identity manifested itself in various ways. The directors of DHN were the same as the directors of Bronze; the share- D holders of Bronze were the same as in DHN. the parent company, and they had a common interest in maintaining on the property concerned the business of the group. If anything were necessary to reinforce the complete identity of commercial interest and personality. cl. 6, to which I have referred already, demonstrates it, for DHN under- E took the obligation to procure their subsidiary company to make the payment which the bank required to be made.

If each member of the group is regarded as a com- pany in isolation, nobody at all could have claimed com- pensation in a case which plainly calls for it. Bronze would have had the land but no business to disturb; DHN would have had the business but no interest in the land."

In this connection it would be useful to refer to Harold Holdsworth & Co. (Wakefield), Ltd. v. Caddies, [1955] 1 All E.R. 725, where Lord Morton of Henryton in England, at page 734 of the report observed as follows:

"My Lords, this clause refers to a group of companies con- sisting of the appellant company and their existing subsi- diary companies. I cannot read the clause as compelling the board to assign duties to the respondent in relation to the business of every company in the group. Nor can I read it as

STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI. J.I 663

compelling the board to assign him duties in relation to the business of the appellant company. That business is not treated as being on a different footing from the business of British Textile or of another subsidiary of the appellant company, Whalley & Appleyard. Ltd., which is mentioned in the respondent's condescendence 3. As I read the clause, it leaves the board of the appellant company free to assign to the respondent duties in relation to the business of one only, or two only or all of the companies in the group, and to vary the assignment and the duties from time to time. Further, I think the clause leaves the board free to appoint another person to be "a managing director", and to divide the duties and powers referred to in the clause between the respondent and the other managing director in such man- c I ner as they think fit. It is true that each company in the group is, in law, a separate entity, the business whereof is to be carried on by its own directors and managing director, if any; but there is no doubt that the appellant company, by taking any necessary formal steps, could D make any arrangements they pleased in regard to the man- agement of the business of (for instance) British Textile. They owned all the issued capital and the directors were their nominees."

Lord Reid at pages 737-738 observed as follows: E

"It was argued that the subsidiary companies were separate legal entities, each under the control of its own board of directors, that iri law the board of the appellant company could not assign any duties to any one in re!~tion to the management of the subsidiary companies, and that, there- F fore, the agreement cannot be construed as entitling them to assign any such duties to the respondent.

· My Lords, in my judgment, this is too technical an argument. This is an agreement ih re mercatoria, and it must be construed in the light of the facts and realities of G the situation. The appellant company owned the whole share capital of British Textile Manufacturing Co., and, under the agreement of 1947, the directors of this company were to be the nominees of the appellant company. So, in fact, the appellant company could control the internal man- agement of their subsidiary companies, and, in the unlikely H

664 SUPREME CQURT REPORTS I1988] Supp. 1 S.C.R.

event of there being any difficulty, it was only necessary to A go through fQnnal proced.ure in order to make the de<;ision of the appellant compa.n{s boardfully effective."

Ou~ attention was drawn by Shri Sen to Scottish Co-operative Wholesale Society Ltd. v. Meyer andAnr., [1958] 3 All E.R. 66, where B Viscount Sil'\\ln<:I.s of House of 1-,or(is observec;l at p~g~s 7 L 72 as follows: ·

"My Lords, it may be that the.acts of the society of which co.inplaint is made could not be regarded as cqrn;luc.t of the aff.ai.rs of the company if the so~iety and the company were bodies wholly independent of each other, competitors in c the rayon market, and using against each 0th.er such methods of trade warfare as custom. permitted. B,.t this is to pursue a false anaiogy. It is not possible to separate the transactions of the society from those of the company. Evezy step taken by the latter was determined by the policy of the former.. I will give an example of this. I observed t.hat,.in the C().urse. of the argumel)t before the House, it. was. suggested· that the company had: only itself to blame: i{, through: its. negl.ect to get a contract with. the soci.ety, it faileq· in a crisis. to obtain from the. Falkland Mill the supply of cloth that is needed. The short answer is that it w.as the policy.o.f the society that the affairs of the company should be so conducted, and the minority shareholders were con- t.e.nt that it. should be so. they relied-how unwisely the event proved-on the good faith of the society, and in any case. I.hey were impotent to impose t})eir own views. It is just because t)le. society could l!ot only use the ordinary and i:'· l~gitimate: >yeapons on commercial warfare. but could also co~trol from within the operations of the company that it is ill~g~ti~at~ tQ regard the conduct of the company's affairs as a ma(ter f()r which it had no responsibility. After much consid~ration of this question, I do not think that my own views c.ould be stated better than in the late Lord Pre- G. sid<tQt, Lord Cooper's words on the first hearing 0 f this case. l;It< saio ( 1954 SC at I?· 39 I);

''In tnY vi!-{w~ the.section.w~r-rants the cou_rt,in.IQQ~ing at the qusint<SS realiti«s qf. a. situation aqd:does:nQt> CQnfinc.: them to a !)arrow l~galistic view. The trutli is that;. w.'1ene_ver a· subsidiary. is fo!J11ed. as in tl:lis case. with au

STATE OF U.P. v. RENUSAGAR POWER CO. [MUKHARJI, J.] 665

independent minority of shareholders, the parent company A must, if it is engaged in the same class of business, .accept as a result of having formed such a subsidiary an obligation so to conduct what are in a sense its own affairs as to deal fairly with its subsidiary."

At the opposite pole to this standard may be put the con- B duct of a parent company which says "our subsidiary com- pany has served its purpose, which is our purpose. ·;I'here- fore Jet it die" and, having thus pronou~ced sentence, is able to enforce it and does enforce it .not only hy attack from without but also by support from within. If ,this sec- tion is inept to cover such a case, it will be a dead ·letter indeed. I have expressed myself strongly in this case c because it appears to me to be a glaring example of pre- cisely the evil which Parliament intended to remedy."

Similarly. at page 84 of the report, Lord Keith's observations are also relevant to the facts of this case. D

"My Lords, if the society could be regarded as an organisa- tion independent of the company and in competition with it, no legal objection could be taken to the actions and policy of the society. Lord Carmon! pointed this out in the Court of Session. But that is not the position. In law, the society and the company were, it is true, separate legal entities. But they were in the relation of parent and sub- sidiary companies, the company being formed to .run a business for the society which the society . could not at the outset have done for itself unless it could have persuaded the respondents to become servants of the society. This the respondents were not prepared to do. The company, through the knowledge, the experience, the connexions, the business ability and the energies of the respondents, had built up a valuable goodwill in which the society shared and which there is no reason to think \vould not have been maintained, if not increased, with the co-operation of the society. The company was in substance, though not in law, a partnership consisting of the society and the respondents.

- Whatever may be the other different legal consequences following on one or other of these forms of combination one result, in my opinion, followed in the present case from the method adopted, which is common to partnership,.that H

666 SUPREME COURT REPORTS [1988] Supp. 1 S.C.R.

there should be the utmost good faith between the constitu- A tent members. In partnership the position is clear. As stated in Lindley on Partnership (11th Edn.) p. 401:

"A partner cannot, without the consent of his co-partners, lawfully carry on for his own benefit, either openly or 8 secretly, any business in rivalry with the firm to which he belongs."

It may not be possible for the legal remedies that would follow in the case of a partnership to follow here, but the principle has, I think, valuable application to the circumst- ances of this case." c In Charterbridge Corpn. Ltd. v. Lloyds Bank Ltd. & Anr. [1969] 2 All E.R. 1185 at page 1194 Justice Pennycuick emphasised that the reality of the situation must be looked in.

D Shri Trivedi drew out attention to the decision in Marshall Richards Machine Co. "Ltd. v. Jewitt (H.M. Inspector of Taxes) 36 TC 511, where at page 525 of the report Lord Upjohn, J. observed that where you have a wholly-owned subsidiary, and both the parent com- pany and wholly-owned subsidiary enter into trading relationships, there is, of course, a dual relation, but you cannot for the purposes of tax disregard the fact that there are, in fact, two entities and two trades, that is to say, the trade of each company. It is normally a question of fact whether the disbursement in question is laid out wholly and exclusively and for the purposes of the trade. In aid of this proposition and in furtherance Shri Trivedi drew our attention to the profits of the two companies which were separately computed and also referred to Vol. C, 641 where the profits of Renusagar were separately indicated and Vol. C at page 642 where the profits of Hindalco were separately indicated.

We are, however, of the opinion that these tests are not con- clusive tests by themselves. Our attention was also drawn to the deci- G sion of the Madras High Court in M/s. Spencer & Co. Ltd., Madras v. The Commissioner of Wealth Tax, AIR 1969 Madras 359, where Vee- raswami J. held that merely because a company purchases almost the entirety of the shares in another company, there was no extinction of corporate character for each company was a separate juristic entity for tax purposes. Almost on similar facts, are the observations of P.B. H Mukharji, J. in Turner Morrison & Co. Ltd. v. Hungerford Investment

STATE OF U.P. v. RENUSAGAR POWER CO. IMUKHARJI, J.] 667

Trust Ltd., AIR 1969 Cal. 238 where he held that holding company A and subsidiaries are incorporated companies and in this context each has a separate legal entity. Each has a separate corporate veil but that .. does not mean that holding company and the subsidiary company within it, all constitute one company.

Mr Justice 0. Chinnappa Reddy speaking for this Court in Life B Insurance Corpn of India v. Escorts Ltd. & Ors., [1985] Suppl 3 SCR 909 had emphasized that the corporate veil should be lifted where the ··I associated companies are inextricably connected as to be, in reality, part of one concern. It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement c of the element of the public interest, the effect on parties who may be ...f! affected. After referring to several English and Indian cases, this Court observed that eversince A. Salomon & Co. Ltd's case (supra), a company has a legal independent existence distinct from individual members. It has since been held that the corporate veil may be lifted D and corporate personality may be looked in. Reference was made to Pennington and Palmer's Company Laws.