South Arcot Electricity Distribution Co. Ltd. vs State Electricity Board

M. Anantanarayanan, J.—The South Arcot Electricity Distribution Company Limited was a concern which was acquired by the State under

the Madras Electricity Supply Undertakings (Acquisition) Act (XXIX of 1954). On 2nd July, 1955, the Chief Electrical Inspector to Government

intimated the licensee that the undertaking was likely to be taken over by Government in 1959-60. This is of some importance, as this might have

lulled the undertaking into a sense of freedom from imminent acquisition till that period, and freedom to expand in accordance with its plan. For

purposes of that extension scheme, in September, 1955, the licensee applied to Government for sanction of a loan of Rs. five lakhs from the

Madras Industrial Investment Corporation. G.O. Ms. No. 43, P.W.D., dated 4th January, 1956 actually accorded such sanction u/s 9(2) of the

Indian, Electricity Act, 1910. But subsequently, on 10th January, 1957, the Madras Industrial Investment Corporation declined the loan ; this was

on the ground that the undertaking was likely to be acquired by the Government shortly thereafter. On 25th January, 1957, G.O. Ms. No.

290,P.W.D., dated 25th January, 1957, was published notifying acquisition of the undertaking with effect from 1st June, 1957

While matters stood thus, there are two other events of which we will have to take note. The first was that substantial goods were ordered by

the company in accordance with its expansion scheme, and the goods had been received by the time that acquisition was imminent. The second

was that a sum of Rs. 2,50,421-66 nP. was due from the licensee (company) to Government, as arrears of energy charges payable to

Government. We might here note that the company claims that the brand-new materials ordered by it, and in its possession in pursuance of the

expansion scheme, were of the value of Rs. 2,87,823-12 nP. The company chose Basis '' A '' of the three Basises ''A'', ''B'' and ''C'' for the

compensation payable to the licensee u/s 5 of the Electricity Supply Undertakings (Acquisition) Act. As a study of that section will show, Basis '' A

'' related to compensation as equivalent to 20 times the average net annual profits of the undertaking computed upon the principle embodied in

Section 5(1). Basis ''B'' is the aggregate value of all the shares constituting the share capital of the undertaking, broadly stated, and, similarly, Basis

'' C '' consists of the aggregate of the various book values including fixed assets, stocks and stores. It is not in dispute that it is only if the licensee

had chosen Basis '' C'' that the licensee would have a right to insist that the brand-new goods acquired for the expansion scheme, that we have

referred to, should be paid for as part of the compensation.

In these circumstances, the company made repeated representations to the Chief Engineer for Electricity, stressing the facts in relation to the

goods acquired by the company, as also the arrears for energy supplied due to the State, and claiming that it was only just and equitable that the

brand-new goods should be separately taken over by the State, and their value adjusted against the energy charges. It must be immediately stated

that the Chief Engineer (Mr. V.P. Appadurai) not merely fell in with the suggestion, but strongly recommended it to Government, and did

everything in his power to see that this proposal was approved. That is clear from the correspondence, the details of which need not be set forth

here. But it is equally clear that the Chief Engineer, as he was bound in duty to do, protected himself from any language that might imply a

committal by Government to the proposal. He was careful to reiterate, upon every relevant occasion, that the proposals could only be pressed and

recommended by him, and that it was entirely for the Government to accede to the proposal or not to do so. On 5th February, 1957, the Chief

Electrical Inspector to Government wrote to the licensee, and this letter, which was otherwise a purely formal communication, contains a paragraph

which has become the central issue in this case. For this reason we think that no apology is necessary for extracting it verbatim here:

It may be noted that none of the fixed assets of the undertaking should be disposed of in any manner hereafter (such as sale, transfer, etc.) except

under, intimation to and approval by Government.

The licensee claims that this representation or prohibition, whatever it may be termed, was taken by the licensee at full value, as proceeding not

merely from a responsible officer of Government, but the Acquisition Officer functioning as such under Madras Act (XXIX of 1954). For this

reason the licensee felt that it had no option to dispose of the goods in the open market, and the licensee could only hope that the proposal of Mr.

Appadurai would be accepted by Government, namely, the acceptance of these goods at full value by Government, and the set-off towards

arrears of energy charges due to Government.

There were several other letters from the Chief Engineer to the State and to-the licensee on formal subjects such as the appointment of the

Accredited Representative, the intimation by the licensee of the selection of the Basis '' A '', etc. Finally, on 23rd April, 1957, the Chief Engineer

had to intimate to the licensee, no doubt with regret on his part, that the Government declined to approve his proposal ; this communication was

actually received by the licensee on 1st May, 1957.

Now the vesting date under the Act (vide Section 8(1)) was the 1st June, 1957 and theoretically the company was certainly at liberty to dispose

of these goods in the open market between 1st May, 1957, when it received the letter embodying the refusal of Government to Mr. Appadurai''s

proposal and the vesting date. In any event, it is common ground between the parties that till the actual vesting date or shortly prior thereto, when

the inventory was made and handed over by the licensee to the State, the licensee had, in law, liberty to dispose of these goods. Alternatively, the

licensee could have claimed that, in the circumstances these goods were not part of the fixed assets which would vest in Government under the

provisions of the Act, and could have sought to segregate and to retain them. The licensee adopted neither of these courses and as we have stated

earlier, the explanation of the licensee is that the letter of the Chief Electrical Inspector, Exhibit P-8 earlier referred to, inhibited the licensee from

adopting either course, though at all subsequent stages the licensee did press the hardship under which it has suffered. But throughout,

subsequently, the claim of the licensee only was that these goods should be paid for by Government, in some form. They should be either paid for

outright, or their value should be adjusted towards the arrears of electricity charges. As there was some controversy at one stage of the arguments

whether the licensee did claim that it was inhibited from selling these goods by virtue of Exhibit P-8, we think it is sufficient to refer to the letter of

the licensee, dated 21st May, 1957 (Exhibit R-1) which contains the following representation:

We might at least have been allowed to sell these goods in the market but the Chief Electrical Inspector to Government in his letter No. 234/M/57-

2, dated 6th February, 1957, has put a ban on our selling these goods outside.

That is repeated in the testimony of Mr. Rajarathnam, and in the representations prior to the Award made before the Arbitrator.''

Upon these facts, two. issues were propounded for arbitration, and also dealt with by the learned Judge, Ramachandra Iyer, J., (as he then was)

in O.P. No. 208 of 1959, arising out of the arbitration and the award. The first was whether the Government were entitled to deduct the arrears of

energy charges earlier referred to, from the compensation amount payable by them. The second was whether the Government were or were not

bound to pay a sum of Rs. 2,87,823-12 nP. to the licensee (company) for the value of the brand-new materials taken over as part of the fixed

assets. On the first point, there is now really no controversy. Learned Counsel for the company does not dispute that Section 10(1)(c) is explicit on

the point, and that the Government is entitled under that Sub-section to deduct from the compensation that amount due from the licensee towards

energy supplied. On the second point, both the Arbitrator and the learned Judge came to the conclusion that there was no such independent

contract to pay the value of these goods, which could at all bind the Government. Neither in the correspondence, nor in the evidence, is there any

hint of any such concluded contract. It was then urged that in any event the ban or the interdict in the letter of the Chief Electrical Inspector Exhibit

P-8 earlier referred to virtually prevented the licensee from selling these goods in the open market before the vesting date, which it could otherwise

have done, and that Government, having thus acquired these goods by virtue of a misrepresentation, in a substantial sense, should not be permitted

to profit by that wrong and to retain the goods so acquired. On this point, the discussion of the Arbitrator is of some interest, and we think that it is

essential to extract the relevant passage here.

The Arbitrator states on this aspect as follows:

It is further argued by Mr. A.K. Sriraman that not only on legal grounds but on equitable grounds as well the company are entitled to ask the

Government to pay for the value of the goods. Besides the circumstance that the acquisition of the undertaking of the company was much earlier

than expected, involving the company in the purchase of the stores for their capital programme, the company''s hands were tied by the letter of the

Chief Electrical Inspector to Government, dated 5th February, 1957, Exhibit P-28, from disposing of the goods otherwise, as the company were

notified by that letter not to dispose of the fixed assets in any manner. But there was no absolute prohibition against any disposal of these goods as

the Chief Electrical Inspector''s letter only stated that they should not be disposed of except under intimation and approval by Government. There

is nothing to show that any attempt had been made by the company for disposing of these goods and permission was applied for from the Chief

Electrical Inspector and the Chief Electrical Inspector refused.

The learned Judge (Ramachandra Iyer, J.) was of the opinion that the Arbitrator was perfectly justified in declining grant of relief to the licensee

upon mis line of reasoning. He also stressed that there was no independent and concluded contract to purchase these goods, and that Government

could not be compelled to pay for the value of these goods. If the licensee had chosen Basis ''C'' no doubt Government would have, in effect, paid

for the goods as part of the compensation. But, when the licensee deliberately chose Basis '' A '', that implied that there was no separate

compensation payable for the '' fixed assets'' taken over by Government; therefore, within the scope of the arbitration, no relief could really be

afforded to the licensee.

As the matter was argued before us, Mr. Sriraman for the licensee sought to advance the claim of the licensee either for value of these goods

or adjustment of such value towards the electricity arrears already deducted from the compensation payable by the State, upon several alternative

grounds. Firstly, he pleaded that the circumstances amounted to an estoppel by conduct. There was a prohibition by an Officer of the State, which

bound the State, and which prevented the licensee from realising the value of the goods in the open market. The licensee changed his position as a

result of this prohibition, and the Government cannot profit by the goods acquired. Alternatively, this amounted to a tort, and Government was

liable for tortious acts of its employees in the circumstances of this case. A third alternative ground was that Government was unduly or unjustly

enriched by the process of acquisition, because of the interdict. A fourth was on the equitable basis that in any event the Government, having

committed a wrong by a misrepresentation, could not profit by its own wrong. We are referring to these arguments only for the sake of

completeness ; for a reason that will be made clear a little later, we are not dealing with these arguments upon the merits here. Per contra, the

learned Advocate-General for the State has stressed, upon authority of several citations both of the Supreme Court and of Courts in the United

Kingdom which need not be detailed here, that the Government were not bound by statements made by any body about a future course of

conduct, that only acts of officers within their authority would bind the Government, and that even statements as to the right or interest of

Government, when not within such authority, will not estop the Government. Further, in India, the Government is bound like a private person only

in respect of its commercial activities, and it is not liable in respect of its sovereign activities or statutory functions. Finally, the learned Advocate-

General stressed, and we accept this argument after careful consideration that the matter is really outside the scope of the arbitration altogether. It

is not within the scope of the relevant provisions of Madras Act XXIX of 1954 providing for such arbitration and award. Thus, the Arbitrator

really lacked jurisdiction to decide this particular controversy, one way or the other, and the party alleged to be aggrieved, the licensee, must

therefore work out his remedies separately and as best advised.

We think that this line of argument of the learned Advocate-General can be easily demonstrated to be correct. Either these goods formed part

of the fixed assets, as defined in the Act and the Rules, or they did not. If they formed part of the fixed assets, they necessarily vested in

Government on the vesting date u/s 6(1) and the licensee having chosen Basis '' A '', no separate compensation for their value could be awarded

under the Act. If the licensee claimed that they did not form part of the fixed assets, that claim should have been pressed before the preparation of

the inventory, or at least a specific reference about this should have been raised. This was not done. As we saw earlier, the right of the State u/s

10(1)(c) to deduct arrears of energy charges from the compensation payable is really incontrovertible. Section 13 provides for arbitration. Sub-

sections (a), (b), (c), (d), (e) and (f) of that section stipulate the contingencies or categories with regard to which arbitration could be claimed by

either party. The present controversy, as such, does not fall within any of these categories. Presumably category 13 (b) or 13 (c) could be cited,

but, as we pointed out earlier, there was no specific reference raised by the licensee that these goods were not part of the fixed assets of the

undertaking and did not vest in Government. The controversy was, and remains now to the effect, that Government, having made a

misrepresentation which bound it, could not profit by the failure of the licensee to sell the goods in the open market before the vesting date,

consequent directly on this misrepresentation. As the learned Advocate-General has stressed, even with regard to the misrepresentation, there is

absolutely no question of an alleged lack of bona fides. It is true that there is no rule or section of law which authorises the Government or any

officer to interdict the licensee from selling the goods before the vesting date, but a controversy might conceivably arise u/s 9 with regard to such

transactions when they were not bona fide, and, presumably this was what the officer (Chief Electrical Inspector) had in mind when he wrote

Exhibit P-8. However this may be, the present reference is wholly outside the scope of the several subsections of Section 13 and we must

emphasise that, equally, any independent contract or alleged contract to take over these goods and to pay for their value is outside the scope of the

Sub-sections of Section 13. For these reasons, it is clear enough that there could be no arbitration on this aspect nor any award binding on the

parties.

In residual result of this analysis, we may formulate the following conclusions-Firstly, the Award, on the question that Government are entitled

to deduct the charges for electricity, will stand. As regards the question whether the company can claim payment for goods upon estoppel, tort, or

any other ground, the matter is set at large, with liberty to the company to institute any legal proceedings as advised. The learned Advocate-

General has very fairly conceded that the time taken by the arbitration proceedings upon this question was utilised bona fide, as both parties were

engaged in the contest. Therefore, this would fall within the principle of Section 14 of the Limitation Act, with regard to the computation of

limitation. In any subsequent proceedings, all contentions are open to both parties, except that Government will not be entitled to plead bar of suit

on grounds of Section 13(1)(b) or (c).

The appeals are partly allowed in terms of the above order. There will be no order as to costs.