The Okara Electric Supply Co. Ltd., And... vs The State Of Punjab And Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Petition No. 19 of 1959

Decision Date: 13 November 1959

Coram: P.B. Gajendragadkar, Bhuvneshwar P. Sinha, K.C. Das Gupta, J.C. Shah

In the case styled The Okara Electric Supply Co. Ltd., And … versus The State Of Punjab And Another, the Supreme Court of India rendered its judgment on 13 November 1959. The opinion was authored by Justice P. B. Gajendragadkar and the bench was composed of Justices P. B. Gajendragadkar, Bhuvneshwar P. Sinha, K. C. Das Gupta, J. C. Shah, with Chief Justice Bhuvneshwar P. Sinha presiding. The petitioner was the Okara Electric Supply Co. Ltd. and another entity, while the respondents were the State of Punjab and another party. The citation of the decision appears in the All India Reporter as 1960 AIR 284 and in the Supreme Court Reports as 1960 SCR (2) 239, with subsequent references in later reports. The factual background concerned the application of Section 28(1) of the Indian Electricity Act, 1910 (IX of 1910), which empowers a State Government to grant a temporary sanction to a person who does not hold a licence to engage in the business of supplying electricity, subject to such conditions as the Government may fix. By a notification dated 26 May 1948, issued under this provision, the first respondent, the State of Punjab, authorised the first petitioner to supply electricity in the Muktsar area. Clause 11 of that notification stipulated that the Provincial Government retained the option to acquire the undertaking at any time after 21 October 1950, provided that it gave a one-year notice and paid fair market value for lands, buildings, works, material and plant that might be acquired. On 3 January 1958 the first respondent exercised this option by serving a notice that, after the expiry of one year, the undertaking would vest in the State as its absolute property. Accordingly, on 4 January 1959 the State took possession of the undertaking. The petitioners argued that clause 11 exceeded the authority granted by Section 28(1) and, assuming it was justified by that section, that Section 28 itself was void for contravening Articles 19(1)(f) and 31 of the Constitution of India. The Court held that clause 11 was intra vires the statutory provision. It reasoned that a provision authorising the grant of a temporary sanction for supplying electricity must, in view of the special nature of the business, necessarily address the consequences of termination of the sanction; therefore, it was reasonable to assume that the legislature intended to empower the State to acquire the supplier’s assets upon payment of appropriate compensation. Although Section 28(1) does not expressly mention compulsory acquisition, the phrase “such conditions in this behalf” was interpreted to include conditions dealing with the inevitable position at the conclusion of the business, such as the acquisition provision in clause 11. The Court further concluded that Section 28(1) did not offend Articles 19 or 31, noting that the Act was an existing law saved by Article 31(5) and by Section 299(4) of the Government of India Act, 1935, and that the restrictions imposed were reasonable in the public interest within the meaning of Article 19(5).

The Court examined the meaning of section 28(1) of the Indian Electricity Act, 1910 and observed that the provision, when read in context, necessarily embraced conditions that would arise at the termination of the sanctioned business. Because a sanction granted under section 28 was by its nature temporary, the Court held that it was logical and in the interest of the grantee that the statute made provision for payment of compensation when the business ended. Consequently, a condition for acquisition, such as clause eleven of the relevant notification, fell within the scope of section 28(1). The Court referred to the American decision in New Orleans Gas Light Co. v. Louisiana Light and Heat Producing and Manufacturing Co., 115 U.S. 650; 29 L. Ed. 516, to support this view. The Court further held that section 28 was constitutionally valid and did not infringe article 19 or article 31 of the Constitution. It explained that the Act could not be attacked on the ground of violating article 31(2) because it was an existing law saved by clause (5) of article 31. Likewise, the provision was protected from challenge under section 299(2) by the saving clause contained in section 299(4) of the Government of India Act, 1935. The Court described the restrictions imposed by section 28 as reasonable restrictions in the public interest within the meaning of article 19(5). Such limitations, the Court noted, were commonly imposed on enterprises engaged in the supply of energy.

The petition arose under original jurisdiction as petition number 19 of 1959, filed under article 32 of the Constitution for enforcement of fundamental rights. The petitioners were The Okara Electric Supply Co. Ltd., a joint-stock company, and Shrimati V. V. Oberoi, a principal shareholder of that company. They sought a writ, order, or direction against the State of Punjab and the Punjab State Electricity Board, the respondents. The petition challenged a notice issued by the first respondent on 3 January 1958, which the petitioners alleged to be illegal, unauthorized, and violative of their rights under articles 19 and 31. The petition was presented on 3 January 1959 and asked that the respondents be restrained from giving effect to the notice. On 4 January 1959, relying on the impugned notice, the respondents took possession of the petitioners’ property, prompting the petitioners to seek a mandamus directing the return of the property. Counsel for the petitioners were identified, as were counsel for the respondents, including the Advocate-General for the State of Punjab. The judgment was delivered on 13 November 1959 by Justice Gajendragadkar.

The first petitioner obtained permission to supply electric energy at Muktsar through Government Notification No 1766-1 & C-48/28784, which was published on 26 May 1948. The sanction conferred by that notification authorised the first petitioner, under section 28 of the Indian Electricity Act, 1910, to engage in the business of supplying electricity at the specified location. Following the grant of the sanction, the first petitioner established an electricity undertaking at Muktsar, incurring considerable expense in order to carry out its commercial activities. On 3 January 1958, the Secretary to respondent 1, who headed the Public Works Department, Irrigation and Electricity Branches in Chandigarh, issued a notice to the first petitioner. The notice claimed that respondent 1 was exercising the option granted to it by clause 11 of the aforementioned notification. By virtue of that notice, the first petitioner was informed that respondent 1 had elected to invoke the option contained in clause 11 and that, one year after the petitioner received the notice, the entire undertaking would vest in respondent 1 and become its absolute property.

The first petitioner relied on bulk electricity supply from the Public Works Department Electricity branch of respondent 1. According to the petition, respondent 1 was unable and unwilling to take over the plant, yet it ordered the first petitioner that it could not sell the plant without the permission of respondent 1. The petition contended that imposing such a condition was wholly illegal and constituted an unreasonable restriction on the petitioner’s right to conduct its business and to hold and dispose of its property. The petition further alleged that clause 11 of the notification, on which the contested notice was based, exceeded the limits of section 28 of the Act; alternatively, if the inclusion of clause 11 was justified by section 28, the petition argued that section 28 itself was ultra vires because it violated Articles 19 and 31 of the Constitution.

Initially, the petition sought an order restraining the enforcement of the notice, and subsequently it added a prayer for a writ of mandamus directing respondent 1 to restore possession of the property that had been taken over by respondent 1 after the filing of the present petition. Both respondents denied the petition’s claim. Respondent 1 argued that the petitioners could not challenge the validity of clause 11 because it had been accepted by them before the Constitution came into force. It further maintained that clause 11 was justified by section 28 of the Act and that both the clause and the section were intra vires and valid. The respondents also alleged that after taking possession of the first petitioner’s property under the option in clause 11, they repeatedly requested the petitioner’s assistance in carrying out a proper valuation of the assets seized. An amount of Rs 60,000 was paid to the first petitioner as partial compensation, which the petitioner accepted, albeit under protest, while the completion of the full valuation was delayed and hampered by the petitioner’s alleged non-cooperative attitude.

After receiving compensation in the amount of Rs 60,000 under protest, the first petitioner’s cooperation in completing the valuation of the total assets was lacking, which caused a delay and obstruction of the valuation process. Consequently, the principal issue that the petition required the Court to resolve was whether clause 11 of the notification was supported by section 28 of the Act. The notification comprised fourteen clauses that exhaustively set out the terms and conditions under which the first petitioner had been granted sanction pursuant to section 28 of the Act. For the purposes of this petition, it was sufficient to examine clause 11 alone. Clause 11 stipulated that the Provincial Government possessed the option to acquire the undertaking at any time after 21 October 1950, subject to four conditions. First, the Provincial Government had to give the supplier at least one year’s notice in writing of its intention to acquire. Second, the generating station could not be included in the acquisition if the acquisition occurred after the grid supply from the East Punjab Public Works Department, Electricity Branch, had reached Muktsar. Third, the price payable for any lands, buildings, works, materials or plant acquired under this clause had to be the fair market value at the time of purchase, without any addition for compulsory acquisition, goodwill or any profits that might have been earned from the undertaking; any dispute over the value was to be resolved by arbitration in accordance with section 52 of the Act. Fourth, the Provincial Government was required to pay the determined price within six months of the price being fixed.

Mr Veda Vyas, appearing for the petitioners, argued that the condition granting respondent 1 the power to acquire the petitioners’ property exceeded the authority conferred by section 28 and was therefore ultra vires. The Court examined section 28 as it existed before its amendment by Act 32 of 1959. Section 28(1) provided: “No person, other than a licensee, shall engage in the business of supplying energy except with the previous sanction of the State Government and in accordance with such conditions as the State Government may fix in this behalf, and any agreement to the contrary shall be void.” The Act of 1910, which amended the law relating to the supply and use of electrical energy, was enacted to regulate the supply of energy by granting licences; consequently, the provisions concerning licences were contained in sections 3 to 27 of Part II. Part III, which included section 28, dealt with the supply of energy by non-licensees. The legislative material suggested that the Legislature intended the sanctioning of energy supply by non-licensees to be a temporary measure, applicable only in areas where it was deemed expedient to do so.

In this case a person who is not a licence holder may not carry on the business of supplying energy unless he obtains prior sanction from the State Government, and section 28(1) empowers the State Government to impose conditions that must be satisfied before such sanction is granted. The existence of this requirement is not contested. The dispute centres on the nature of the conditions that may be validly imposed. The petitioners argue that any condition attached to the sanction must be directly related to, or have a bearing upon, the business of supplying energy. Accordingly, they contend that a condition that obliges the compulsory acquisition of the applicant’s property cannot fall within the phrase “in this behalf” because the acquisition of property has no connection with, and does not affect, the actual business of supplying energy. By contrast, the State Government may legitimately prescribe conditions concerning the area of supply, the erection of aerial lines, the character of the supply, the ceiling on prices that may be charged, and the bulk purchase of energy; such matters are clearly linked to the supply business and therefore may be imposed under section 28(1). To support their interpretation, the petitioners rely on sections 5 and 6 of the Act, which specifically deal with compensation in cases where an undertaking is acquired. Section 3 provides for the granting of licences, while section 4 deals with their revocation and amendment. After the framework for granting, revoking and amending licences, section 5 addresses compensation payable to a licencee whose licence is revoked, and section 6 makes similar provisions for a local authority’s licence. Section 7 governs the purchase of an undertaking and sets out the procedure for valuing the properties involved. The petitioners submit that, because the legislature has expressly provided for the acquisition of the property of licencees in the event of revocation or cancellation, it would have done the same for non-licence persons if it had intended to enable the State Government to acquire their property when granting sanction under section 28. This line of reasoning appears plausible at first glance and initially lends some weight to the contention that “in this behalf” should be read to mean conditions that are relevant to or connected with the energy-supplying business. Nevertheless, in deciding the question, the Court must keep in mind the special nature of the subject matter—energy for which the sanction is granted—and must consider the overall scheme of the Act regarding the conditions that are intended to be imposed on the business of its supply.

In examining the conditions that may be imposed on the business of supplying electricity, the Court considered it appropriate to look at how the supply of energy is regulated in England and in the United States. The Court observed that the Indian legislation under review is modelled on the provisions of English law. Consequently, the Court found it useful to investigate whether, under English law, the conditions for acquiring a supplier’s property were treated as part of the conditions that permitted the supplier to continue the business of supplying electricity. The Court referred to Halsbury’s “Laws of England”, where this matter is discussed under the heading “Acquisition of undertaking by Local Authority”. Halsbury explains that a local authority having jurisdiction over an area of supply may, within six months after the expiry of a period of forty-two years or any shorter period specified in the special order, give written notice requiring the undertakers to sell their undertaking, or the portion of it within the authority’s jurisdiction. The undertakers are then obliged to sell the portion of the undertaking that lies within the jurisdiction, on terms that reflect the then-value of all land, buildings, works, materials, and plant used for the purpose of the undertaking in that area. If there is any disagreement as to the value, the matter is to be resolved by arbitration.

The Court concluded that, when a special order granted sanction to a person to carry on the business of supplying electricity, the order itself incorporated a condition that allowed for the compulsory acquisition of the undertaking, provided that adequate compensation was paid to the affected person. After the enactment of the Electric Lighting Act of 1909, the power to supply electricity was no longer granted by provisional orders, although many such orders continued to operate. Halsbury notes that many of these orders were in a standard form, but a number contained special clauses, the most common of which gave local authorities special purchase rights. These special orders were affirmed by statutes and contained provisions for the protection of county bridges, the breaking up of streets, the inter-connection of generating stations and systems of different undertakings, and the joint use of generating stations for the purposes of those undertakings. From this, the Court inferred that a licence to supply electricity generally gave the licensing authority the right to acquire the licensee’s property on terms and conditions set out in the licence by the provisional order. The Court also observed that American jurists describe the right to supply electricity as a “franchise”. This franchise is classified among rights in public streets that are granted for public purposes and involve the use of streets. The relevant excerpts from Halsbury’s “Laws of England”, Volume 12, Second Edition, are cited as (1) page 597, article 1152, and (2) the same volume.

The discussion, referring to page 668 footnote (t), notes that the various ways in which such rights have been granted generate a series of questions between the grantee of the right on the one side and the municipality or adjoining landowners on the other. Dillon, in his treatise Municipal Corporations, observes that for convenience these rights are described as franchises to use the public streets and highways, and that whether properly termed franchises or not, they essentially meet the definition and elements of a franchise created by the State. He further comments that the business of furnishing water and light, when undertaken by a corporation or an individual, inevitably requires the use of municipal streets and highways; consequently the authority to lay pipes, mains and conduits, to erect poles and stretch wires, and to maintain, operate and use those installations constitutes a franchise vested in the State, which may be exercised only by a corporation or individual pursuant to the authority granted by the State (2). Dillon also considers the question of municipal purchase of works owned by private companies. He explains that where a municipal corporation has granted a franchise to a water or gas company to construct its plant, to use city streets for pipes and mains, and to supply water or light to the city’s inhabitants, the legislature, subject to special constitutional restrictions, lacks the power to compel the city to purchase the company’s property or plant even if the city wishes to acquire or construct its own works. However, in the absence of such constitutional limitations, statutes may be enacted and contracts may be made that effectively prevent municipalities from establishing their own water works until they have at least offered to purchase the works of corporations that are organised and existing within the municipal limits (3). The author adds that if a municipality includes in a contract with a water or other public-service company a stipulation granting it the right to purchase the company’s works at a specified time and in a specified manner, and if that stipulation becomes part of the grant of the right to use the municipality’s streets and public places for laying mains and pipes, the corporation is estopped from denying the municipality’s authority to make and enforce that stipulation (1). In the United States case New Orleans Gas Light Co. v. Louisiana Light and Heat Producing and Manufacturing Co., the Supreme Court held that the manufacture and distribution of gas by means of pipes, mains and conduits placed under legislative authority in the public ways of a municipality is not an ordinary business, but rather a franchise-like activity subject to the State’s control (2).

The Court observed that while any person may engage in a service on a basis of equal right, the provision of such a service constitutes a franchise. A franchise concerns matters over which the public may exercise control and, in the absence of a prohibition in the State’s organic law, may be bestowed by the Legislature as a means of achieving public objectives to whomever it desires and upon whatever terms it deems appropriate. In the earlier case that gave rise to the present dispute, the issue for determination was the constitutionality of a prohibition on State legislation that impaired contractual obligations; however, the Court noted that that particular constitutional question was not relevant to the appeal before it. The discussion then turned to the description offered by American jurists, who characterise the enterprises of supplying electricity, water, and gas as franchises. The Court further observed that when a licence or sanction authorising a person to engage in such a business is granted, it is customary to attach a condition that provides for the compulsory acquisition of the business once the licence or sanction expires.

Considering the matter pragmatically, the Court explained that if a person receives a sanction to supply energy, section 28(1) of the Act justifies imposing a temporal limitation on that sanction. When the sanction, limited to a specified number of years, comes to an end, the assets that the supplier erected for the purpose of supplying energy cannot simply be dismantled, because doing so would damage public property such as streets. Consequently, the supplier cannot remove those installations. The Court held that the Legislature may therefore enact a provision that mandates the acquisition of such installations so as to protect the interests of the temporary sanction holder. That provision would also serve a broader public purpose by ensuring that suitable works remain available for continued electricity supply by another agency.

The Court therefore concluded that any statutory scheme governing the grant of a sanction to engage in the business of supplying energy must, in view of the special character of that business, expressly address the situation that will arise upon termination of the sanction. It would not be unreasonable to expect the statute to empower the State Government to effect compulsory acquisition of the supplier’s assets, subject to the payment of appropriate compensation. Accordingly, section 28(1) must be interpreted in light of this distinctive feature of the energy-supplying enterprise. The Court also noted that sections 5, 6, and 7 of the Act provide additional assistance, as they contain specific provisions dealing with the acquisition of a licence holder’s undertaking in cases of revocation or cancellation, thereby indicating the legislative intention to secure the public interest through compulsory acquisition when necessary.

The Court explained that the provisions dealing with the revocation or cancellation of licences also provide for the compulsory acquisition of the licence-holder’s undertaking, and that this purpose is equally applicable to the sanction contemplated by section 28(1). Although section 28 does not contain an explicit provision for compensation, the Court held that this omission was intentional because the recourse to the provisions of Part III was meant to be an exceptional, temporary measure to be employed only when necessary. Consequently, the legislature entrusted the State Government with the authority to legislate for compulsory acquisition, guided by the provisions found in sections 5, 6 and 7. Turning to section 28(1) in this light, the Court observed that the provision authorises the State Government to grant sanction to a person to engage in the business of supplying energy subject to “such conditions in this behalf.” The expression, the Court said, must be interpreted to include conditions that address the situation that will inevitably arise when the business comes to an end. The sanction under section 28 cannot be permanent; it is always intended to be temporary, issued on an ad hoc basis according to the requirements of each case. When the sanction is granted for a specified number of years, it is in the interest of the grantee that the sanction include a provision for payment of compensation for the investment made in the energy-supplying business, because otherwise the grantee would find it difficult to recover his assets. Accordingly, the Court rejected the petitioners’ narrow construction of the words “such conditions in this behalf” and adopted a wider, more liberal interpretation. Under this broader view, a condition requiring the acquisition of the petitioners’ property, such as clause 11, falls within the scope of section 28(1). Therefore, the challenge to the validity of that condition on the ground that it is ultra vires section 28(1) must fail. The Court then turned to the constitutional question of whether the allowance of such a condition under section 28 violates Article 19 or Article 31 of the Constitution. It noted that reliance on Article 31(2) is of little assistance to the petitioners because Article 31(5) expressly provides that nothing in clause (2) shall affect the provisions of any existing law, except where clause (6) applies, and clause (6) does not apply to the Act. Consequently, Article 31(2) cannot be used to challenge the validity of the Act. The Court also recorded that counsel for the petitioners, Mr Veda Vyas, attempted to argue that the Act could be challenged on a different constitutional ground, but that line of argument was not pursued further.

The Court observed that reliance on Article 31(2) could be based only on section 299(2) of the Government of India Act, 1935, but noted that this line of argument encountered a similar problem created by the provision in section 299(4), which declares that nothing in section 299 shall affect any law that was already in force on the date the Act was enacted. The Court further recorded that the legislature which passed the Act in 1910 was competent to enact it and that, at that time, the Act suffered from no defect. For this reason, although an attempt was initially made to invoke Article 31(2), that attempt was ultimately abandoned, and the Court indicated that there was no further need to discuss that point.

Regarding the challenge to section 28 on the ground that it violated Article 19(f) or Article 19(g), the Court found the answer to be straightforward. The limitations imposed by section 28 were described as reasonable restrictions that had been placed in the interests of the general public within the meaning of Article 19(5) of the Constitution. The Court pointed out that such limitations are commonly imposed on the business of supplying energy and that their reasonableness had not been seriously contested. Consequently, the Court expressed no hesitation in concluding that the validity of section 28 could not be successfully challenged.

The Court also observed that when the Constitution came into force, the petitioners possessed the property that was subject to the liability created by clause 11 of the notification. At that moment, the petitioners’ rights in the property were of a limited nature and were subject to the State’s option to acquire the property. The respondents relied on the decision of this Court in Director of Endowments, Government of Hyderabad v. Akram Ali (1) and argued that the State’s exercise of the option conferred by clause 11 of the notification could not be challenged as ultra vires of Article 19 of the Constitution. The Court, however, deemed it unnecessary to decide that point because it was already conceded that if section 28 were valid and were interpreted to include a condition such as clause 11 of the notification, no other issue would survive.

Finally, the Court mentioned a minor point concerning the validity of a notice issued by the respondent to the petitioners, which prohibited the petitioners from dealing with the property and had been challenged in the petition. That matter was no longer in dispute because the respondent had effectively withdrawn the notice. The Court noted that this fact would be relevant only for the question of costs. In view of the foregoing, the Court held that the petition failed, but, considering the circumstances of the case, ordered that no costs be awarded and dismissed the petition.