State of U.P. and Ors. Vs. Renusagar Power Co. and Ors.

The corporate veil must be lifted if it is in the interest of justice. It is the outmost duty of courts to provide justice and it is up to the judiciary to decide whether it is the need of the hour or not.
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Introduction

In State of U.P. and Ors. Vs. Renusagar Power Co. and Ors.[1], the principle of lifting the corporate veil was applied and it was examined if the person generating and consuming energy were the same and the corporate veil should be lifted or not. In this case Hindalco and Renusagar were in-extricably linked up together. Renusagar had in reality no separate and independent existence apart from and independent of Hindalco. Consumption of energy of Hindalco was consumption of Hindalco from its own source of generation.

Facts

An appeal by special leave was filed in the Supreme Court against the judgment and order of the High court of Allahabad dated 26th September 1984. The U.P. Electricity Duty Act, 1952 (hereinafter referred as ‘the act’) was introduced to levy duty on consumption of electrical energy. The object of the act stated that, tax levied will be calculated according to the quantity of electricity consumed. An amendment was made in 1959, according to which an exemption from paying electricity duty was provided to consumers in a scheduled industry, this schedule included “Metallurgical Industries”. In 1971, another amendment took place, and it was stated that,

  • An electricity duty will be levied on the licensee for the energy sold to a consumer.
  • An electricity duty will be levied on the licensee for the consumption of energy in or upon residential or commercial premises
  • There would be a duty on consumption of electricity by any other person from “his own source of generation”.

The Respondent no. 2, established an aluminium factory at Renukut in 1959. In 1964, Respondent no.1, a wholly owned subsidiary of the respondent no. 2, was incorporated. On 12th November 1964, respondent no.1 had acquired sanction from the state government under section 28[2] of the Indian Electricity Act, 1910 to supply electricity to the Respondent no. 2. Hence Respondent no. 1 became the licensee eligible to pay electricity duty. The respondent no. 2 wrote an application to the state government to grant exemption to the respondent no.1 for payment of electricity duty. This application was rejected by the government on the ground that imposition of electricity duty is not an unbearable burden on Hindalco, and it would be against the public interest to grant exemption. On receiving the rejection. 

Respondent no. 2 approached the High court of Allahabad. The court quashed the order of the government and directed to reconsider the application for exemption by the respondent no.2. the state government after providing opportunity of personal hearings and considering all arguments and contentions of the respondents came to the conclusion that, the exemption  was not at all justified on any ground. Respondent no. 1 was asked to pay Rs. 11,96,83,153.80 as electricity duty within a stipulated time period, through a notice dated 3.03.1982, on failing to do so, the state government approached the District magistrate, Mirzapur.

The DM ordered for payment of revenue, on aggrieved by the order, the respondents approached high court. The high court quashed the order of the state government, and the notice dated 3.03.1982. It also stated that the order was not maintainable in law. Being aggrieved by this order of the High court, the appellants approached the Supreme Court.

Issue

  • Whether Hindalco and Renusagar should be treated as one concern and the consumption of energy by Hindalco must be regarded as consumption by Hindalco from own source of generation?

Arguments

Arguments of the Appellants

  • There is no need of lifting of the corporate veil. There was no warrant either in law or in fact to lift the corporate veil and to treat Renusagar plant as Hindalco’s own source of generation. The veil has been lifted only on such cases where the company has been formed to escape legal obligations[3].
  • The two companies are two separate entities. The profits and balances of both the companies are calculated distinctly. For purposes of tax, even if a parent company wholly owns the subsidiary company, they are treated as two separate juristic entities[4]

Arguments of the Respondents

  • Electivity is a raw material for aluminium. The state government had assured that adequate power would be provided to them at a very cheap and economical rate for production of aluminium. This is why the aluminium plant by respondent no. 2 was set up.
  • Respondent no. 2 was allowed to expand its capacity on the condition that

(a) Installation of its own power plant

(b) This power plant could be later taken over by the state government.

 Therefore, to reduce complications in case of a takeover, it decided to make a 100% owned subsidiary which will supply power only to the respondent no.2. Its only object was to suit part and parcel of Hindalco.

  • The respondent no 1. Is different from the licensees mentioned under the Indian Electricity Act, 1910. It is not a free or individual entity; it is a captive source of generation of respondent no. 2. The sanction provided to the respondent no.1. is different from other sanctions in the sense that, the holder is allowed to supply power “only” to respondent no.2.
  • The three clauses of Section 3(1)[5] must be interpreted by way of harmonious construction. Section 3 (1)(a) must not defeat the purpose of section 3(1)(c). The distinction, if any, is made, would be arbitrary and irrational. Therefore, amounting to violation of Article 14 of the constitution of India.
  • Respondent no. 1. 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 Duty Act.

Judgement

The Supreme Court was in agreement with the judgement of the High Court in lifting the corporate veil as it was an error on the part of the appellants to not treat the subsidiary as  “own source of generation” of the parent company. It was held that in the facts of this case, the corporate veil must be lifted and Hindalco and Renusagar should be treated as one concern and the consumption of energy by Hindalco must be regarded as consumption by Hindalco from own source of generation. Hence, the appeal was rejected. It was held that the State authority shall consider true ownership of company while levying duty on it.

Analysis

The High Court is correct in lifting the corporate veil and treating Renusagar as “own source of generation” of Hindalco. Respondent no.1 must be liable for payment of electricity duty in the sense of being “own source of generation” as covered under section 3(1)(c) of the act. Here, the person generating, and consuming electricity were the same, they were inextricably linked together. The court relies on, Life Insurance Corporation of India v. Escorts Ltd. and Ors[6]. where it was held that “the corporate veil should be lifted where the associated companies are inextricably connected as to be, in reality, part of one concern.”

In the current case, there was no independent existence of Respondent no.1. even day-to-day affairs of it were controlled and regulated by the parent company. Even the appellant themselves treated the two companies as one concern in cases of power cuts and denial of supply of electricity from state governments sources. Therefore, the supreme court is in agreement with the judgement of the high court in this regard, it was an error on the part of the appellants to not treat the subsidiary as  “own source of generation” of the parent company. Hence, the appeal directed against this finding stands rejected.

The preamble of the act stated “raising revenue” for the development projects as the primary purpose of this legislation. In any matter of public interest, it was up to the legislature to prioritise between rural development by aid in agriculture activities or electrification, or the development of aluminium industry. On the other hand, activities like allocation of funds, supply, alteration of costs of aluminium are matter of policy and fall under the ambit of state’s power to decide. This power when exercised against an individual is administrative in nature. It is not wrong that various factors[7] must be kept in mind when fixing any rates of duty but they are subordinate considerations to the purpose of public interest.

In this case, all considerations, requests were heard and examined subject to public interest. The profit or loss of an individual company does not hold more value than the public interest therefore it not a matter of concern for the executive. In fact, only minimal and reasonable charges were levied on the company. In this way the principles of natural justice were followed and there was no violation of the same. Therefore, it was erroneous on the part of the high court to set aside the state government’s order in its entirety. It should not have interfered in this matter the way it did. Hence the appeal is allowed to the extent as mentioned above and restore the state’s order to the extent of modifications made on the basis of treating Renusagar as Hindalco’s own source of generation.

Conclusion

It is concluded that the Supreme Court is justified in its decision of partially quashing the high court’s order. The corporate veil must be lifted if it is in the interest of justice. It is the outmost duty of courts to provide justice and it is up to the judiciary to decide whether it is the need of the hour or not. In this case, it was indeed a need. The state government was already treating the subsidiary as part and parcel of the parent company by cutting of electric supply and other methods but refusing to accept the same on papers. Therefore, it was needed to clarify the same.

On the other hand, the executive has a responsibility to maintain balance between the interests of corporations and the public in general. It cannot single headedly make decisions based on the needs or requirements of one of these two parties. It needs to consider the circumstances of both spheres. Especially in cases where the public interest is a focus of any act, the legislature will be leaning towards the public in general and at times might need the corporate sector to make some compromises.


[1] AIR 1988 SC 1737

[2] 28. Sanction required by non-licensees in certain cases.- 1[(1) No person , other than a licensee, shall engage in the business of supplying energy to the public 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.

[3] Western Coalfields Ltd. v. Special Area Development Authority, Korba and Anr., [1982]2SCR1

[4] Spencer and Co. Ltd., Madras v. The Commissioner of Wealth Tax, MANU/TN/0217/1969

[5] 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:

(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 Board in or upon 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; 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 time be fixed by the State Government by notification in the Gazette, and such rate may be fixed either as a specified 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 effective on or from a prior date not earlier than October 1, 1984.

[6] MANU/SC/0015/1985

[7] “these factors, namely, 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”

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