Brief case: Concessions expire after Electricity Act

A weekly selection of key court orders

With the introduction of the Electricity Act in 2003, all concessions granted to heavy industries before the new law must be understood to have come to an end unless they are explicitly recognised and extended, the Supreme Court stated last week while dismissing a large batch of appeals by furnace industries from Punjab in the case Waryam Steel Castings Ltd vs Punjab State Power Corporation. The businesses had contended that as they had established their units before 1995, and they had been exempted from levy by the then authorities, they should be given the concessions granted then, such as exemption from 17.5 per cent surcharge. The state power regulatory commission established after the Act, the appellate tribunal and the high court had rejected their petitions. On appeal, the Supreme Court upheld the rulings of the courts below. The commission, exercising its statutory power, had justified the surcharge as the industries had not switched over to a more economical power supply line as advised and therefore transmission losses and incidental charges should be recouped. The court further reiterated that tariff fixation is a statutory function and a policy matter and the court would not intervene in that exercise unless there was patent illegality and arbitrariness.

Honda appeal on royalty dismissed 

The Supreme Court has dismissed a set of five appeals of Honda Siel Cars India ruling that the royalty it had paid to parent company Honda Motors Co Ltd in Japan was capital expenditure and not revenue expenditure as argued by the company. The two companies had signed an agreement in 1995 for technical collaboration in the automobile business. For providing facilities in India, the Indian arm was to pay a lump sum in five annual instalments. According to the revenue department, the technical know-how and royalty payments are of enduring nature and therefore they would qualify as capital expenditure. On the other hand, the company maintained it had acquired a mere right to use technical information provided by the Japanese corporation and thus it did not lead to the creation of any asset of enduring nature. Therefore, it was to be treated as revenue expenditure. The appellate tribunal accepted the argument of the company but the Allahabad High Court rejected it, leading to the appeal. The Supreme Court upheld the high court’s view. It said the joint venture was to set up the Indian company by not only providing know-how but also plant and machinery. The agreement was framed in a manner so as to give the colour of a licence for a limited period having no enduring nature, but a close scrutiny showed otherwise. The judgment also made a significant observation: “What is capital expenditure and what is revenue expenditure are not eternal varieties but must need be flexible so as to respond to the changing economic realities of business.”

'Anticipated loss' not valid in damages

A unilaterally projected profitability in a loan application, which is a mere assumption, cannot be the basis for assessment of damages in a dispute when the contract is terminated between two companies, the Supreme Court ruled last week. In this case,  Kanchan Udyog Ltd vs United Spirits Ltd, Kanchan started a bottling plant in West Bengal in 1987 after getting loans from the state financial corporation. United Spirits was supposed to provide concentrates for soft drinks and provide advertisements and other support. After a year, United Spirits terminated the contract leading to the suit in the high court where Kanchan first succeeded to get compensation. 

But the division bench reversed the ruling leading to the appeal in the Supreme Court. Kanchan demanded compensation towards anticipated loss of profits and cost of installation. The court rejected all the claims and dismissed the petition. It observed that Kanchan was not entitled to damages for any “expectation loss towards anticipated profits”. The judgment further remarked: “The business failed to take off due to lack of business acumen, inability to manage its own finances, and failure to deploy manpower distribution in accordance with its own projections in the loan application.”

Son absolved for father’s bad cheque 

The Bombay High Court last week ruled if a cheque was issued by a debtor from the account of another person, and it bounces, the creditor cannot file a criminal case under the Negotiable Instruments Act against the debtor. In this case, Washim Coo Bank vs Kisan Bhika, the accused person had issued the cheque from his father’s account and it was dishonoured. The lender bank filed a criminal case against the debtor which was dismissed by the magistrate, leading to the appeal. The high court also dismissed the bank’s appeal pointing out the condition in Section 138 of the Act that “the person must have drawn the cheque on an account maintained by him in a bank”. In this case, the drawer is the father of the debtor and therefore that ingredient of the offence has not be fulfilled.  

Bid to reduce tax litigation

The recent circulars issued by the Central Board of Excise & Customs and the Department of Revenue setting the monetary limit for filing appeals before high courts were applied by the Bombay High Court in recent judgments while disposing of pending litigation.  According to the finance ministry’s instructions, the high courts will hear appeals only in those cases where Rs 20 lakh and above are involved. This policy was introduced to reduce litigation by revenue authorities. In view of this, the high court in the case, the Commissioner of Central Excise vs Suvarna Sugarcane Transport, allowed the service tax department to close the case as the dispute was over a smaller amount. The high court judgment recalled several other cases in recent months in which such appeals have been disposed of without adjudicating on the claims.

Fixed deposit renewal advice on phone valid 

The instruction to a bank on renewal of fixed deposits need not be in writing; it could be oral or on the telephone, according to a ruling by the National Consumer Commission. In this case, Bank of India vs N K Jain, fixed deposits of Rs 25 lakh was auto-renewed for five years though the depositor had telephonically instructed the bank to transfer the amount on maturity to his overdraft account. The depositor alleged that this had caused him monetary loss. The Punjab state commission awarded a compensation of Rs 2 lakh for the bank’s deficiency in service. The bank appealed to the national commission, arguing there was no written instruction from the depositor, as required by the Reserve Bank of India (RBI). The commission stated the RBI rules did not insist on written instruction.