Financial principles and their application

THE SIXTH SCHEDULE. FINANCIAL PRINCIPLES AND THEIR APPLICATION. I. Notwithstanding anything contained in the Jammu and Kashmir Electricity Act, Svt. 1997, and the provisions in the licence of a licensee, the licensee shall so adjust his rates for the sale of electricity whether by enhancing or reducing them that his clear profit in any year of account shall not, as far as possible, exceed the amount of reasonable return: Provided that such rates shall not be enhanced more than once in any year of account : Provided further that the licensee shall not be deemed to have failed so to adjust his rates if the clear profit in any year of account has not exceeded the amount of reasonable return by fifteen per centum of the amount of reasonable return : Provided further that the licensee shall not enhance the rates for the supply of electricity until after the expiry of a notice in writing of no less than sixty clear days of his intention to so enhance the rates given by him to the Government and to the Board : Provided further that if the rates of supply fixed in pursuance of the recommendations of a Rating Committee constituted under section 53 are lower than those notified by the licensee under and in accordance with the preceding proviso, the licensee shall refund to the consumers the excess amount recovered by him from them. II. (1) If the clear profit of a licensee in any year of account is in excess of the amount of reasonable return, one-third of such excess, not exceeding five per cent of the amount of reasonable return, shall be at the disposal of the undertaking. Of the balance of the excess, one-half shall be appropriated to a reserve which shall be called the Tariffs and Dividends Control Reserve and the remaining half shall either be distributed in the form of a proportional rebate on the amounts collected from the sale of electricity and meter rentals or carried forward in the accounts of the licensee for distribution to the consumers in future, in such manner as the Government may direct. (2) The Tariffs and Dividends Control Reserve shall be available for disposal by the licensee only to the extent by which the clear profit is less than the reasonable return in any year of account. (3) On the purchase of the undertaking under the terms of its licence, any balance remaining in the Tariffs and Dividends Control Reserve shall be handed over to the purchaser and maintained as such Tariffs and Dividends Control Reserve. III. There shall be created from existing reserves or from the revenues of the undertaking a reserve to be called "Contingencies Reserve". IV. (1) The licensee shall appropriate to Contingencies Reserve from the revenues of each year of account a sum not less than one quarter of one per centum and not more than one-half of one per centum of the original cost of fixed assets; provided that if the said reserve exceeds or, would by such appropriation, be caused to exceed five per centum of the original cost of fixed assets, no appropriation shall be made which would have the effect of increasing the reserve beyond the said maximum. (2) The amount of the Contingencies Reserve shall be invested in securities authorised under the Trusts Act, Samvat 1977. V. (1) The Contingencies Reserve shall not be drawn upon during the currency of the licence except to meet such charges as the Government may approve as being- (a) expenses or loss of profits arising out of accidents, strikes or circumstances which the management could not have prevented; (b) expenses on replacement or removal of plant or works other than expenses requisite for normal maintenance or renewal; (c) compensation payable under any law for the time being in force and for which no other provision is made. (2) On the purchase of the undertaking, the balance remaining in the Contingencies Reserve shall be handed over to the purchaser and maintained as such Contingencies Reserve. VI. (1) There shall be created a reserve to be called the "Development Reserve" to which shall be appropriated in respect of each accounting year a sum equal to the amount of income tax and super tax calculated at rates applicable during the assessment year for which the accounting year of the licensee is the previous year, on the amount of development rebate to which the licensee is entitled for the accounting year under the Indian Income Tax Act, 1961 (13 of 1961) : Provided that if in any accounting year, the clear profit excluding the special appropriation to be made under item (iv) of clause (e) of sub-paragraph (2) of paragraph XVIII together with the accumulations, if any, in the Tariffs and Dividends Control Reserve less the sum calculated as aforesaid falls short of the reasonable return, the sum to be appropriated to the Development Reserve in respect of such accounting year shall be reduced by the amount of the shortfall. (2) Any sum to be appropriated towards the Development Reserve in respect of any accounting year under sub-paragraph (1), may be appropriated in annual instalments spread over a period not exceeding five years from the commencement of that accounting year. (3) The Development Reserve shall be available only for investment in the business of electricity supply of the undertaking. (4) On the purchase of the undertaking the Development Reserve shall be handed over to the purchaser and maintained as such Development Reserve. VII. (1) There shall be allowed in each year in respect of depreciation of fixed assets employed in the business of electricity supply such an amount as would, if set aside annually throughout the prescribed period and accumulated at compound interest at 4 per centum per annum, produce by the end of the prescribed period an amount equal to 90 per cent of the original cost of the asset after taking into account the sums already written off or set aside in the books of the undertaking. Annual interest on the accumulated balance will be allowed as an expense from revenue as well as the annual incremental deposit : Provided that within 3 months from the date upon which these principles are enacted, a licensee may elect to adopt the straight line method of depreciation accounting in lieu of the compound interest method above prescribed. Straight line method of depreciation accounting means the method whereby an allowance is made in each year in respect of depreciation of fixed assets employed in the business of such an amount as is arrived at by dividing ninety per cent of the original cost of the asset by the prescribed period in respect of such asset. (2) The year in which any asset becomes available for use in the business and the relative cost thereof shall, in the absence of satisfactory record, be determined by the Government. All sums credited to depreciation account shall be invested only in the business of electricity supply of the undertaking or where it is not practicable to so invest them in investments, approved by the Government. (3) Any sums invested in investments approved by the Government under sub-paragraph (2) shall, as soon as practicable, be utilised in the business of electricity supply of the undertaking and if such sums are not so utilised, they shall not form part of the capital base under clause (d) of sub-paragraph (1) of paragraph XVIII. VIII. (1) Where any fixed asset ceases to be available for use through obsolescence, inadequacy, superfluity or for any other reason, it shall be described in the books of the licensee as no longer in use and no further depreciation in respect thereof shall be allowed as a charge against revenue. (2) The written down cost of such fixed asset shall be charged against the Contingencies Reserve : Provided that where the accumulations in the Contingencies Reserve are not sufficient to permit the charging of the entire written down cost of the asset, the excess amount may be included in the capital base for the purpose of clause (a) of sub-paragraph (1) of paragraph XVIII. (3) The amount for which any such fixed asset is sold or the amount of its scrap value when actually realised shall be credited to the Contingencies Reserve. IX. When any fixed asset has been written down in the books of the undertaking to 10 per cent or less of its original cost, no further depreciation shall be allowed in respect of that asset. X. When any fixed asset is sold for an amount exceeding its written down cost, the excess after deducting all taxes payable thereon shall be credited to the Contingencies Reserve. XI. Except with the previous consent of the Government, no sums shall be carried forward to a reserve and no dividends in excess of 3 per cent shall be paid on share capital and no other distribution of profits shall be made to the share-holders in respect of any year of account so long as any of the following sums remain to be written off in the books of the undertaking, namely-- (i) normal depreciation due for that year of account calculated in accordance with the provisions of paragraph VII. (ii) equated instalment in respect of arrears of depreciation, computed in accordance with the provisions of paragraph XII for that year of account; (iii) arrears, if any, in respect of normal depreciation referred to in clause (i), accumulated after the date of application of the provisions of the Sixth Schedule to the licensee; (iv) arrears, if any, in respect of equated instalments referred to in clause (ii). XII. Arrears of depreciation calculated in accordance with the paragraph VII may be written off by equated payments over the remainder of prescribed period and the amount so set aside in the books of the undertaking may be taken into account in any year as a special appropriation for purposes of assessing the clear profit. XIII. Where contributions are made by consumers towards the cost of construction of service lines constructed after the date on which this Act comes into force, only the net cost of such service lines after deducting such contributions shall be included in the cost of fixed assets for the purpose of arriving at the capital base : Provided that for the purposes of depreciation under paragraph VII the total original cost of construction of service lines shall be taken into account. XIV. (1) Subject to the provisions of sub-paragraph (2), the ordinary remuneration of a managing agent excluding the office allowance mentioned in sub-paragraph (3) but including purchasing commission, if any, shall be based on a percentage of net profits as determined in accordance with the provisions of section 349 of the Companies Act, 1956 (I of 1956) and shall not exceed :- (a) in respect of the first Rs. 5 lakhs of such net profit-10 per cent, and (b) in respect of all net profits in excess of Rs. 5 lakhs-7 per cent. (2) The amount paid to a managing agent shall be subject to a minimum payment on account of ordinary remuneration not exceeding two rupees per annum for each complete thousand rupees of paid up share and debenture capital; provided that for purposes of computing the minimum payment, should the share and debenture capital be less than rupees five lakhs, it shall be taken as rupees five lakhs and should the said capital, be greater than rupees one crore, it shall be taken as rupees one crore. (3) An office allowance drawn by a managing agent which shall include the salaries and wages of all persons employed in the office of the managing agent, but not the salaries of the engineering staff employed for purposes of the undertaking, shall be a percentage of the operating expenditure and the expenditure during the year of account on capital works. The office allowance so drawn shall not exceed :- (a) In respect of the first Rs. 1 lakh of operating expenditure-8 per cent ; In respect of the next Rs. 2 lakhs of operating expenditure-5 per cent ; In respect of the next Rs. 7 lakhs of operating expenditure-24 per cent ; In respect of all operating expenditure in excess of Rs. 10 lakhs-15 per cent ; and (b) In respect of the first Rs. 1 lakh of capital expenditure incurred during the year of account-4 per cent ; In respect of the next Rs. 2 lakhs of capital expenditure incurred during the year of account-3 per cent ; In respect of the next Rs. 7 lakhs of capital expenditure incurred during the year of account-14 per cent ; In respect of all capital expenditure in excess of Rs. 10 lakhs incurred during the year of account-1 per cent. Operating expenditure for the purpose of sub-paragraph (3) (a) above shall mean the sum of the items of expenditure as defined in sub-paragraph (2) (b) of paragraph XVIII with the omission of those under clauses (i), (iv), (ix) and (x) thereof. Explanation.-For the purposes of this paragraph, the expression "managing agent" shall include every person by whatever name called, who is incharge of the management of the whole, or substantially the whole, of the undertaking: The total remuneration payable to all such persons shall not in the aggregate exceed the limits specified in this paragraph. XV. The Board of Directors of an undertaking shall not contain more than ten directors. XVI. (1) Where at any time within three years before the next option of purchase under the licence arises, the licensee proposes to make any capital expenditure which exceeds twenty-five thousand rupees or two per centum of the capital base, whichever is more, in respect of which any amount would in the event of purchase under the option be payable by the purchaser to the licensee, the licensee shall, before giving effect to such proposal, apply to the Board for its concurrence. (2) If the Board does not, within one month from the receipt of such application, consent to such expenditure, the licensee may refer the matter to the arbitration of such person or authority as the Government may appoint. XVII. Any dispute or difference as to the interpretation or any matter arising out of the provisions of this Schedule shall be referred to the arbitration of such person or authority as the Government may appoint : Provided that where a rating committee has been constituted under section 53, no such dispute or difference shall be referred to the arbitration during the period between the date of the constitution of such committee and the date of the order of the Government made on the recommendations of the committee. XVIII. For the purposes of this Schedule- (1) "capital base" means the sum of- (a) the original cost of fixed assets available for use and necessary for the purpose of the undertaking subject to the provisions of paragraph XIII in respect of service lines, and the excess amount referred to in the proviso to sub-paragraph (2) of paragraph VIII in respect of any fixed asset which has ceased to be available for use; (b) the cost of intangible assets; (c) the original cost of works in progress: (d) the amount of investments compulsorily made under paragraph IV of this Schedule together with the amount of such investments made after the commencement of this Act from the contributions towards depreciation as in the opinion of the Authority could not be utilised for the purposes of the business of electricity supply of the undertaking; (e) an amount on account of working capital equal to the sum of- (i) one-twelfth of the sum of the book cost of stores, materials and supplies including fuel on hand at the end of each month of the year of account; (ii) one-twelfth of the sum of cash and bank balances and call and short term deposits at the end of each month of the year of account, not exceeding in the aggregate an amount equal to one quarter of the expenditure under sub-paragraph (2) (b) of this paragraph excluding clauses (i), (iv) and (x); less- (i) the amounts written off or set aside on account of depreciation of fixed assets and amounts written off in respect of intangible assets in the books of the undertaking before or after the commencement of this Act; (ii) the amount of any loans advanced by the Board; (iii) the amount of security deposits of consumers held in cash; (iv) the amount standing to the credit of the Tariffs and Dividends Control Reserve; (v) the amount set apart for the Development Reserve; (vi) the amount carried forward in the accounts of the licensee for distribution to the consumers under paragraph II. (2) "clear profit" means the difference between the amount of income and the sum of expenditure plus specific appropriations made up in each case as follows:-- (a) income derived from- (i) gross receipts from sale of energy, less discounts applicable thereby; (ii) rental of meters and other apparatus hired to consumers; (iii) sale and repair of lamps and apparatus; (iv) rents, less outgoings not otherwise provided for: (v) transfer fees; (vi) investments, fixed and call deposits and bank balances: (vii) other general receipts accountable in the assessment of Indian Income-Tax and arising from and ancillary or incidental to the business of electricity supply; (b) expenditure properly incurred on- (i) generation and purchase of energy; (ii) distribution and sale of energy; (iii) rents, rates and taxes, other than all taxes on income and profits; (iv) interests on loans advanced by the Board; (v) interest on security deposits; (vi) legal charges; (vii) bad debts; (viii) auditor's fees: (ix) management including managing agents' remuneration as provided for in para XIV: (x) depreciation, computed as hereinbefore set out; (xi) other expenses (excluding interest on debentures and loans) admissible under the law for the time being in force in the assessment of Indian Income-tax and arising from and ancillary or incidental to the business of electricity supply; (xii) contributions to provident fund, staff pension gratuity and apprentice and other training schemes; (xiii) bonus paid to the employees of the undertaking- (a) where any dispute regarding such bonus has been referred to any tribunal or other authority under any law for the time being in force relating to industrial or labour disputes, in accordance with the decision of such tribunal or authority; (b) in any other case, with the approval of the Government; (c) special appropriation sufficient to cover- (i) previous losses (that is to say excess of expenditure over income) which have arisen from the business of electricity supply to the extent in any year permitted by the Government; (ii) all taxes on income and profits; (iii) instalments of written down amounts in respect of intangible assets and new capital issue expenses to the extent in any year actually appropriated for the purpose in the books of the undertaking; provided that the amounts so appropriated shall not exceed the amount found by dividing the written down cost of such assets by the number of complete years remaining before the next option of purchase under the licence arises: (iv) contributions to the Contingency Reserve, computed as hereinbefore set out: (v) contributions towards arrears of depreciation; (vi) contributions to the Development Reserve referred to in paragraph VI; (vii) other special appropriations permitted by the Government; (3) "debenture capital" means-capital raised against debentures or other instruments creating a charge or lien on the assets of the undertaking; (4) "intangible assets" means-underwriter's commission and such preliminary and promotional expenditure shown as a debit in the capital account of the undertaking as has fairly arisen in promoting the business of electricity supply excluding any amount paid on account of good will; (5) "ordinary capital" means-in the case of a company, the amount of ordinary capital paid up and attributable to the undertaking of the licensee; in other cases, the net amount standing to the credit of the proprietor of proprietors' account or accounts whether in capital, personal or any other account howsoever called and properly attributable to the business of electricity supply; (6) "original cost" means-in respect of any asset the sum of-- (a) the cost of the asset to the licensee, including the cost of delivery and all charges properly incurred in erecting and bringing the asset into beneficial use; (b) interest charges on capital expenditure incurred, during the period between the date of grant of the licence and the date when the undertaking commences supply, from borrowed money and properly attributable to the asset, accrued up to the date of such commencement of supply at a rate not exceeding the average Reserve Bank rate ruling at that time plus one per centum; (c) a proper addition on account of supervision not exceeding fifteen per centum of the cost referred to in sub-paragraph (a), so however that the original cost of any asset shall not in any case exceed the original cost of attributed thereto in the books of the undertaking; (7) "preference capital" means-the amount of paid up capital attributable to the undertaking of the licensee, issued on such preferred terms as are sufficient to qualify it for such description. (8) "prescribed period" means-in respect of each of the assets specified in the table appended to the Seventh Schedule, the number of years or period specified therein, in relation to such assets, running in each case from the beginning of the year of account next following that in which the particular asset became available for use in business: Provided that on the application of the licensee, the Government may vary the prescribed period in respect of any assets in use on the date when this Schedule comes into force if, having regard to the physical condition of such assets, the application of the table to such assets would be unreasonable. Any question arising out of the decision of the Government on any such application shall be referred to arbitration. (9) "reasonable return" means-in respect of any year of account, the sum of the following :- (a) the amount found by applying the standard rate to the capital base at the end of that year; (b) the income derived from investments other than those included in the capital base under the provisions of clause (d) of sub-paragraph (1); (c) an amount equal to one-half of one per centum on any loans advanced by the Board; (d) an amount equal to one-half of one per centum on the accumulations in the Development Reserve created under paragraph VI of this Schedule; (10) "standard rate" in respect of any year of account means the Reserve Bank rate ruling at the beginning of that year, plus two per centum; (11) "written down cost" means-original cost less the amounts set aside or written off on account of depreciation in the books of the undertaking.