Legal Provisions on Accounts of Electricity

In this article we will discuss about the Legal Provisions on Accounts of Electricity:- 1. Depreciation 2. Reasonable Return 3. Clear Profit 4. Disposal of Surplus 5. Tariffs and Dividends Control Reserve 6. Contingencies Reserve 7. Development Reserve 8. General Reserve.


  1. Depreciation
  2. Reasonable Return
  3. Clear Profit
  4. Disposal of Surplus
  5. Tariffs and Dividends Control Reserve
  6. Contingencies Reserve
  7. Development Reserve
  8. General Reserve

1. Depreciation:


Till 1st April, 1979, two methods of depreciation were recognised under para VI of the Sixth Schedule, the Compound Interest and the Straight Line Methods. Under the Compound Interest Method, such an amount as would, together with compound interest at the rate of 4% per annum, amount to 90% of the value of the asset concerned within the life of the asset, had to be set aside as depreciation every year.

Under the Straight Line Method, the amount of depreciation is determined by dividing 90% of the cost of the asset by its life as laid down in the Seventh Schedule.

If the Compound Interest Method (really the Sinking Fund Method) was followed, every year interest at the rate of 4% per annum on the opening balance of the Depreciation Reserve had to be transferred from the Profit and Loss Account to the Depreciation Reserve Account.

If the full amount could not be credited to this account in any year, the arrears had to be carried forward and charged as an appropriation in the future years, when practicable, after interest on unguaranteed bonds or stocks had been allowed. No dividends could be paid till arrears of depreciation remained.

Following amendment to the Electricity (Supply) Act in 1978, with effect from 1st April 1979 only the Straight Line Method (as stated above) is now allowed. The Central Government has been given the power to prescribe, by notification, the life of various types of assets and the method of depreciation.

No depreciation is to be written off when an asset has been written down to 10 per cent of its original cost. Also, when an asset ceases to be available for use due to obsolescence, inadequacy, superfluity or any other reason, no depreciation is to be written off.


A description regarding non-­availability for use is to be made in the books of the undertaking. When a fixed asset is discarded, the written down value of the asset is to be carried to a special account which may be called Discarded Assets Account.

The account is to be credited with the value realised or expected to be realised by its sale (as scrap or otherwise). Any debit balance remaining in the account is to be charged to Contingencies Reserve. Thus, any profit or loss because of discarding of a fixed asset is to be charged to Contingencies Reserve.

2. Reasonable Return:

The law seeks to prevent an electricity undertaking from earning too high a profit.

For this purpose, “reasonable return” has been defined as consisting of:—


(a) An yield at the standard rate, which is the Reserve Bank rate (10% w.e.f. 11th July, 1981) plus two per cent on the capital base as defined below;

(b) Income derived from investments except investments made against Contingencies Reserve;

(c) An amount equal to ½ per cent on loans advanced by the Electricity Board;

(d) An amount equal to ½ on the amounts borrowed from organisations or institutions approved by the state government.


(e) An amount equal to ½ per cent on Debentures.

(f) An amount equal to ½ per cent on the balance of Development Reserve.

(g) Such other amounts as may be allowed by the control government having regard to the pervading tax structure in the country.

“Capital Base” means:

(a) The original cost of fixed assets available for use and necessary for the purpose of the undertaking less contribution, if any, made by the consumers for construction of service lines and also amounts written off;

(b) The cost of intangible assets;

(c) The original cost of works in progress;

(d) The amount of investments made compulsorily against Contingencies Reserve together with the amount of such investments from contributions towards depreciation as in the opinion of the central Electricity Authority could not be utilised for the purpose of the business of electricity of the undertaking; and (e) the monthly average of the stores, materials, supplies and cash and bank balances held at the end of each month.


(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;

(ii) Loans advanced by the Board;

(iii) The amount of any loans borrowed from organisations or institutions approved by the state government,

(iv) Debentures;

(v) Security deposits of consumers held in cash;

(vi) The amount standing to the credit of the Tariff and Dividends Control Reserve;

(vii) The amount set apart for the Development Reserve; and

(viii) The amount carried forward in the accounts of the licensee for distribution to consumers.

3. Clear Profit:

Clear Profit means the difference between the total income and the total expenditure plus specific appropriations. The Act defines the three terms—income, expenditure and appropriations.

The provisions are set out below for ready understanding in the form of an account:—

4. Disposal of Surplus:

Should the clear profit exceed the reasonable return, the surplus has to be disposed of as under—

(a) One-third of the surplus not exceeding 5% of the reasonable return will be at the disposal of the undertaking;

(b) Of the balance, one-half will be transferred to “Tariffs and Dividends Control Reserve”; and

(c) The balance will be distributed among consumers by way of reduction of rates or by way of special rebate.

An electricity undertaking must so adjust rates that the amount of clear profit in any year does not exceed the reasonable return by more than 20% of the reasonable return.

Illustration 1:

D Electricity Co. earned a profit of Rs 26,98,500 after paying Rs 1,40,000 @ 14% as debenture interest for the year ended March 31,2012.

The following further information is supplied to you:—

Illustration 2:

The following balances have been extracted from the books of an electricity company at the end of an accounting year:

5. Tariffs and Dividends Control Reserve:

This can be utilised whenever the clear profit is less than the reasonable return. The balance in the Reserve must be handed over to the purchaser of the undertaking, if it changes hands.

6. Contingencies Reserve:

A sum equal to not less than 1/4% and not more than 1/2% of the original cost of fixed assets must be transferred from the revenue account to Contingencies Reserves until it equals 5% of the original cost of fixed assets. The amount of the reserve must be kept invested in trust securities.

The reserve can be utilised with the approval of the State Government for the following purposes:—

(a) To meet expenses or loss of profits arising out of accidents, strikes or circumstances beyond the control of the management;

(b) To meet expenses of replacement or removal of plant or works other than the expenses necessary for normal maintenance or renewal; and

(c) To pay compensation payable under law for which no other provision has been made. Any loss or profit on sale of fixed asset has to be transferred to Contingencies Reserve.

7. Development Reserve:

An amount equal to income-tax and super tax (calculated at current rates) which would have been paid but for the development rebate allowed by income-tax authorities on installation of new plant and machinery, has to be transferred to the Development Reserve Account.

If, in any accounting year, the clear profit excluding the special appropriation together with the accumulations, if any, in the Tariff and Dividends Control Reserve less the amount to be credited to Development Reserve falls short of the reasonable return, the sum to be appropriated to the Development Reserve in respect of such accounting year may be reduced by the amount of the shortfall.

Appropriations to the Development Reserve may be made over a period of five years. Development Reserve can be invested only in the business of electricity supply of the undertaking. On a transfer of the undertaking, the reserve should be transferred to the purchaser.

8. General Reserve:

Section 67 lays down that after interest and depreciation have been provided, a contribution to general reserve shall be made at the rate of not exceeding 1/2% of the original cost of the fixed assets until the total of such reserve comes to 8% of the original cost of the assets. This applies only to the Electricity Boards though there is nothing to stop electricity companies from building up reserves.

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