217

CHAPTER6

TEST FOR DETERMINING AGENCY OR

INSTRUMENTALITY OF THE STATE

I. Meaning of Agency or Instrumentality

Blacks Law Dictionary1 defines "instrumentality" to mean "a means

or agency through which a function of another entity is accomplished, such as
a branch of a governing body". "Agency" is defmed as:

"A fiduciary relationship created by express or implied

contract or by law, in which one party (the agent) may act on
behalf of another party (the Principal) and bind that other
party by words or actions."

Thus instrumentality and agency are the two terms which to some extent
overlap in their meaning; "instrumentality" includes "means" also, which
"agency" does not, in its meaning. "Quasi-governmental agency" is "a
government-sponsored enterprise or corporation (sometime called a
government-controlled corporation)". Authority, as Webster s Comprehensive
Dictionary2 defines, is "the person or persons in whome government or
aommend is vested ; often in the plural". The applicable meaning of the word
"authority" given in Webster s Third New International Dictionary, is "a public
administrative agency or corporation having quasi-govemmental powers and
authorized to administer a revenue-producing public enterprise".
The defmition of the State under Art, 12 has a specific purpose and
that is Part III of the Constitution, and not for making it a Government or
department of the Government itself. This is the inevitable consequence of
the other authorities being entities with independent status distinct from the
State and this fact alone dose not militate against such entities or institutions
1. Black's Law Dictionary 7th Edn ..
2. Webster s Comprehensive Dictionary? International Edition.
 218

being agencies or instrumentalities to come under the net of Art. 12. The con-
cept of Instrumentality or agency of the Government is not to be confmed to
entities created under or which owes its origin to any particular statute or
order but would really depend upon a combination of one or more of relevant
factors, depending upon the essentiality and overwhelming nature of such
factors in identifying the real source of governing power, if need be, by pierc-
ing the corporate veil of the entity concerned.

II. Important Judgments

In Sukhdev Singh v. Bhagathram3 Mathew, J., opined that the question
whether a public corporation of the nature of Oil and Natural Gas Commission,
Life Insl.J!ance Corporation or Industrial Finance Corporation is a 'state' within
the meaillng of Art. 12 of the Constitution is one of far reaching importance4 .

In Rajasthan State Electricity Board5 case, the question whether the

Rajasthan Electricity Board was an authority within the meaning of the
expression "other authorities" in Article 12 of the Constitution. Bhargava, J.
delivering the judgment for the majority pointed out that the expression "other
authorities" in Article 12 would include all constitutional and statutory
authorities on whom powers are conferred by law. The learned judge also said
that if any body of persons has authority to issue directions, the disobedience
of which would be punishable as a criminal offence, that would be an indication
that the authority is 'state'. Justice Shah who delivered a separate judgment
agreeing with the conclusion reached by the majority preferred to adopt a
slightly different meaning to the words "other authorities". He said that
authorities, constitutional or statutory, would fall within the expression 'state'
as defmed in article 12 only if they are invested with severing power of the
State, namely, the power to make rule or regulations which have the force of
law6 •

3. AIR 1975 SC 1331

4. 2. Ibid at 1348.
5. Electricity Board, Rajasthan v. Mohan La/, AIR 1967 SC 1857, quoted in Sukdev Singh
v. Bhagatram, AIR SC 1975 SC 1331 at 1348.
6. Ibid. at 1349.
 219

The test propounded by the majority is satisfied so far as the Oil and
Natural Gas Commission is concerned as Section 25 of the Oil and Natural
Gas Commission Act provides for issuing binding directions to owners of
land and premises not to prevent employees of the Commission from entering
upon their property if the Commission so directs. In other words, as Section 25
authorizes the Commission to issue binding directions to third parties not to
prevent the employees of the Commission from, entering into their land and as
disobedience of such directions is punishable under the relevant provision of
the Indian Penal Code since those employees are deemed to be public servants
under Section 21 of the Indian Penal Code by virtue of Section 27 of the Act,
the Commission is an 'authority' within the meaning of the expression "other
authorities" in Article 12. 7

It is relevant to note that Article does not defme the word 'State'. It
only provides that 'State' includes the authorities specified therein. The question
whether a corporation set up under a statute to carry on a business of public
impmtance is 'State' despite the fact that it has no power to issue binding
directions has to be decided on other considerations.

The concept of State has undergone drastic changes in recent years.

Today State cannot be conceived of simply as a coercive machinery wielding
the thunderbolt of authority. It has to be viewed mainly as a service corporation.

If we clearly grasp character of the state as a social agent,

understanding it rationally as a form of service and not
mystically as an ultimate power, we shall differ only in, respect
of the limits of its ability to render service8

To some people State is essentially a class,.structure, 'an organization

of one class dominating over the other class': others regard it as an organization
that transcends all classes and stand for the whole community. They regard it
as a power system. Some view it entirely as a legal structure, either in the old

7. Ibid.
8. see MacIver, "The Modern State, 183 ..
 220

Austinian sense which made it a relationship of governors and governed, or, in

the language of modern jurispmdence, as a community 'organized for action
under legal rules'. Some regard it as no more than a mutual insurance society,
other as the very texture of all our life. Some class the State as a great
'corporation' and others consider it as indistinguishable from society itself. 9

Part IV of the Constitution gives a picture of the services which the

state is expected to undertake and render for the welfare of the people. Article
298 provides that the executive power of the Union and State extends to the
canying on of any business or trade, the question for consideration is whether
a public corporation set up under a special statute to carry on a business or
service which Parliament thinks necessary to be carried on in the interest of
the nation is an agency or instmmentality of the State and would be subject to
the limitations expressed in Article 13(2) of the Constitution. A state is an
abstract entity. It can only act through the instmmentality or agency of natural
or juridical persons. Therefore, there is nothing strange in the notion of the
state acting through a corporation and making it an agency or instrumentality
of the State. 10

The Supreme Court of the United States in McCullough v. MarylantJ1 1,

held that the Congress has power to charter corporations as incidental to or in
aid of governmental functions. So far as federal corporations are concerned,
they are, by hypothesis, agencies of government. With this premise it would
follow that action of a federally chartered corporation would be governed by
the constitutional limitation imposed on an agency of the Federal Government. 12

The tasks of government multiplied with the advent of the welfare State
and consequently, the framework of civil service administration became

9. See MacIver, "The Modern State" at 3-4.

10. SukhdevSinghv. Bhagatram, AIR 1975 SC 1331 at 1350.
1L (1919) 4 Wheat 316.
12. Adolf A Berle, "Constitutional Limitations on Corporate Activity - Protection of
Personal Rights from Invasion through Economic Power" 100 Univ. of Pem1sylvania
Law Rev. 933.
 221

increasingly insufficient for handling the new tasks which were often a ·
specialized and highly technical character. At the same time, 'bureaucracy'
came under a cloud. The distrust of government by civil service, justified or
not, was a powerful factor in the development of a policy of public
administration through separate corporations. which would operate largely
according to business principles and as separately accountable.

The public corporation, therefore, became a third arm of the

Government, In Great Britain, the conduct of basic industries: through giant
corporations is now a permanent feature of public life 13 •

A public corporation is a legal entity established normally by Parliament

and always under legal authority, usually in the form of a special statute, charged
.with the duty a carrying out specified governmental functions in the national
interest, those functions being confmed to a comparatively restricted field and
subjected to control by the executive, while the corporation remains juristically
an independent entity not directly responsible to Parliament. A public
corporation is not generally a multi-purpose authority but a functional
organization created for a specific purpose. It has generally no shares or
shareholders. It responsibility generally is to Government. Its administration
is in the hands of a Board appointed by the competent Minister. The employees
of public corporation are not civil servants. It is, in fact, likely that in due
course a special type of training for specialized form of public service will be
developed and the status of the personnel of public corporation may more and
more closely approximate to that of civil service without forming part of it. In
so far as public corporations fulfil public tasks on behalf of government, they
are public authmities and as such subject to control by government14 •

In France, "An enterprise publique is an enterprise the whole or the

majority of whose capital belongs to the State or other public agencies. By
reason of its industrial or commercial activities it is basically subject to private

13. SukhdevSinghv. Bhagatram, AIR 1975 SC 1331 at 1350.

14. Ibid. at 1351.
 222

law (and particularly to commercial law as are private enterprises). But, because
of its public nature, it fmds itself subjected to a cettain degree of dependence
on and control by public authority" 15 .

The motivation for the creation of public corporation naturally plays

much larger part in underdeveloped and poor countries than in industrially
advanced countries. This accounts for the emergence of public corporations
.and the present significance of public enterprise carried on by them. The
Government of India resolution on industrial policy dated April6, 1948 stated,
among other things that "management of state enterprise will as a mle be through
the medium of public corporation under the statutory control of the Central
Government who will assume such powers as may be necessary to ensure
this". The Government of India Resolution on Industrial Policy dated April
30, 1956 stated. 16

The Constitution was framed on the theory that limitation should exist
on the exercise of power by the State. The assumption was that the State alone
was competent to wield power. But the essential problem oflibetty and equality
is on of freedom from arbitrary restriction and discrimination whenever and
however imposed. The Constitution, therefore, should, wherever possible, be
so construed as to apply to arbitrary application of power against individuals
by centers of power. The emerging principle appears to be that a public,
corporation being a creation of the State is subject to the constitutional
lamination as the State itself. The preconditions of this are two, namely, that
the corporation is created by State, and the existence ofpower in the corporation
to invade the constitutional right of individual.

Large corporations have power and this power does not merely come
from the statutes crating them. They acquire power because they produce goods
or service upon which the community comes to rely. The methods by which
these corporations produce and the distribution made in the course of their
production by way of wages, dividends and interest, as also the profits withheld

15. See "Government Ente1prise", ed. W. Friedmann & J.F. Gamer, at 107-108.
16. See ''Government in Business", S.S. Khera, at 368, 373.
 223

and used for further capital progress and the manner in which and the conditions
under which they employ their workmen and staff are vital both to the lives of
many people and to the continued supply line of the country. Certain
impersatives follow from this. Both big business and big labour unions exercise
much quasi public authority. The problem posed by the big corporation is the
protection of the individual rights of the employees. Suggestions are being
made that the corporate organizations of big business and labour are no longer
private phenomena; that they are public organisms and that constitutional and
common law restrictions imposed upon State agencies must be imposed upon
them.

The governing power wherever located must be subject to the

fundamental constitutional limitations. The need to subject the power center
to the control of constitution requires an expansion of the concept of State
action. The historical trend in America of judicial decisions has been that of
bringing more and more activity within the reach of the limitations of the
Constitution. "The next step would be to draw private governments into the
tent of state action. This is not a particularly starling proposition, for a number
of reGent cases have shown that 'the conception of state action where public
functions are being performed" 17 .

In Marsh v. Alabamd 8, a corporation owned a 'company town'. Marsh,

a Jehovah's witness offered his pamphlets and preached his doctrine on one of
the town comers. He was anested for trespassing by one of the company guards,
was fined five dollars and the case went all the way up to the Supreme Court.
On straight property logic, Marsh of course was trespassing; he was unwanted
visitor a company's real estate. But, Court said operation of a town is a public
function. Although private in the property sense. It was public in the functional
sense. The substance of the doctrine there laid down is that where a corporation
is privately performing a 'public function' it is held to the constitutional

17. See Arthus S. Millar: "The Constitutional Law of the 'Security State". 10 Stanford
Law Rev. 620, at 664.
18. (1946) 326 us 501.
 224

· standards regarding civil rights and equal protection of the law that apply to
the state itself. The Court held that administration of private property of such
a town, though privately carried on, was, nevertheless in the nature of a 'public'
function' that the private tights of the corporation must therefore be exercise
within constitutional limitations, and the conviction for trespass was reversed.

But how far can this expansion go? Except in very few cases, our
Constituion does not, through its own force, set any limitation upon private
action. Article 13 (2) provides that no State shall make any law which takes
away or abridges the right guaranteed by Part III. It is the State action of a
particular character that is prohibited. Individual invasion of individual right
is not, generally spealcing, covered by Article 13 (2). In other words, it is against
State action that fundamental rights are guaranteed. Wrong ful individual acts
unsupported by State authority in the shape of laws, customs, or judicial or
executive proceeding are not prohibited. Articles 17, 23 and 24 postulate that
fundamental rights can be violated by private individuals and that the remedy
under Article 32 may be available against them. But by and large, unless an act
is sanctioned in some way by the State, the action would not be State action. In
other words, until some law is passed or some action is taken through officers
or agents of the State, there is no action by the State. In the Civil Rights 19 case,
Bradley. J. spealcing for the majority, took this view of the 141h Amendment.
That Amendment provides:

No State shall make or enforce any law which abridge the

privileges or immunities of citizens of the United States: nor
shall any State deprive any person of life, liberty or property
without due process of law; nor deny any person within its
jmisdiction the equal protection of the laws20 •

A fmding of state fmancial support plus an unusual degree of control

over the management and policies !night lead one.to characterize an operation
as state action.
19. (1881) 109 us 3.
20 Ibid.
 225

Another factor which can be considered is whether the operation is an

important public function. The combination of state aid and the furnishing of
an important public service may result in a conclusion that the operation should
be classified as a state agency. If a given functioin is of such public importance
and so closely related to governmental functions as to be classified as a
governmental agency. If a given function is of such public importance and so
closely related to govemmental functions as to be classified as a governmental,
I

agency. Then even the presence or absence of state fmancial aid might be
iiTelevant in making a finding of state action. If the function does not fall
within such a description, then mere addition of state money would not influence
the conclusion.

The State may aid a private operation in vmious ways other than by
direct fmancial assistance. It may give the organization the power of eminent
domain, it may grant tax exemptions, or it may give it a monopolistic status for
certain purposes. All these m·e relevant in making an assessment whether the
operation is private or savours of state action21 •

The difficulty of separating vital government functions from non-

government functions has created further difficulties. Is the distinction between
governmental and non-governmental functions which plagued the courts a
rational one? The contrast is between governmental activities which are private
and private activities which are governmental. Without the adoption of a radical
laissez faire philosophy and the definition of state functions as they were current
in the days of Herbert Spencer it is impossible to sort out proper from improper
functions. Besides the so-called traditional functions, the mo"dem state operates
a multitude of public enterprises.

The Oil and Natural Gas Commission consisted of the Chairman, and
not less than two, and not more than eight, other members appointed by the
Central Government. The Central Government may, if it thinks fit, appoint
one of the members as Vice-Chairman of the Commission. The Commission
may, for the purpose of performing its functions or exercising its powers, appoint

21. See generally "The meaning of State Action, LX Columbia Law Rev. 1083.
 226

such number of employees as it may consider necessary. The functions and the
terms and conditions of service of such employees shall be such as may be
provided by regulations made under the 1959 Act. The Commission may, with
the previous approval of the Central Govemment, by notification in the Official
Gazette, make regulations not inconsistent with the Act and the rules made
there under, for enabling it to discharge its functions under the Act. The
regulations provide inter aia for the terms and conditions of appointment and
service and the scales of pay of employees of the Commission; the time and
place of meetings of the Commission, the procedure to be followed in regard
to the transaction of business at such meeting; the maintenance of minutes of
meetings of the Commission and the transmission of copies thereof to the
Central Govemment; the persons by whom, and the manner in which payments,
deposits and investments may be made on behalf of the Commission; the
custody of moneys required and the maintenance of accounts. The Central
Government may amend, vary or rescind any regulation which it has approved;
and thereupon the regulation shall have effect accordingly but without prejudice
to the exercise of the powers of the Commission under sub-section ( 1) and
Section 3222 •

The Life Insurance Corporation was established by the Life Insurance

Corporation Act, 1956. Under Section 49 of the Act the Corporation may,
with the previous approval of the Central Government, by notification in this
Gazette of India, make regulations not inconsistent with the Act and the rules
made hereunder to provide for all matters for which provision is expedient for
the purpose of giving effect to the provisions of this Act. The regulations may
provide inter alia for the powers and functions of the Corporation which may
be delegated to the Zonal Managers the method of recruitment of employees
and agents of the Corporation and the terms and conditions of service of persons
who have become employees of the Corporation under Section 11 of the Act;
the number, term of office and conditions of service of members of Boards
constituted under Section 22 of the Act; the manner in which the Fund of the

22. Sukhdev Singh v. Bhagatram, AIR 1975 SC 1331 at 1363.

 227

Corporation shall be maintained; the form and manner in which policies may
be issued and contracts binding on the Corporation may be executed23 •

The Industrial Finance Corporation was set up by the Industrial Finance

Corporation Act, 1948. The superintendence of the business of the Corporation
is entrusted to a Board of Directors. The Central Government may make rules
in consultation with the Development Bank not inconsistent with the provisions
of the 1948 Act and to give effect to the provisions of the Act Sec. 43 of the
Act enacts that the Board may with the previous approval of the Development
Bank make regulations not inconsistent with the Act and the 1ules made
hereunder to provide for all matters for which provision is necessary or
expedient for the purpose of giving effect to the provisions of this Act. The
Development Bank means the Industrial Development Bank established under
the Industrial Development Act, 1964. The shares of the Central Government
in the Corporation shall stand transferred to the Development Bank when the
Central Government shall so notify. The regulations provide inter alia for the
holding and conduct of elections under this Act including the fmal decision of
doubts or disputes regarding the validity of the election; the manner in which
and the conditions subject to which the shares of the Corporation may be held
and transferred; the manner in which general meetings shall be convened, the
procedure to be followed thereat; the duties and conduct, salaries, allowances
and conditions of service of officers and other employees and of advisers and
agents of the Corporation24 •

All these Acts confer rulemaking power on the Central Government. It

is necessruy to refer to the regulation making power conferred on the three
organizations under consideration. ON behalf of these organizations the
contention advanced was that the regulations relate to internal management,
that the terms and conditions of service of employees as laid down in the
regulations are not law but merely rules for the purposes of internal
management. In so far as the appointments of the various employees of these

23. Ibid.
24. Ibid. at 1364.
 228

three organizations are concetned they are appointed by contract and these
regulations merely form part of those contracts. On behalf of the employees
the contention was that as the source of the power to make regulations is the
statute the regulations are themselves law25 .

Finally, the Court was of the opinion that the Ru1es and Regulations of
the Oil and Natural Gas Commission. Life Insurance Corporation. Industrial
Finance Corporation have the force of law. The employees of these statutory
bodies have a statutory status and they are entitled to a declaration of being in
employment when their dismissal or removal is in contravention of statutory
provisions. These statutory bodies are authorities within the meaning of Art.
12 of the Constitution26 •

In order that an institution must be an 'authority' it shou1d exercise part

of the sovereign power or authority of the State in this connection the definition
of the word in the General Clauses Act, which reads as follows:

Local authority" shalL mean a municipal committee, district

board, body of port commissioners or other authority legally
entitled to, or entrusted by the Government with, the control
or management of a municipal or local fund27 •

They are all concerned with exercising part of the powers of the State.
That is why a Port Trust is given even the power to make regu1ations to provide
that a breach. of its regulations would be punishable. In such a case it is
undoubtedly exercising part of the power of the State. The whole purpose of
the provisions of Part III of the Constitution is to confer fundamental right on
the citizen as against the power of the State or those exercising the power of
the state28 .

25. Ibid.
26. Ibid at 1378.
27. SukhdevSinghv. Bhagatram, AIR 1975 SC 1331 at 1369.
28. Ibid.
 229

The case in British Broadcasting Corpn. V. Johns 29 is very much in

point. It is not necessaty to burden this judgment by quoting extensively from
that decision. It was held there that the B.B.C. was not an instrument of
Government. It was argued in that case that the Crown was entitled to a
monopoly ofbroadcasting and therefore the Govemment purposes also include
non-traditional provisions of Government if the Crown has constitutionally
asserted that they are to be within the province ofGovemment. Willmer, L.J.
quoted with approval the remarks ofWilbetforce, J., against whose judgment
the Comt of Appeal was being heard, to the effect:

So I came to the conclusion that however widely one may be

inclined to extend the conception of an act or function of
govemment the Crown has not taken the path of engaging
itself in a broadcasting service or of entrusting it to any agent.
It has deliberately chosen the altemative of an independent
instrument30 •

In the case of Sabhajit Tewary 1~ Union ofIndia 31 , the Supreme Court

held that the, Council of Scientific and Industrial Research which was sponsored
and controlled by the Central Government and registered under the Societies
Registration Act cannot be said. to be "State" within the meaning of Atticle
12.

Again, Teway case 32 has also been distinguished in a number of

susequent decisions. In Ajay Hasia33 speaking for the Constitution Bench,
Bhagwati, J. Observed :

The test which the court applied for determining this question
was the same as the one laid by us, namely, whether the council

29. 1965(1) Ch. 32.

30. British Broadcasting Corpn. V. Johns, 1965(1) Ch. 32, quoted in Sukhdev Singh v.
Bhagatram, AIR 1975 SC 1331 at 1369.
31. AIR 1975 SC 1329.
32. Ibid.
33. AIR 1981 SC 487.
 230

was an instrumentality or agency of the Government. The court

impliedly asserted to the proposition that if the council were
an agency of the Government, it would undoubtedly be an
authority. But having regard to the various features enumerated
in the judgement, the comt held that the council was not an
agency of the Govemment and hence not be regarded as an
"authority".

In Som Prakash Rekhi 1~ Union oflndia34 the Supreme Comt held that
there was sufficient material to hold Bharat Petroleum Corporation, registered
as a company under the Indian Companies Act, 1956 as a "State" within the
meaning of Article 12. It is clearly a limb ofthe Government, an agency of the
State and recognised by and Clothed with rights and duties by the statute. The
court was of the opinion that, If a statutory corporation, body or other authority
is an instrumentality or agency ofthe Government, it would be an "authority"
and therefore "State" within the meaning of that expression in Article 12, and
is subject to the same constitutional limitations as Government. The
preponderant considerations for. pronouncing an entity as State agency or
. instrumentality are (i) fmancial resources of the State being the chiefftmding
source (ii) functional character being governmental in essence) (iii) plenary
control residing in Government, (iv) prior history of the same activity having
been carried on by Government and made over to the new body and (v) some
element of authority or command.

Whether the legal person is a corporation crated by a statue, as

distinguished from under a statute, is not an important criterion although it
may be an indicium35 .

A careful study of the features of the Airport Authority and a government

company covered by Sees. 7,9,10 and 12 of Burma Shell (Acquisition of
Undertakings in India) Act (1976) discloses a close parallel except that the
Airport Authority is created by a statute while Bharat Petroleum (notified under

34. AIR1981SC212.
35. Ibid
 231

Section 7 of the Act) is recognized by and clothed with rights and duties by the
statute. Applying the constellation of criteria collected from Airport Authority36 ,
on a cumulative basis, to the given case, there is enough material to hold that
the Bharat Petroleum Corporation is "State" within the enlarged meaning of
Article 12. The commonsense signification of the expression "other authorities
under the control of the Government of India" is plain and there is no reason to
make exclusions on sophisticated grounds such as that the legal person must
be a statutory corporation, must have power to make laws, must, be created by
and not under a statute and so on37 .
Pathak, J., opined that, the Bharat Petroleum Corporation Limited is
"State" within the meaning of Article 12 of the Constitution. There is, however,
no support for the above proposition in the provisions of the Burma Shell
(Acquisition of Undertaking in India) Act (1976)38 •
On the other hand, in Praga Tools Corpn. v. C.A. lmanuaf3 9, some of
the workmen sought a writ of mandamus against the Corporation which was a
company registered under the Indian Companies Act, 1913. 56 percent of the
share capital was held by the Central Government, 32 percent by the
Government of Andhra Pradesh and remaining 12 percent was held by private
individuals. The Supreme Court held:
The company being a non-statutmy body and one incorporated
under the Companies Act there was neither a statutory nor a
public duty imposed on it by a Statute in respect of which
enforcement could ne sought by means of mandamus 40 •
Praga Tools Corpn. case41 was dintinguished in lnternation Airport
Authority case 42 and in Sam Prakash Rekhi Case 43 • In the latter case, Krishna

36. AIR 1979 SC 1628

37. AIR 1979 SC 1628.
38. lbidat213 ..
39. AIR 1969 SC 1306.
40. AIR 1969 SC 1306 (emphasis added).
41. Ibid.
42. AIR 1979 SC 1628.
43. AIR 1981 SC 212.
 232

Iyer; J. observed:

There was no specific reference to Atticle 12 as such although

it was mentioned early in .the judgment that the company was
a separate legal entity and could not be said to be 'either a
Government Corporation or an industry run by or under the
authmi.ty of the Union Government. It was also noticed that
12 percent shares in the company were held by private
individuals and nothing more was known about the plenary
control by govemment. '

In R.D. She tty v. International Airport Authority 44, the question before
the Supreme Court was whether the Intetnational Airpmt Authority can be
said to be "State" within the meaning of Article 12. Holding the Airport
Authority to be 'State" by foliowing the earlier judgements in Rajasthan State
46
Electricity Board Case 45 and Sukhdev Singh Case , and adopting the line of
reasoning of Mathew, J. in Sukhdev Singh case47 , Bhagawati J. (as he then
was) laid down certain tests for determining as to when a Corporation can be
said to be an instrumentality or agency of government with the preface:

What are the tests to determine whether a Corporation established by

statute or incorporated under law is an instrumentality or agency of
Govemment? It is not possible to formulate an all inclusive or exhausive test
which would adequately answer this question. There is no cut and dried formula
which would provide conect division of Corporations into those which are
instrumentalities or agencies of Government and those which are not.

The following are the relevant factors which may convert a statutory
Corporation, a Government Company, a Co-operative society and other

44. AIR 1979 SC 1628.

45. AIR 1967 SC 1857.
46. AIR 1975 SC 1331.
47. Ibid.
 233

registered society or body into a "State" within the meaning of Article 12 of

the Constitution :

( 1) If the entire share capital of the Corporation is held by Government, it

would go a long way towards indicating that the corporation is an
instrumentality or agency of Government.

(2) Whether the financial assistance of the State is so much to meet almost
the entire expenditure of the Corporation, it would afford some indication
of the Corporation being impregnated with govemment character.

(3) Whether the Corporation enjoys monopoly status which is State conferred
or State protected.

(4) Existence of deep and pervasive State control may afford an indication
that the Corporation is a State agency or instrumentality.

(5) If the functions of the Corporation are of public importance and closely
related to Govemmental functions, it would be a relevant factor in
classifying the corporation as an instrumentality or agency of Government.

(6) If a department of Government is transferred to a Corporation, it would

be a strong factor supporting the inference that the Corporation is an
instrumentality or agency of Government. 48

His Lordship also rightly observed. 49

It is not enough to examine seriatim each of the factors upon

which a Corporation is claimes to be an instrumentality or.
agency of Government and to support a fmding to that effect.
It is the aggregate or cumulative effect of all viz. relevant
factors that is controlling.
His Lordship, however, added the following warning 50

48. Ajay Hasia v. KhalidMujib, AIR 1981 SC 487, 496.

49. R.D. Shetty v. International Airport Authority, AIR 1979 SC 1628 (emphasis added).
50. Ajay Hasia v. Khalid Mujib, AIR 1981 SC 487, 496 (emphasis added).
(
234

These tests are not conclusive or clinching, but they are merely indicative
indicia which have to be used with care and caution, because which stressing
the necessity of a wide meaning to be placed on the expression "other
authorities". It must be realised that it should not be stretched so far as to
bring in every autonomous body which has some nexus with government within
the sweep of the expression. A wide enlargement of the meaning must in
tempered by a wise limitation.

In Ajay Hasia v. Khalid Mujib 51 the Supreme Court held that the
Regional Engineering College, Srinagar, established, administered and
managed by a Society registered under the Jammu and Kashmir Registration
of Societies Act, 1893 was a "State" within the meaning of Article 12.
Extending the principle laid down by the Court in earlier cases, it was observed:

It may be pointed out that it is immaterial, for this purpose whether the
Corporation is created by a statute or under a statute. The test is whether it is
instrumentality or agency of the Government and not as to how it is created.
The inquiry has to be not as to how the juristic person is bmn but why it has
been brought into existence.

In the above mentioned case 52 , the Regional Engineering College,

Srinagar was one of the fifteen Engineering Colleges in the country sponsored
by the Government oflndia. The College was established and its administration
and management are carried on by a Society registered under the Jammu and
Kashmir Registration of Societies Act, 1998. Having regard to the
Memorandum of Association and the Rules of the society it was held that the
Society was an instrumentality of the agency of the State and the Central
Governments and it was an "authority" within the meaning of Article 12. The
composition of the Society was dominated by the representatives appointed by
the central Government and the govemments of Jammu & Kashmir, Punjab,
Rajasthan and Uttar Pradesh with the approval of the Central Government.
The monies required for running the College are provide entiTely by the Central

51. Ibid.
52. Ibid.
 235

Government and the Governments of Jammu & Kashmir, and even if any other
monies are to be received by the Society, it can be done only with the approval
or the State and the Central Governments. The rules to be made by the Society
are also required to have the prior approval of the State and the Central
Governments and the accounts of the Society, have also to be submitted to
both the Government for their scrutiny and satisfaction. The Society was also
to comply with all such directions as may be issued by the State Government
with the approval of the Central Government in rt!spect of any matter dealt
with in the report of the Reviewing Committee.

The control of the State and the Central Governments was indeed so
deep and pervasive that no immovable property of the society can be disposed
of in any manner without the approval of both the Governments. The State and
the Central Government have even the power to appoint any other person or
persons to be member of the Society and any member of the Society other the~
a member representing the State or the Central Government can be removed
from the membership of the Society by the State Government with the approval
of the Central Government. The Board of Governors, which was in charge of
General superintendence. Directions and Control of the affairs of Society and
of its income and property was also largely controlled by nominees of the
State and the Central Governments. Thus the State Government and by reason
of the provision for approval. The Central Govt. also have full control of the
working of the Society53 •

While considering this question it is necessary to bear in mind that an

authority falling within the expression "other authorities" is, by reason of its
inclusion within the definition of 'State' in Article 12, subject to the same .
constitutional limitations as the Government and is equally bound by the basic
obligation to obey the constitutional mandate of the Fundamental Rights
enshrined in Part III of the Constitution. We must therefore give such an
interpretation to the expression 'other authorities" as will not stultify the
operation and reach of the fundamental rights by enabling the Government to

53. Ibid. at 488.

 236

its obligation in relation to the Fundamentals Rights by settings up an authority

to act as its instrumentality or agency for carrying out its functions. Where
constitutional fundamentals vital to the maintenance to human rights are at
stake, functional realism and not facial cosmetics must be the diagnostic tool,
for constitutional law must seek the substance and not the form. Now it is
obvious that the Government may act through the instrumentality or agency of
natural persons or it may employ the instrumentality or agency of juridical
persons to carry out its functions 54 .

In the early days when the Government had limited functions, it could
operate effectively through natural persons constituting its civil service and
they were found adequate to discharge govemmental functions which were of
traditional vintage. But as the tasks of the Government multiplied with the
advent of the welfare State, it began to be increasingly felt that the frame work
of civil service was not sufficient to handle the new tasks which were often
specialized and highly technical in character and which called for flexibility of
approach and quick decision making.

The inadequacy of the civil service to deal with these new problems
came to be realized and it became necessary to forge a new instrumentality or
administrative device for handling these new problems. It was in these
circumstance and with a view to supplying this administrative need that the
corporation came into being as the third arm of the Government and over the
years it has been increasingly utilized by the Government for setting up and
running public enterprises and carrying out other public functions 55 •

Today with increasing assumption by the Government of commercial

venture and economic projects, the corporation has become an effective legal
contrivance in the hands of the Govemment for carrying out its activities, for
it is found that this legal facility of corporate instrument provides considerable
flexibility and elasticity and facilitates proper and efficient management with

54. Ibid at 492.

55. Ibid
 237

professional skills and on business principles and it is blissfully free from

"departmental rigidity, slow motion procedure and hierarchy of officers" 56 •

The Government in many of its commercial ventures and public

enterprises is resorting to more and more fi:equently to this resourceful legal
contrivance of a corporation because it has many practical advantages and at
the same time dose not involve the slightest diminution in its ownership and
control of the undertaking. In such cases "the true owner is the State, the real
operator is the State and the effective controllorate is the State and accountability
for its actions to the community and the Parliament is of the State" 57 .

It is undoubtedly true that the corporation is a distinct juristic entity

with a corporate structure of its own and it carries on its functions on business
principles with a certain amount of autonomy which is necessary as well as
useful from the point of view of effective business management, but behind
the formal ownership which is cast in the corporate mould, the reality is very
much the deeply pervasive presence of the Government. It is really the
Govemment which acts through the instrumentality or agency ofthe corporation
and the juristic veil of corporate personality worn for the purpose of convenience
of management and administration cannot be allowed to obliterate the true
nature of the reality behind which is the Government. Now it is obvious that if
a corporation is an instrumentality or agency of the Government, it must be
subject to the same limitations in the field of constitutional law as the
Government itself, though in the eye of the law it would be a distinct and
independent legal entity. If the Govemment acting through its officer is subject
to certain constitutional limitations, it must follow a fortiori that the Government
acting through the instrumentality or agency of a corporation should equally
be subject to the same limitations. If such corporation were to be free from the
basic obligation to obey the Fundamental Rights, would lead to considerable
erosion of the efficiency of the Fundamental Rights, for in that event the
Government would be enabled to override the Fundamental Rights by adopting

56. Ibid.
57. Ibid at 493.
/
238

the stratagem of canying out its functions through the instrumentality or agency
of a corporation, while retaining control over it. The Fundamental Rights would
then be reduced to little more than an idle dream or a promise of unreality58 .

It must be remembered that the Fundamental Rights are constitutional

guarantees given to the people of India and are not merely paper hopes or
fleeting promises and so long as they fmd a place in the Constitution, they
should not be allowed to be emasculated in their application by a narrow and
constricted judicial interpretation. The courts should be anxious to enlarge the
scope and width of the Fundamental Rights by bringing within their sweep
every authority which is an instrumentality or agency of the Government or
through the corporate personality of which the Government is acting, so as to
subject the Govemment in all its myriad activities, whether through natural
persons or through corporate entities, to the basic obligation of the Fundamental
Rights 59

The constitutional philosophy of a democratic socialist requires the

Government to undertake a multitude of socio-economic operations and the
Government, having regard to the practical advantages of functioning through
the legal device of a corporation embarks on myriad commercial and economic
activities by resorting to the instrumentality or agency of a corporation, but
this contrivance of canying on such activities through a corporation cannot
exonerate the Government from implicit obedience to the Fundamental Rights.

To use the corporate methodology is not to liberate the Government

from its basic obligation to respect the fundamental Rights and not to override
them. The mantle of a corporation may be adopted in order to free the
Government from the inevitable constraints of red-tapism and slow motion
but by doing so, the Government cannot be allowed to play tmant with the
basic human rights. Otherwise it would be the easiest thing for the Government
to assign to a plurality of corporations almost every State business such as
Post and Telegraph, TV and Radio, Rail Road and Telephones- in short every

58. Ibid.
59. Ibid at 493.
 239

economic activity- and thereby cheat the people of India out of the Fundamental
Rights guaranteed to them. That would be a mockery of the Constitution and
nothing short of treachery and breach of faith with the people of India, because,
though apparently the corporation will be carrying out these functions. It will
in truth and reality by the Government which will be controlling the corporation
and carrying out these functions through the instrumentality or agency of the
corporation60 •

By a process of judicial construction it can not be allowed that, the

Fundamental Rights to be rendered futile and meaningless and thereby wipe
out Chapter III from the Constitution. That would be contrary to the
constitutional faith of the Post Menaka Gandhi era. It is the Fundamental Rights
which along with the Directive Principles constitute the life force of the
Constitution and they must be quickened into effective action by meaningful
and purposive interpretation. If a corporation is found to be a mere agency or
surrogate of the Govemment, "in fact owned by the Govemment, in truth
controlled by the govemment and in effect an incamation of the govemment"
the court must not allow the enforcement of Fundamental Rights to be frustrated
by taking the view that it is not the Government and therefore not subject to
the constitutional limitations. Where a corporation is an instrumentality or
agency of the government, it must be held to be an 'authority' within the
meaning of Article 12 and hence subject to the same basic obligation to obey
the Fundamental Rights as the Government61 .

Krishna Iyer, J. in this context rightly observed:

Having regard to the directive in Article 3 8 and the amplitude

of the other Articles in Part rv, government may appropriately
embark upon almost any activity_ which is non-socialist
republic may fall within the private sector. Any person's
employment may appropriately embark upon almost any
activity which is a non-socialist republic may fall within the

60. Ibid.
61. Ibid at 494
 240

private sector. Any person's employment, entertainment,

travel, rest and leisure, hospital facility and funeral service
may be controlled by the State. And if all these enterprises
are executed through Government Companies, bureaus,
societies, councils, institutes and homes, the citizen may forfeit
his fundamental freedoms vis-a-vis these strange beings which
are Governm~nt in fact but corporation in form . If only
fundamental tights were forbidden access to Corporation,
Companies, bureaus, institutes, councils and kindered bodies
which act as agencies of the Administration, thereby may be
a breakdown of the rule of law and the constitutional order in
a large sector of Governmental activity earned on under the
guise of 'jural persons'. It may pave the way for a new tyranny
by arbitrary administrators operated from behind by
government but unaccountable to Part III of the Constitution.
We cannot assent to an interpretation which leads to such a
disastrous conclusion unless the language of Article 12 offers
no other alternative. 62

His Lordship tightly observed:

If a corporation is found to be a mere agency or surrogate of

the government, "in fact owned by the government, in truth
controlled by the govemment and in effect in incamation of
the government", the court must not allow the enforcement
of Fundamental Rights to be frustrated by taking the view
that it is not the government and therefore not subject to the
constitutional limitation. 63

"The Court cannot", Krishna Iyer, I. propounds, "connive at a process

which eventually makes fundamental rights as race as roses in December, ice
in June". 64
62. AIR 1981 SC 212.
63. AjayHasiav. KhalidMujib, AIR 1981 SC 487,731-34.
64. Som Prakash Rekhi v. Union ofIndia, AIR 1981 SC 212, 224
 241

A speciai mention must be made of the recent pronouncement of the

Supreme Court in the Case ofCentrallnland Water Transport Corpn. 1~ Brojo
Nath Gangul;/' 5• In that case the Supreme Court was called upon to decide
whether Central Inland Water. Transport Corporation, a Government Company
incorporated under the Companies Act can be said to be 'State' within the
meaning of Article 12 of the Constitution. After referriilg to all the previous
judgements and after applying various tests laid down therein, the court held
the Corporation to be "State" under Article 12 of the Constitution. In order to
arrive at the said conclusion, the Supreme Comt took into consideration, inter
alia, the following factors: (i) the Corporation was 'wholly owned' and 'entirely
fmanced' by three Governments: (1) Union oflndia; (2) State ofW.B. and (3)
State of Assam; (ii) it was "completely under the control of the Central
Government, and was managed by the Chairman and Board of Directors
appointed by the Central Govemment and removable by it"; and (iii) the
activities carried on by the Corporation "were of great importance to public
interest, concern and welfare". Thus, in every aspect, it was a "veil behind
which the Central Government operated through instrumentality of a
Government company". Speaking for the Court, Madan, J. rightly observed:

For the purposes of Article 12 one must necessarily see

through the corporate veil to ascertain whether behind that
veil is the face of an insttumentality or agency of the State.
The Corporation ..... squarely falls within these observations,
and it also satisfies the various tests which have been laid
down ............ It is nothing but the government operating
behind a corporate veil, carrying out a governmental activity
and governmental functions ofvital public importance. These
can thus be no doubt that the Corporation is 'the State within
the meaning of Article 12 of the Constitution. 66

65. AIR 1986 SC 1571.

66. Central Inland Water Transport Cmpn. v. Brojo Nath Gangul;~ AIR 1986 SC 1571
(emphasis added).
 242

In Ramachandra Iyer v. Union of India 61 distinguishing Tewary Case68 , the

Supreme Court observed:

Much water has flown down the Jamuna since the dicta in
Sabhajit Tewary case69 and conceding that it is not specifically
overruled in later decision, its ration is considerably watered
down so as to be a decision confmed to its own facts. 70

In General Manager, Kisan Sahkari Chini Mills Ltd, '~ Satrughan

Nishad'l, the facts are that the Mill is a co-operative society registered as such
under Uttar Pradesh Co-operative Societies Act, 1965. The contesting
respondents filed various writ applications in the High Court alleging therein
that they had worked on Class III and IV posts in the Mill for a period ranging
from 5 to 12 years. According to them some of them were permanent workmen
whereas others were seasonal. Uttar Pradesh Co-operative Sugar Factories
Federation Limited (hereinafter referred to as 'the Federation') is the apex
body of co-operative sugar mills in the State and its function is advisory in
order to safeguard operational and financial interest of the sugar mills.

On 22"d November, 1999, Chairman-cum-Man aging Director of the

Federation, who was also Scretary to the Government of Uttar Pradesh in the
Department of Sugar Industry and Cane Development, had sent a letter to
General Manager of the Mill in which it was mentioned that during the course
of discussion the Managing Director had with the General Manager and other
officers of the Mill, it transpired that out of 708 were surplus whose services
were required to be dispensed with in view of the deteriorating financial
condition of the Mill. By the said letter the Mill was advised to consider the
desirability of dispensing with services of its surplus workmen. Thereupon,
services of surplus workmen were dispensed with without giving any notice

67. AIR 1984 SC 514.

68. AIR 1975 SC 1329.
69. Ibid.
70. Sabhajit Tewary v. Union ofIndia, AIR 1975 SC 1329 (emphasis supplied).
71. AIR 2003 SC 4531
 243

. and paying retrenchment compensation as required under Section 6N of the

Uttar Pradesh Industrial Disputes Act, 1947 (hereinafter referred to as the Act')
in spite of the fact that they had worked for more than 240 days which
necessitated filling of the various writ applications in the High Court.

Writ applications were contested by the Mill on grounds, inter alia,

that the Mill, which is a co-operative society, was neither State nor
mstrumentally or agency of the State within the meaning of Article 12 of the
Constitution of India, hence, the writ jurisdictioin of the High Court could not
be invoked. According to them, service conditions of the contesting respondents,
who were the workmen, were governed by standing orders of the Mill and the
dispute raised by them related to enforcement of rights and obligations created
under the Act, as such the remedy available to them was to raise an industrial
dispute under the provisions of the Act. Further ground of contest was that
although the workmen had claimed to have worked between the years 1983-
84 to 2000-0 1 but in not a single year, the Mill during these aforesaid period
was from 45 days to 99 days. According to them, the contesting respondents
were seasonal workers and as they did not work for a petiod of240 days in any
year, were not entitled to claim protection under Section 6N of the Act.

The learned single Judge of the High C6Ut1 ovenuled preliminary

objection raised on behalf of the Mill, came to the conclusion that the Mill,
which is a society, was State within the meaning of Article 12 of the
Constitution as it was instrumentality of the State and there was infraction of
the provision of Section 6N of the Act. Accordingly, the writ applications
were allowed, orders of termination of the contesting respondents were quashed
and it was directed that their services shall be regularized in a phased manner
within a period of two years. The said order has been affirmed by the Division
Bench on appeals being preferred by the Mill72 •

In the case of Pradeep Kumar Biswas v. Indian Institute of Chemical

Biology and other13 , a Bench of seven Judges of this Court has noted and

72. Ibid at 4532.

73. (2ooo) 5 sec 111
 244

quoted with approval in extenso the tests propounded in International Airport

Authority case and approved in the case of Ajay Rasia for determining as to
when a Corporation can be said to be an instrumentality or agency of the
Government so as to come within the meaning of the expression 'authority' in
Article 12 of the Constitution. There the Bench referred to the case ofChander
Mohan Khanna v. NCERT'\ where, after considering the memorandum of
association and the rules, this Court came to the conclusion that NCERT was
largely an autonomous body and its activities were not wholly related to
governmental functions and the Government control was confmed only to the
proper utilization of the grants and since its funding was not entirely from
Government resources, the case did not satisfy there requirements of the State
under Article 12 of the Constitution. Further, reference was also made in that
case to the decision of this Court in Mysore Paper Mills Ltd v. Mysore Paper
Mills Officer75 , where it was held that the company was an authority within the
meaning of Article 12 of the Constitution as it was substantially fmanced and
fmancially controlled by the Government, managed by a Board of Directors
nominated and removable at the instance of the Government and carrying on
important functions of public interest under the control of the Govetnment.

From the decisions referred to above, it would be clear that the fmm in
which the body is constituted, namely, whether it is a society or co-operative
society or a company, is not decisive. There can be no hard and fast formula
and in different facts or situations, different factors may be found to be
overwhelming and indicating that the body is an authority under Article 12 of
the Constitution. In this context, Bye-Laws of the Mill would have to be seen.
In the instant case, in one of the writ applications filed before the High Court,
it was asserted that the Government of Uttar Pradesh held 50o/o shares in the
Mill which fact was denied in the counter-affidavit filed on behalf of the State
and it was averred that majority of the shares were held by cane growers. Of
courts, it was not said that the Government of Uttar Pradesh did not hold any

74. (1994) 4 sec 578.

75. (2002) 2 sec 167
 245

share. Before this Court, it was stated on behalf of the contesting respondents
in the counter-affidavit that the Government ofUttar Pradesh held 50% shares
in the Mill which was not denied on behalf of the Mill. Therefore, even if it is
taken to be admitted due to non-traverse, the share of the State Government
would be only 50% and not entire. Thus, the ftrst test laid down is not fulfilled
by the Mill. It has been stated on behalf of the contesting respondents that the
Mill used to receive some financial assistance from the Government. According
to the Mill, the Government had advanced some loans to the Mill. It has nowhere
been stated that the State used to meet any expenditure of the Mill much-less
almost the entire one, but as a matter of fact, it operates on the basis of self-
generated fmances. There is nothing to show that the Mill enjoys monopoly
status in the matter of production of sugar. A perusal of Bye-Laws of the Mill
would show that its membership is open to cane growers, other Societies.
Gram Sabha, State Government, etc. and under Bye-Law 52, a Committee of
Management consisting of 15 members is constituted, out of whom, 5 members
are required to be elected by the representatives of individual members, 3 out
of co-operative society and other institutions and 2 representatives of fmancial
institutions besides 5 members who are required to be nominated by the State
Government which shall be inclusive of the Chairman and Administrator. 76

Thus, the ratio of the nominees of State Government in the Committee

is only 1/3rd and the management of the Committee is dominated by 2/3 non-
Government members. Under the Bye-Laws, the State Government can neither
issue any direction to the Mill nor determine its policy as it is an autonomous
body. The State has no control at all in the functioning of the Mill much-less
deep and pervasive one. The role of the Federation, which is the apex body
and whose ex-officio Chairman-cum-Managing Director is Secretary,
Department of Sugar Industry and Cane, Government ofUttar Pradesh, is only
advisory and to guide its members. The letter sent by Managing Director of
the Federation on 22nd November, 1999 was merely by way of an advice and
was in the nature of a suggestion to the Mill in view of its deteriorating fmancial

76. General Manage1; KS C.M Ltd v. Satrughan Nishad, AIR 2003 SC 4531 at 4534.
 246

condition. From the said letter, which is in the advisory capacity, it cannot be
infen-ed that the State had any deep and pervasive control over the Mill. Thus,
it is found that, the indicia exists in the case of Mill, as such the same being
neither instrumentality nor agency of Govemment cannot be said to be an
authority and, therefore, it is not State within the meaning of Article 12 of the
Constitution77 •

77. Ibid. at4535.