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RAMANA DAYARAM SHETTY

v.

THE INTERNATIONAL AIRPORT AUTHORITY OF INDIA AND

ORS.

May 4, 1979.

[P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ.]

International Airport Authority Act 1971-Whether an instrumentality of

State-Authority called for tenders for a iob-lj could accept a tender not

confonninR to conditions in notice.

C Administrative law-Statutory- body-When an instnunentality of State.

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The first respondent, by a public notice, invited tenders for putting up and

running a second class restaurant and two snack bars at the International Air­

port, Bombay. The notice stated in Paragraph (1) that. sealed tenders in the

prescribed form were invited from registered second class hoteliers having

at least five years' experience for putting up and running a second

cla-,s restau-

rant and two snack bars

at the

Bombay Airport for a period of three years.

Paragraph (8) stated that acceptance of the tender would rest v .. ·ith the Airport

Director who does not bind himself to accept ilny tender and reserYe~ to him­

self the right to reject all or any of the tenders received without as-.igning any

reasons therefor.

Out of the six tenders received only the tender of the 4th respoo.dents was

complete and offered the highest amount as licence fee. All the otheI" tenders

were rejected because they were incomplete.

Since the fourth respondents did not satisfy the description of "registered

second class hoteliers having at least 5 years' experience" prescribed in para­

graph (1) of the tender notice, the 1st respondent called upon the fourth res­

pondents to produce documentary ewidence \Vhether they were registered second

class hotliers having

at least 5 years' experience. The fourth respondents

stated once again that they had considerable experience of catering for various

reputed commercial houses, clubs, messes and banks and that they had Eating

Houses C.atering Establishment (Canteen) Licence. Satisfied with the

informa­

tion given by the fourth respondents, the first respondent accepted their tender

on the terms and conditions set out in its letter.

The aiipellant filed a writ petition before the High Court challenging the

decision of the first respondent in accepting the tender of the fourth respondents.

But it

was rejected.

In appeal to this Court it was contended on behalf of the appellants that ( l)

the first respondent which is a public authority 'vas bound to give effect

to the most important condition of eligibility and acceptance of the tender by

the first respondent was in violation of the standard or norm of eligibility set

up

by the first respondent and (2) had the appellant known that non-fulfilment

of tbe condition of eligibility would be no bar for considering a tender he

·too

would he.ve competed for obtaining the contract.

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R. D. SHETTY V. AIRPORT AUTHORITY 1015

The fourth respondents, on the other hand, contended that the requirement

that the tenderer must be a registered second grade hotlier was meaningless

because the grading

is given by the Bombay City Municipal Corporation only to hotels or resta·1irants and not to persons running them and, therefore there

could be

no second grade hotlier; (2) the notice

Setting out the conditions

of eligibility having had no stautory force, even if there was a departure from

the standard or norm of eligibility, it was not justiceablc and the first respon­

dent was competent to give the conract to anyone it thought fit; and (3) the

Airport Authority reserved to itself the right

to

reject all or any of the ten­

ders without assigning any reasons and, therefore, it \

1as competent to it to

reject all the tenders or negotiate with any person it considered fit to enter into

a contract.

HELD The action of the first respondent in accepting the tender of the

fourth respondents,

who did not satisfy the standard or norm, was clearly dis­

criminatory since it excluded other persons similarly situate from tendering for

the contract and

it was arbitrary

and without reason. Acceptance of the tender

·was invali4 as being violative of the equality c'Iause of the Constitution as also

of administrative

la\V inhibiting arbitrary action.

[1056 C]

(a) What paragraph (1) of the notice required was that only a person

rum1ing a registered second class hotel or restaurant and having at least 5 years'

experience

as such should be eligible to submit the tender. The test of

eligibility laid down in this paragraph was an objective test and not a subjective

one.. If a person submitting the tender did not have atleast

five years'

expe~

rience of running a second class hotel, he was eligible to submit the tender

and

it would not avail him to say that though he did not satisfy this condition

he was otherwise capable of running a second class restaurant and therefore

should be considered. This

\Vas in fact how the first respondent unders_tood

this condition of eligibility. The first respondent did not regard this require­

ment as meaningless or unnecessary and wanted to be satisfied that the fourth

respondents had fulfilled this requirement. The fourth respondents were neither

running a second grade hotel

or. restaurant nor did they have five years'

experience of running such a hotel or restaurant. Therefore the fourth

res­

·pondents did not satisfy the condition of eligibility ltaid down in paragraph( 1)

of the noice. [1028 B·H]

(b) It is not possible to justify the action of the first respondent on the

ground that it could have achieved the same result by rejecting all the tenders

and entering into direct negotiations with the fourth respondents. Although

there wa'i no statutory or administrative rule requiring the first respondent to

give a contract only by inviting tenders and that on the terms of paragraph 8

of the tender notice, it

was not bound to accept any tender, the first respondent

did not reject the tenders outright and enter into direct negotiation

wit~ the

fourth respondents for awarding the contract. The process of awarding a

contract by inviting tenders

was not terminated or abandoned by the first res­

pondent

by rejecting all the tenders but in furtherance of the process the tender

of the fourth respondents was accepted by the first respondent.

Nor

"'·as the

contract given to the fourth respondents a.s a result of direct negotiations.

[1029 D-G]

2(a) Today v;rith tremendous expansion of welfare and social service func­

tions, incre~ing control of materi2'1 and economic resources and large scale

assumption of industrial and comm'ercial activities by the State, the power of

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1016 SUPREME COURT REPORTS [1979] 3 S.C.R.

the executive Government to affect the lives of the people is steadily growing.

The attainment of socio-economic justice bein~ a conscious end of State policy,

there

is a vast and inevitable increase in the frequency with which ordinary

citizens come into

relatioJ!ship of direct enc~unter ,with State power~holders.

This renders it necessary to structure and restrict the power of the executive

Government so as to prevent

its arbitrary application or exercise.

Whatever

be the concept of the rule of la\.', there is substantial agreement in juristic

thought that the great purpose of the rule of law notion is the protection of

the individual against arbitrary exercise of power, wherever it is found. It is

unthinkable that in o. democracy governed by the rule of law the executive

Government

or any of its officers should possess arbitrary power over the

interests of the individual. Every action of the

executive Governn1ent must be

informed with reason and should be free from arbitrariness. That is the very

essence of the rule of law and its bare minimal requirement. And to the appli­

cation of this principle it makes no differen~e whether the exercise of the power

involves affectation of some right or denial of some privilege. [1031 F-H]

(b) To·day the Government, in a \velfare State:, is the regulator and dis­

penser of special services and provider of a large number of benefits. The

valuables dispensed by Governn1ent take

n1any forms, but they all share one cl1aractcrfa,tic. They are steadily taking the place of traditional forms of wealth.

These valuables which derive from relationships-to Government are

of many

D kinds: leases, licences,

contracts and so forth. With the iOCreasing magnitude

and range of governmental functions as

we move closer to a welfare

State,

more and more of our wealth consists of these new forms. Some of these

forn1s of wealth may be in the nature of legal rights but the large majority of

them are in the nature of privileges. But on that account, it cannot be so.id

that they do not enjoy any legal protection nor can they be regarded as

gratuity furnished by the State so thnt the State may withhold, grant or revoke

E it at its pleasure. [1032 E-H]

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(c) The law has not been

slow to recognize the importance of this ne\v

kind of wealth and the need to protect individual interest in it and with that end

in view, it has developed new forms of protection. Some interests in Govern­

ment largess, formerly regarded

as privileges, have been recognized as rights \Vhile others have been given legal protilction not only by forging proceJurr.-l

safeguards but also by confining/structuring and checking Government discre­

tion in the matter of grant of such largess. The discretion of the Government

has been held to be not unlimited

in that the Government cannot give or

\vith~

hold largess in its arbitrary discretion or at its sweet will. [1033 C-D]

Viterolli v. Satan 359 U.S. 535: 3 Law Ed. (Second Series) 1012,

Erusian Equipn1ent and Chen1icals Lrcl. v. State of West Bengal, [1975] 2 SCR,

674 referred to.

(d) Therefore, where the Government

is dealing

\lith the public, whether

by way of giving jobs or entering into contracts

or issuing quotas or

licence<>

or granting other· forms of largess, the Government cannot act arbitrarily at its

sweet will and, like a private individual, deal \Vith any person it pleases, but

its action must be in conformity with standard or norm which is not arbitrary,

irrational

or irrelevant. The power or discretion of the

GoverJ?,ment in the

matter of grant

of largess including award of jobs, contracts etc., must be

con­

fined and structured by rational, relevant and non-discriminatory standard or

norm and if the Government departs from such standard or norm

in any

parti­

cular case or cases, the action of the Government would be liable to be struck

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R. D. SHETTY V, AIRPORT AUTHORITY 1 0 I 7

down, unless it can be shown by the Government that the departure was not

arbitrary, but was based on some valid principle \Vhich in itself was non-irra­

ticnal, unreasonable or discriminatory. [1034 F-H]

(e) The Government which represents the executive authority of the State

may act through the instrumentality or agency of natural persons or it may

empk>y the instrumentality or agency of juridicinl persons to carry out its func­

tions. With the advent of the welfure state the civil service, which traditionalJy

carried

out functions of Government through natural persons, was found in­

adequate

to handle the new tasks of specialised and highly technical character.

To fill the gap it became necessary to forge a new instrumentality or

adminis­

trative device for handling these new problems and that is done by public cor­

porations \vhich has become the third arm of the Government. They are

regarded as agencies

of the Government. In pursuance of the industrial policy

resolution

of the Government of India corporations were created by the

Gov­

ernment for setting up and management of public enterprises and carrying out

public functions. The corporations so created, acting as instrumentality or

ogency of Government, would obviously be subject to the same limitations in

the field of constitutional and administrative law as Government itself though

in the eye of law they would be distinct and independent legal entities. Jf

Government, acting through its officers is subject to certain constitutional and

public la\v limitations, it must follow a fortiori that Government, -through the

instrumentality

or agency of corporations, should equally be subject to the same

limitations. But

the question is how to determine whether a corporation is

acting as instrumentality or agency of Government. [1035 A-C, F-HJ

3(a) The factors for d~termining whether a corporation bas becon1e an

instrumentality or agency of the Government are; does the State give any finan~

cial assistance and if so what is the magnitude of such assistance ? Is there

any control

of the management and policies of the corporation by the State,

and

'~'hat i:oi the nature and extent of such control? Does the corporation enjoy

any State conferred or State protected monopoly status and whether the func­

tions carried ~out by the corporation are nublic functions closely related to

governmental functions? It is not ~io;e to particularise all the i-elevant fac­

tors but no sing]e factor will yield a sansfoctory answer, to the question and

the court

\viU have to consider the cumulative

effect of these various factors

and ~stablish it by its decision on the basis of a particularised enquiry into

facts and circumstances

of each case.

[1041 B-EJ

(b) Sukhdev v. Bhagatram [1975] 3 S.C.R. 619 at 658 explained, Kerr

v. Eneck Pratt Free Library, 149 F. 2d 212, Jack:Jon v. Metropolitan Edison

Go. 419 U.S. 345; 42 L.ed. 2d 477, Evans v. Newton 382 U.S. 296; 15 L.•d.

2d 373, Pfizer v. Ministry of Health [1964] 1 Ch. 614, New York v. United

!!tales 326 U.S. 572, Cf. Helvering v. Gerhardt 304 U.S. 405, 426, 427 referred

to .

(c) Where a corporation i:i; an irutrumentality or agency of Government

it would be subject to some constitutional or public law Jimitations as Govern­

ment. The rule inhibiting arbitrary action by Government must apply equaJly

where such corporation

is dealing with the public and it cannot act arbitrarily

and enter into relationship with any

person it lit~ at it! sweet will. Its action

must be in conformity with so111e principlt! which meets the test of reason and

relevance. (1041 HJ

9'-409 SCI /79

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1018 SUPREME COURT REPORTS [1979] 3 S.C.R.

A Rajastha11 Electricity Board v. Mohan Lal [1967] 3 S.C.R. 377, aod

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Sukhdev v. Bhagatram [1975) 3 S.C.R. 619 at 658 followed.

Praga Tools Corporation v. C.A. lnianuel [1969] 3 S.C.R. 773, lfeavy Engi­

neering Mazdoor Union v. State of Bil1ar [1969] 3 S.C.R. 995, S. L. Aggarwal

v. General lllanager, Hindustan Steel Li1nited [1970] 3 SCR 363, Sarbhajit

Tewmi v. Union of India & Ors. [1975) 1 SCC 485; held inapplicable.

(<l) lt is ·wen established that Art. 14 requires that State action must not

be arbitrary and must be based on some rational and relevant principle which

is n6n-discriminatory. It must not be guided by extraneous or irrelevant con­

iiderations. The State cannot act arbitrarily in entering into relationship,

contractual

or otherwise, with a third party. Its action must conform to some sta.Rdard or norm which is rational and non-discriminatory. [1042 C]

E. P. Rayappa v. State of Tamil Nadu [1974) 2 SCR 348, Maneka Gandhi

v. Union of India [1978) 2 S.C.R. 621, Rashbihari Panda v. State of

Orissa [1969) 3 S.C.R. 374, C. K. Achuthan v. State of Kera/a [1959)

S.C.R. 78, referred to.

Trilochan Mishra v. State of Orissa & ors. [1971 3 S.C.R. 153, State

of Orissa v. Harinarayan Jaiswal & ors. [1972[ 2 S.C.R. 36, Raiasthan

Eltctricity Board v. Mohan Lal [1967] 3 S.C.R. 377, Fraga Tools Corporation

D v. C. A. lmanuel [1969) 3 S.C.R. 773, Heavy Engineering Mazdaar Union v.

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State of Bihar [1969] 3 SCR, 995, S. L. Aggarwal v. General Manager,

Hindustan Steel Limited [1970] 3 SCR. 363, Sarbhajit Tewari v. Union bf India

& ors. [1975) 1 sec 485, held in applicable.

4(a) The lnterne.tional Airport Authority-Act, 1971 empowers the Central

Government

to constitute an authority called the International

Airport Autho­

rity. The salient features of the Act are: the Authority, which is a body cor­

porate having perpetual succession and a common seal, consists of a Chairmen

and certain other Members who are appointed by the Central Government. The

Central Government has power to terminate the appointment

or to remove a

member from the Board of the Authority. Although the Authority bas

no

share capital of its own, capital needed by it for carrying out its functions is

provided wholly by the Central Government. All non-recurring expenditure

incurred by the Central Government for

or in connection with the purposes

of the airports upto the appointed date and

dec1a~-red to be capital expenditure

by the Central Government shall be treated as capital provided by the Central

Government

_to the first respondent and all sums of money due to the Central

Government in relation to the airports immediately before the appointed date

shall be deemed

to be due to the first respondent. The functions, which until

the appointed date were being carried out

by the Central Government, were

transferred to the Airport Authority by virtue

of s. 16. The first respondent,

according to

s. 20, should pay the balance of its annual net profits to the

Central Government after making provision for reserve funds, bad and

doubt·

ful debts, depreciation in assets and so on. The first respondent, under s. 21,

has to submit for the approval

of the Central Government a statement of the

programme

of its activities during the forthcoming

financial year. Its accounts

are audited by the Comptroller and Auditor General and the audited accounts

shall

be forwarded to the Central Government. The first respondent is

requir­

ed to submit an account of its activities during a financial year and this report

is laid before the Houses of Parliament by the Central Government. The

Central Government bas power to divest the first respondent temporarily from

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R. D. SHETTY V. AIRPORT AUTHORITY 1019

the management of any airport and direct it to entrust such manngement to any

other person. llo'\'er is conferred under s. 34 on the Central Government

to supersede the first respondent under certairi specified circumstances. Section

35 gives pO\VC'f to the Central Government to give directions in writing te> the

Airport Authority on questions

of policy and the Airport Authority is bound

by such directions. Section 37 empowers the Airport Authority to make

regu­

lations. Section 39 provides that contravention of any regulation made by the

Airport Authority

is punishable.

[1052B-1054C]

(b) A conspectus of the provisions of the Act clearly sho\Vs that every test

Jaid down by this Court in deciding whether a statutority authority comes

within the purview of Art. 12 of the Constitution is satisfied in the case of

the first respondent. They leave no room for doubt that it is an instrumentality

or agency of the Central Government and falls within the definition of State.

Therefore, having regard both to the constitutional mandate of Art.

14 and the

judicially evolved rule of administrative la\v, the first

resp'!n<lent \Vas not

-entitled to act arbitrarily in accepting the tender of the fourth respondents but

was bound to conform to the standard or norm le.id down in paragraph 1 of the

notice inviting tenders. The standard or norm Jaid down by the notice waa

reasonable and non-discriminatory and once it is found that such a standard

or norm is laid down, the first respondent was not entitled to depart from it

and award the contract to the fourth respondents who did not satisfy the con·

dition of eligibility rrescribed by standard or norm. If none of the tenderers

satisfied the condition the first respondent could have rejected the tender and

invited fresh tenders on the basis of less stringent standard

or norm, but it

could

not depart from the prescribed standard or norm. [1055 E-A]

(c)

In the instant case the appellant had no real interest in the result of

the litigation. There can be no doubt that the litigation was commenced by

the appellant

not with a view to protecting his own interest, but had been put

up by others for depriving the fourth respondents of the benefit of the contract

secured by them. The Writ Petition was filed more than

five months after

the

acceptance of the tender and the position would have been different had tho

appellant filed it immediately after the acceptance of the tender. The fourth

respondents have incurred a large expenditure

in making necessary arrangements

under the bona fide belief that their tender had been legally and validly

accept­

ed.. It would be· most inequitous to set aside the contract at the instance of the

appellant

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 895 of 1978.

Appeal by Special Leave from the Judgment and Order dated

23-1-1978 of the High Court at Bombay in Appeal No. 234/77 aris­

ing out of Misc. Petition No. 1582/77.

Ashnk H. Desai, Y. S. Chitale, Jai Chinai, P. G. Gokhale and

8. R. Agarwal for the Appellant.

G. B. Pai, 0. C. Mathur and D. N. Mishra for Respondent No. 1.

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1020 SUPREME COURT REPORTS [1979] 3 S.C.R.

F. S. Nariman, R. H. Dhebar, S. K. bholakia, h H. Yagnik and

B. V. Desai for Respondent No. 4.

The Judgment of the Court was delivered by

BHMWATI, J.-This appeal by special leave raises interesting

questions of

Jaw in the area of public Jaw. What are the constitutional

obligations on the State when it takes action

in exercise of its statutory

or

executi>e power? Is the State entitled to deal with its property

in any manner it likes or award a contract to any person it chooses

without any constitutional limitations upon it'! What are the para­

meters of its statutory or executive power

in the matter of awarding

a contract or dealing with its propery ''

These questions fell in the

sphere of both administrative law and constitutional law and they

assume special significance in a mod.em welfare State which is com­

mitted to egalitarian values and dedicated to the rule of law. But

these questions cannot be decided in the abstract. They can

be

determined only against the back-ground of facts and hence

'<;'c shall

proceed to State the facts giving rise to the appeal.

On or about 3rd January, 1977 a notice inviting tenders for putt­

ing

up and running a second class restaurant and two

Snack bars at

the International Airpofi at Bombay was issued by the 1st respondent

E which

is a corporate body constituted under the International Airport

Authority Act,

43 of 1971. The notice stated in the clearest terms

in paragraph

(1) that

"Sealed tmders in the prescribed form are here­

by invited from Registered IInd Class Hoteliers having at least 5

years' experience for putting up and running a IInd Class Restaurant

and

two Snack bars at this Airport

fol' a period of 3 years". The

F 1 iatest point of time upto which the tenders could be submitted to the

1st respondent

was stipulated in Paragraph 7 of the notice to be 12 p.m.

on 25th January, 1977 and

it was provided that

th~ tenders would

be opened on the same date at 12.30 hours. Paragraph (8) of the

notice made it clear that "the acceptance of the tender will rest with

G the Airport Director who does not bind himself to accept any tender

and reserves to himself the right to reject all or any of the tenders

received without assigning any reasons therefor." There were sLx

tenders received by the 1st respondent in response to the notice and

one of them

was from the 4th respondents of offering a licence fee of Rs. 6666.66 per month, and the others were from Cafe Mahim, Cen-

H tral Catering Service, one A. S. Irani, Cafe Seaside and Cafo Excelsior

offering progressiveiy oecreasing licence fee very much lower than

that offered by the 4th respondents. The tenders were opened

in the

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R. D. STIETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1021

office of the Airport Director at 12.30 p.m. on 25th January, 1977

and at that time the 4th respondents were represented by their sole

proprietor Kumaria.

A.

S. Irani was present on behalf of himself, Cafe

Mahim, Cafe Seaside and Cafe Excelsior and there was one represen­

tative

of Central Catering Service. The tenders of

Cafe Mahim, Cen­

tral Catering Service, Cafe Seaside and Cafe Excelsior were not com­

plete since they were not accompanied by the respective income tax

certificates, affidav·its of immovable property and solvency certifica­

tes, as required by cl. (9) of the terms and conditions of the tender

form. The tender

of A.

S. Irani was also not complete as it was not

accompanied

by an affidavit of immovable

property held by him and

solvency certificates. The only tender which was complete and fully

complied

with the terms and conditions of the tender form was that

of the 4th respondents and the offer contained in that tender

was also

the highest amongst all

the tenders. Now it is necessary to point out

at this stage that

while submitting their tender the 4th respondents had

pointed out in their letter dated

24th January, 1977 addressed to the

Airport Director that they had 10 years' experience in catering to re­

puted commercial houses, training centres, banks and factories and

that they

were also doing

considerable outdoor catering work for

various institutions. This letter showed that

the 4th respondents had experi·2nce only of running canteens and not restaurants and it appeared

that they did not satisfy the description of "registered IInd Class

Hotelier having

at least 5 years'

experience" as set out in paragraph

(1) of the notice inviting tendern. The Airport Officer, therefore,

by his Jetter dated 15th February, 1977 requested the 4th respondents

to inform

by return of post whether they were a

"registered IInd

Class Hotelier having at least

5 years

experience" and to produce

documentary evidence in this respect within 7 days. The 4th res­

pondents pointed out

to the Airport

Officer by their letter dated 22nd

Febrnary, 1977 that they had, in addition to what

was set out in

their earlier letter dated 24th January, 1977, experience

of running

canteens

for

Phillips India Ltd. and Indian Oil Corporation and more­

over, they held Eating House Licence granted by the Bombay Munici·

pal Corporation since 1973 and had thus experience of 10 years in

the catering line. It appears that before this letter of the 4th respon­

dents could reach Airport Officer, another letter dated 22nd Febru­

ary, 1977

was addressed by the Airport

Officer once again requesting

the 4th respondents to produce documentary evidence to show if they

were '"a registered IInd Class Hotelier having at least 5 years experi­

ence". The 4th respondents thereupon addressed another letl'er dated

26th February, 1977 to the Director pointing out that they had con­

siderable experience

of catering for various reputed commercial houses,

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1022 SUPREME COURT REPORTS [1979] 3 S.C.R.

clubs, messes and banks and they also held an Eating House Catering

Establishment (Canteen) Licence

as also a licence issued under the Prevention of Food Adulteration Act. The 4th respondents stated that

their sole proprietor Kumaria had started his career in catering line

in the year 1962

at

Hold Janpath, Delhi and gradually risen to his

present position

and that he had accordingly

"experience equivalent

to that of a !Ind Class or even 1st Class hotelier." This position was

reiterated by the 4th respondents in a further letter dated 3rd March,

1977 addressed to the Director. This information given by the 4th

respondents appeared to satisfy the 1st respo1ident and by a letter

dated 19ti1 April, 1977 the !st respondent accepted the tender of the

4th respondents on the tei;ms and conditions set out in that letter.

The 4th respondents accepted these terms and conditions by their

letter dated 23rd April, 1977 and deposited with the 1st respondent

by way of security a sum of Rs. 39,999.96 in ~he form of fixed

Deposit Receipts in favour of the

Ist respondent and paid to the 1st

respondent a sum of Rs. 6666.66 representing licence fee for one

month and other amounts representing water, electricity

and

conser·

vancy charges. The 4th respondents thereafter executed and hand-

ed over to the Ist respondent an agreement in the form attached to

the tender on 1st May, 1977. The 4th respondents also got pre·

pared furniture, counters and showcases as also uniforms for the

staff, purchased

inter alia deep freezers, water coolers, electrical

ap­

pliances, icecrea1n cabinets, espresso coffee machines, crockery, cut­

lery and other article~ ;and things and also engaged the necessary

staff for the purpose of running the restaurant

and the two

Snack bars.

But the Ist respondent could not hand over possession of the req•1i·

site sites to _!he 4th respondents, since A. S. Irani was rnnning his

restaurant and snack bars on these sites under a previous contract

with the 1st respondent and though that contract had come to an

end,

A.

S. Irani did not deliver possession of these sites to the Ist

respondent. The 4th respondents repeatedly requested the 1st res­

pondent and the Airport Director who is the 2nd respondent in the

appeal, to hand over possession of the sites and pointed out to them

that the 4th reeeondents were incurring losses by reason of delay in

delivery of possession, but

on account of the intransigence of A.

S.

Irani the Ist respondent could not arrange to hand over possession of

the sites to the

4th respondents.

Meanwhile one

K.

S. Irani who owned Cafe Excelsior filed Suit

No. 6544 of 1977 in the City Civil Court, Bombay against the res­

H pondenls challenging the decision of the 1st respondent to accept the

tender of the 4th respondents and took out a notice of motion for

res'.rair.;ng the !st respondent from taking any further steps pursuant \o

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, I.) 1023

the acceptance of the tender. K. S. Irani obtained an ad-interim injunc­

tion against the rS'spondents but after hearing the respondents, the

City Civil Court vacated the ad-interim injunction and dismissed the

notice of motion by a_n order dated 10th October, 1977. An appeal

was preferred by K. S. Irani against this order, but the appeal was

dismissed

by the High Court on 19th October, 1977. Immediately

thereafter, on the same day, the Ist respondent handed over posses­

sion of iwo

site~ to the 4th respondents and the 4th respondents

proceeded

to set up snack bars on the two sites and started business

of catering at the

two snack bars. These two sites handed over

to the 4t11 respondents were different from the sites occupied by A.

S.

Jrani, because A. S. Irani refused to vacate the sites in his occupa­

tion. So far as the site for the restaural)t was concerned, the Ist

respondent could not hand over the possession of it

to the 4th res­

pondents presumably because there

was no other appropriate site

available other than the

one occupied by A.

S. Irani. Since A. s.

Irani refused to hand over possession of the sites occupied by him

to the

1st respondent, even though his contract

had come to an end,

and continued to carry on the business of running the restaurant :md

the snack bars on these sites, the Ist respondent was constrained to

file suit No. 8032 of 1977 against A. S. Irani in the City Civil Court

at Bombay and

in that suit, an injunction was

obtairied by the 1st

respondent restraining A. S. Irani from running or conducting the

restaurant and the snack bars or from entering the premises save and

except for winding up the restaurant and the snack bars.

A.

S. Irani

preferred an appeal against the order granting the injunction, but the

appeal

was rejected

and ultimately a petition for special leave to

appeal

to this Court was also, turned down on 31st July, 1978.

This

was, however, not to be the end of the travails of the 4th

respondents, for,

as soon as the appeal preferred by K. S. Irani against

the order dismissing

his notice of motion was rejected by the High

Court

on 19th October, 1977, A.

S. Irani filed another suit being sait

No. 8161 of 1977 in the City Civil Court, Bombay on 24th October,

1977 seeking mandatory injunction for removal of the two snack bars

put

up by the 4th respondents. This was one more attempt by A.

S.

Irani to prevent the 4th respondents from obtaining the benefit of the

contract awarded to them by the Ist respondent. He, however, did

not succeed in obtaining ad-interim injunction and

we are told that the

notice of motion taken out by him

is still pending in the City Civil

Court.

It will thus be seen that A.

S. Irani failed in his attempts to pre­

vent the 4th respondents from obtaining the contract and enjoying its

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1024 SUPREME COURT REPORTS [1979] 3 S,C.R.

benefit. The 4th respondents put up two snack bars on the sites

provided by the !st respondent and started running the two snack

bars from 19th October, 1977. 'The restaurant howel<er, could not

be put up on account

of the inability of the Ist respondent to

pro-ride

appropriate site to ·the 4th respondents and, therefore, the licence fee

for the two snack bars had to be settled and it was fixed at Rs. 4,500/­

per month by mntual agreement between the parties. But it seems

that the 4th respondents were not destined to be left in peace to run

the two snack bars and soon after the dismissal of the appeal of A. S.

Irani on 19th October, 1977 and the failure of A. S. Irani to obtain

an ad-interim mandatory injunction in the suit

filed by him

against

the !st and the 4th respondents, the appeflant filr l writ petition No.

1582 of 1977 in the High Court of Bo~bay challenging the decision

of the Ist respondent to <tCcept the tender of the 4th respondents. The

writ petition

was moved before a

Single Judge of the High Court on

8th November, 1977 a_fter giving prior notice to the respondents and

after hearing

the parties, the learned

Single Judge sununarily rejected

the writ petition. The appellant preferred an appeal to the Division

Bench of the High Court against the order rejecting the writ petition

and

on

notice being issued by the Division Bench, the Ist and the 4th

respondents

filed their respective affidavits in reply showing cause

against the admission

of the appeal. The Division Bench

after con­

sidering the

affidavits and hearing the parties rejected the appeal

in

limine on 21st February, 1978. The appellant thereupon filed a

petition

for special leave to appeal to this Court and since it

was felt

that the questions raised in the appeal were of seminal importance,

this Court granted special leave and decided to hear the appeal at an

early date after

giving a further opportunity to the parties to file their

respective affidavits. That is how the appeal has now come before

us for

fmal hearing with full and adequate material placed before us on

behalf of both the parties.

The main contention urged

on behalf of the appellant was that

in

par..graph (1) of the notice inviting tenders the !st respondoot

had stipulated a condition of eligibility by providing that a pecson

submitting a tender must be a "registered Und class Hotelier having

at least 5 years experience." This was a condition of eligibility to

be satisfied by every person submitting a tender and if in case

of

iiny

person, this condition was not satisfied. his tender was ineligible for

being considered. The 1st respondent, being a State within the

meaning of Art. 12 of the Constitution

or in any event a public

authority,

was bound to give effect to the condition of eligibility set

up by it and

was not entitled to depart from it at its own sweet

will

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1025

without rational justification. The 4th respondents had experience

of catering only in canteens and

did not have 5 years' experience of

running a Ilnd

class hotel or restaurant and hence they did not satisfy

the condition of eligibility and yet the 1st respondent accepted the

tender submitted by

them. This was clearly in violation .of

lhe stand­

ard or norm of eligibility set up by the 1st respondent and the action

of

the 1st respondent in accepting the tender of the 4th respondents was clearly invalid. Such a departure from the standard or norm of eligibi­

lity had the

effect of denying equal opportunity to the appellant and

others

of submitting their tenders and being considered for entering

into contract

for putting up and running the restaurant and two

·suack bars. The appellant too was not a registered 2nd class

hotelier with 5 years' experience and

was in the same position as

the 4th respondents vis-a-vis this condition of eligibility and he also

could have submitted

his tender and entered the field of consideration

for award

of the contract, but he did not do so because of this

condition

of eligibility which he admittedly did not satisfy. The

action of the 1st respondent in accepting the tender of the 4th res­

pondents had, therefore, the

effect of denying him equality of oppor­

tunity

in the matter of consideration for award of the contract and

hence it

was unconstitutional as being in violation of the equality

clause. This

contention of the appellant was sought to be met by a

threefold argument on behalf of the 1st and the 4th Respondents.

The first head

of the argument was

that grading is given by the

Bombay City Municipal Corporation only to hotels or restaurants

and not persons running them and hence there can be a 2nd grade

hotel or restaurant but not a 2nd grade hotelier

and the requirement

in paragraph

(l) of the notice that a tenderer must be a registered

2nd grade hotelier

was therefore a meaningless requirement and it

conld not be regarded

as laying down any condition of eligibility.

It was also urged that in any

event what paragraph ( 1) of the notice

required

was not that a person tendering must have 5 years' experi­

ence of running a 2nd grade hotel, bnt he should have sufficient

experience

to be able to run a 2nd grade hotel and the 4th

respon­

dents were fully qualified in this respect since they had over 10 years'

·experience in catering to canteens

of well known companies, clubs

and banks.

It was further contended in the alternative that para­

graph (8)

of the notice clearly provided that the acceptance of the

·tend,er would rest with the Airport Director who did not bind him­

self to accept any tender and reserved

to himself the right to reject

all or any of the tenders without assigning any reasons therefor and

it

was, therefore, competent to the 1st respondent to reject all the

tenders and

to negotiate with any person it considered fit to enter

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1026 SUPREME COURT REPORTS [1979] 3 S.C.R.

into a contract and this is in effect and substance what the 1st

respondent did when he accepted the tender of the 4th respondents.

The second head of argument

was that paragraph (I) of the notice

setting out the condition of eligibility had no statutory force nor was

it issued under any administrative rules and, therefore, even

if there

was any departure from the standard or norm of eligibility set out

in

th,at paragraph, it was not justiciable and did not furnish any cause

of action to the appellant.

It was competent to the 1st respondent to

give the contract to any one it thought fit and it was not bound by

the standard

or norm of eligibility set out in paragraph (1) of the

notice.

It was submitted that in any event the appellant had no

right to complain that the' !st respondent had given the contract to

the 4th respondents in breach of the condition of eligibility laid

down in paragraph

(I) of the notice. And lastly, under the third

head of argument, it

was submitted on behalf of the !st and the 4th

respondents that in any

view of the matter, the writ petition of the

appellant was liable to be rejected in the exercise of its discretion

by the Court, since the appellant had no real interest but was merely

a nominee of

A.

S. Irani who had been putting up one person after

another to start litigation with a view to preventing the award of

the contract to the 4th respondents. The appellant

was also guilty

of !aches and delay in

filing the writ petition and the High Court was

justified in rejecting the writ petition in limine

particul~r!y in view

of the fact that during the period between the date of acceptance of

the tender and the date of

filing of the writ petition, the 4th respon­

dents had spent an aggregate sum of about Rs.

1,25,000/-in making

arrangements for putting np the restaurant and

two snack bars.

These were the rival contentions

. urged on behalf of the parties and

we shall now proceed to discuss them in the order in which we have

set them out.

Now it

is clear from paragraph (I) of the notice that tenders

were invited only from

"registered 2nd Class hoteliers having at least

5 years' experience". It is only if a person was a registered 2nd

Class hotelier having at least

5 years' experience that he could, on

the terms of paragraph

(1) of the

notice, submit a tender. Paragraph

(!) of the notice prescribed a condition of eligibility which had to be

satisfied by

e.very person submitting a tender and if, in a given case,

a person submitting a tender did not satisfy this condition,

his tender

was not eligible to be considered. Now it is true that the terms and

conditions,

of the tender form did not prescribe that the tenderer mnst

be a registered Ilnd Class hotelier having at least 5 years' experience

nor

was any such stipulation to be found in the form of the agreement

•

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) I 027

annexed to the tender but the notice inviting tenders published in the

newspapers clearly stipulated that tenders may be submitted only by

;t;gistercd !Ind Class hoteliers having at least 5 years' experience and

this tender notice

was also included amongst the documents handed

over

to prospective tenderers when they applied for tender forms. Now

the question is, what

is the meaning of the expression

"registered Ilnd

Class hotelier", what category of persons fall within the meaning of

this description? This

is a necessary enquiry in order to determine

whether the 4th respondents were eligible to submit a tender.

It is

clear from the affidavits and indeed there was no dispute about it that

different grades arc given by

the Bombay City Municipal Corporation

to hotels and restaurants and, therefore, there may be a registered Jlnd

Class Hotel but no such grades are given to:persons running hotels and

restaurants and hence

it would be inappropriate to speak of a

perwn

as a registered Hnd Class hotelier. But on that account would it be

right to reject the expression "registered Ilnd Class hotelier" as mean­

ingless and deprive paragraph ( 1) of the notice of any meaning and

effect. We do not think such a view would be justified by any canon

of construction.

It is a

well settled rule of interpretation applicable

alike to documents

as to statutes that, save for compelling necessity,

the court should not be prompt

to ascribe superfluity to the language

of a document

"and should be rather at the outset inclined to suppose

every word int~nded to have some effect or be of some use". To

reject words

as insensible should be the last resort of judicial

interpre­

tation, for it is an elementary rule based on common sense that no

author of a formal document intended

to be acted upon by the others

should be presumed to

use words without a meaning. The conrt must,

as far

as possible, avoid a construction which would render the words

used by the author

of the document meaningless and futile or reduce

to silence any part of the document and make it altogether

inappli­

caple. Now, here the expression used in paragraph (1) of the notice

was "registered Ilnd Class hotelier" and there can be no doubt that by

using this expression the Ist respondent intended

to delineate a certain

category of persons

who alone should be eligible to submit a tender.

The Ist respondent was not acting aimlessly or insensibly in insisting

upon this requirement nor

was it indulging in a meaningless and futile

exercise.

It had a definite purpose in view when it laid down this

condition of eligibility in paragraph

(I) of the notice. It is true that

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the phraseology used by the Ist respondent to express its intention was

rather inapt but it

is obvious from the context that tlie expression

"registered llnd Class hotelier" was loosely used to denote a person · HI

conducting or running a IInd Class hotel or restaurant. It may be

ungrammatical but it does not offend common-sense to describe a

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1028 SUPREME COURT REPORTS (1979] 3 S.C.R.

person running a registered !Ind grade hotel as a registered Und grade

hotelier. This meaning

is quite reasonable and does not do any vio­

lence to

the language and makes sense of the provision contained in

paragraph (1) of the notice. We must, in the circumstances, hold that,

on a proper construction, what paragraph (1) of the notice required

was that only a person running a

ref,>istered IInd Class hotel or

restaurant and having at least 5 years' experience as such should be

eligible to submit a tender. This was a condition of eligibility and it

is difficult to see how this condition could be said to be satisfied by any

person who did not have

five years' experience of running a IInd Class

hotel

or restaurant. The test of eligibility laid down was an objective

test and

not a subjective one. What the condition of eligibility required

was that the person submitting a tender must have 5 years' cxperi,ence

of running a

II Class hotel, as this would ensure by an objective test

that he was capable of running

a II Class restaurant and it should not

be left to the

Ist respondent to decide in its subjective discretion that

the person tendering was capable of running such a restaurant. If,

therefore, a person submitting a tender did not have at least 5 years'

experience of running a

II Class hotel, he was not eligible to submit

the tender and it would not avail him to say that though he did

not satisfy this condition, he was otherwise capable of running a

Ilnd Class restaurant and should, therefore, be considered. This was

in fact how the I st respondent itself understood this condition of

eligibility. When the 4th respondents submitted their tender along

with their letter dated 24th

January. 1977. it <1ppeared from the

documents submitted

by the 4th respondents that thev did not have

5 years' experience of running a

II Class restaurant. The 1st res­

pondent by its letter dated 15th February, 1977 required the 4th

respondents to produce documentary evidence to show that they

were

"registered II Class hotelier having at least 5 years' experience."

The 1st respondent did not regard this requirement of eligibility as

meaningless

or unnecessary and wanted to be satisfied that the 4th

respondent did fulfil this requirement. Now, unfortunately for the

4th respondents, they had over

10 years' experience of running can­

teens

but at the date when they submitted their tender, they were

not running a

II grade hotel or restaurant nor did they have

5 years' experience of running such a hotel or

restaurant. Even if

the experience of the 4th respondents in the catering line were taken

into account from 1962 onwards, it would not cover a total period

of more

than 4 years 2 months so far as catering experience in

IInd Grade hotels and restaurants

is concerned. The 4th

r,ospondenlli

thus did not satisfy the condition of eligibility laid down in para­

graph ( 1 ) of the notice and in fact this was impliedly conceded -Oy

•

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, l.) I 029

the 4th respondents in their letter dated 26th February, 1977 where

they stated that they had "experience equivalent to that of a 2nd

class or even 1st class hotelier." The 4th respondents were, accor­

dingly, not eligible for submitting a tender and the action of the 1st

respondent in accepting their tender

was in contravention of para­

graph

(1) of the notice.

~ It was suggested on behalf of the 1st and the 4th respondents

that there was nothing wrong in the 1st respondent giving the con­

r tract to the 4th respondents since it was competent to the 1st res-

;. ptmdent to reject all the tenders received by it and to negotiate

' ~ directly with the 4th respondents for giving them the contract and

it made

no difference that instead of

follo·.<'ing this procedure, which

perhaps might have resulted in t!Je 4th respondents offering a smaller

licence

fee and the 1st respondent suffering a loss in the process,

the

1st respondent accepted the tender of the 4th respondents. We

do not think there is any force in this argument. It is true that

there

was no statutory or administrative rule requiring the 1st res­

pondent to give a contract only by inviting tenders and hence the

1st respondent

was entitled to reject all the tenders and, subject to tlte constitutional norm laid down in Art 14. negotiate directly for

.~ entering into a contract. Paragraph (8) of the notice also made it

clear that the 1st respondent

was not bound to accept any tender

and could reject all the tenders received by it. But here the 1st

respondent

did not reject the tenders outright and enter into direct

negotiations "with the 4th respondents for awarding the contract. The

process of awarding a contract by foviting tenders was not terminated

or abandoned

by the !st respondent by rejecting all the tenders but

in furtherance

of the process, the tender of

t!Je 4th respondents was

accepted by the I st respondent. The contract was not given to the

I _ 4th respondents as a result of direct negotiations. Tenders were

r invited and out of the tenders received, the one submitted by the

~ 4th respondents was accepted and t!Je contract was given to them .

. ,.. Jt is, therefore, not possible to justify the action of the 1st respon-

• dent on the ground that t!Je 1st respondent could have achieved the

same result by rejecting all the tenders and entering into direct

• negotiations with the 4th respondents.

That takes

us to the next question whether

t!Je acceptance of

the tender of the 4th respondents

was invalid and liable to be set

aside at the instance pf the appellant.

It was contended on behalf

of the 1st and the 4th respondents that the appellant had no

locus

to maintain t!Je writ petition since no tender was submitted by him

and he was a mere stranger. The argument was that if the appellant

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1030 SUPREME COURT REPORTS [1979) 3 S.C.R.

did not enter the field of competition by submitting a tender, what

did it matter to him whose tender was accepted; what grievance

could he have if the tender of the 4th respondents

was wrongly

accepted. A person whose tender

was rejected might very well com­

plain that the tender of someone else

was wrongly accepted,

but it

was submitted, how could a person who

never

tendered and who was at no time in the field, put forward such a

complaint ? This argument, in our opinion,

is mis-conceived and

cannot

be sustained for a moment. The grievance of the appellant,

it may be noted, was not that his tender was rejected as a result

of improper acceptance of the tender of the 4th respondents,. but

that he was differentially treated and denied equality of opportuni!f

with the 4th respondents in submitting a tender. His complaint

was that

if it were known that non-fulfilment of the condition of

eligibility would be no bar to consideration of a tender, he also

would have

submitted a tender and competed for obtaining a

contract. But he was precluded from submitting a tender and

entering the

field of consideration by reason of the condition of

eligibility, while so far as the 4th respondents were concerned, their

tender was entertained and accepted even though they did not

satisfy the condition of

eligib1lity and this resulted in inequality of

treatment which was constitutionally impermissible. This was the

grievance made by the appellant in the writ petition and there can

be no doubt that if this grievance were well founded, the appellant

would be entitled to maintain the writ petition.

The" question is

whether this grievance was justified in law and the acceptance of the

tender of the 4th respondents was vitiated by any legal in­

firmity.

Now, there can

be no doubt that what paragraph (1) of

the

notice prescribed was a condition of eligibility which was required to

be satisfied by every person submitting a tender. The condition of

eligibility

was that the person submitting a tender must be conducting or

running a registered 2nd class hotel or restaurant and be must have

at least

5 years' experience as such and if he did not satisfy this

condition of eligibility

his tender would not be eligible for conside­

ration. This

was the standard or norm of

eligibility laid down by

the l st respondent and since the 4th respondents did not satisfy

this standard or norm, it

was not competent to the 1st respondent

to entertain the tender of the 4th respondents.

It is a well settled

rule of admini.strative law that an executive authority must

be rigo­

rously held to the standards by which it professes its actions to

be

judged and it must scrupnlously observe those standards on pain of

invalidation of an act in violation of them. This rule

was enunciat-

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, /.) 10 31

ed ·by Mr. Justice Frankfurter in Vitera/I; v. Seton(') where the

Ieai:ned Judge said :

"An executive agency must be rigorously held to the

standards by which it professes its action to be judged.

Accordingly, if dismissal from employment is based op. a

defined procedure, even though generous beyond· the re­

quirements that bind such agency, that procedure must be

scrupulously observed. This judicially evolved rule of

administrative law is now firmly established and, if I may

add, rightly so.

He that takes the

procedurnt sword shall

perish with the sword."

This Court accepted the rule as valid and applicable in Jndia In

A. S. Ahluwalia v. Punjab(

2

)

and in subsequent decision

given in

Sukhdev v. Bhagatram,(') Mathew, J., quoted the above-referred

observations

of Mr. Justice Frankfurter with approval. It may be noted' that this rule, though supportable also as emanation from

Article 14, does not rest merely

on that article. It has an inde­

pendent existence apart from Article 14.

It is a rule of administra­

tive law which has been judicially evolved as a check against exer­

cise

of arbitrary power

by' the executive authority. If we turn to

the judgment of Mr. Justice Frankfurter

and examine it, we find that

he has not sought to draw support for the rule from the equality

clause

of the

United States Constitution, but evolved it purely as a

· -rule of .administrative law. Even in England, the recent trend in

administrative law is in that direction as is evident from what is·

s~ted at pages 540-41 in Prof. Wade's Administrative Law 4th

edition. There · is no reason why we should ·hesitate to adopi this

rule

as a part of our continually expanding administrative law.

To­

day with tremendous expansion of welfare and social service func­

tions, increasing control of material

and economic resources and

large scale assumption

of industrial and commercial activities by

the State, the power of the executive Government to affect the

lives

of the people i.s steadily. growing. The attainment of socio-economic

justice being a conscious end

of

State poficy, there is a vast and

ineVitable increase in the frequency with which ordinary citizens

come into relationship

of direct encounter with

State power-holders.

This renders

it necessary to structure and restrict the power of the

executive Government so as

to prevent

its arbitrary applicatio.n or

(I) 359 U.S. 535 : · 3 Law. Ed. (Second series) 1012

:(2) (1975] 3. s. c. R. 82.

; · (3)[19751 3. S. C. R. 619.

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1032 SUPREME COURT REPORTS [1979] 3 s.c.R.

exercise. Whatever

be the concept of the rule of law, whether it

be the meaning given by Dicey in his

"The Law of the Constitution"

or the definition given by Hayek in his "Road to Serfdom"

and "Constitution of liberty" or the exposition set-forth by Harry

Jones in

his

"The Rule of Law and the Welfare State", there is, as

pointed out by Mil thew, J., in his article on "The Welfare State,

Rule of Law and Natural Justice" in "Democracy, Equality and Free­

dom," "substantial agreement is in juristic thought that the great pur-

pose of the rule of law notion

is the protection of the individual

against arbitrary exercise of power, wherever it

is

found". ·It is

indeed unthinkable that in a democracy governed by the rule of

law the executive Govermnent or any of its

officen; should possess

arbitrary power over the interests of the individual. Every action

of the executive Government must

be informed with reason and

should be free from arbitrariness. That

is the very essence of the

rule of law and its bare minimal requirement And to the applica-

tion of this principle it makes

no difference whether the exercise of

the power involves affection of some right or denial of

some pri-

vilege.

To-day the Government, is a welfare State, is the regulator and

dispenser of special services and provider of a large number of

benefits, including jobs contracts, licences, quotas, 1nineral rights

etc. The Government pours forth wealth, money, benefits, services,

contracts, quotas and licences. The valuables dispensed by Govern-

ment take many

forn1s, but they all share

one characteristic. They

are steadily taking the place of traditional forms of wealth. These

valuables which derive from relationships to

Goven.ment are of

many kinds. They comprise social

security benefits, cash grants for

politiCal sufferers and the. whole scheme of State and local welfare.

Then again, thousands of people are employed in the State and the1

Central Governments and local authorities. Licences arc required •. ......,l.

before one can engage in many kinds of business or work. The 7 ...

power of giving licences means power to withhold them and this

gives control to the Government or to the agents of Government on

the lives of many people. Many individuals and many more

busi­

nesses enjoy largess in the form of Government contracts. These

contracts often resemble subsidies.

It is virtually impossible to

lose money on them and many enterprises are set up primarily to

do business with Government. Government

owns and controls

hundreds of acres of pubic

land valuable for mining and other

purposes. These resources are available for utilisation

by private

corporations and individuals by way of lease or licence. All

these

mean growth in the Government largess and with the increamng

..

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1033

magnitude and range of governmental functions as we move closer

to a welfare State, more and more of our wealth consists of these

new forms. Some of these forms of wealth may be in the nature

of legal rights but the large majority of them are in the nature of

privileges. But on that account, can it be said that they do not

enjoy any legal protection? Can they be regarded as gratuity fur­

nished by the State so that the State may withhold, grant_ or revoke

it at its pleasure ? Is the position of the Government in this respect

the same as that of

a private giver ? We do not think so. The

law has not been slow to

recognise. the

importance of this new kind

of wealth and the need to protect individual interest in it and with

that end in view, it has developed new forms of protection. Some

interests in Government largess, formerly regarded as privileges, have

been recognised as rights while others have been given legal protec­

tion not only by forging procedural safeguards but also by confin­

ling/structuring ;tnd checking Government discretion in lhe inatter

of grant of such largess. The discretion of the Government has been

held to be not unlimited in that the Government cannot

give or

withhold largess in its arbitrary discretion or at its sweet will. It

is insisted, as pointed out by

Prof. Reich in ari especially. stimulat­

ing article on "The New Property" in 73 Yale Law Journal 733,

"that Government action be based on standards that are not arbi-·

trary or unauthorised." "The Government cannot be permitted to

say that it

will give jobs or enter into contracts or issue quotas or

licences only in favour of those having grey hair

or· belonging

to a particular political party

or professing a particular religious faith. The Government is still the Government when it acts in the

matter of granting largess and

it cannot act arbitrarily. It does not

stand in the same position as a private individual.

We agree with the observations of Mathew, J., in

V. Punnan

Thomas v. State of Kera/a(') that : "The Gowrnment is not and

should not be as free as an individual in selecting the recepients for

jts largess. Whatever its activity, the Government is still the Gov­

ernment and will be subject to restraints, inherent in its position in

a democratic society.

A democratic Government cannot lay down

arbitrary and capricious standards

fur the choice of pe~sons with

whom alone it will deal". The same point was made by this court

in Erusian Equipment dJld Chemicals Ltd. v. State of West Benga/(2)

where the question was whether black-listing of a person without

(1) AIR 1969 Kerala 81.

(2) [1975) 2

S.C.R. 674.

10-409 SCI/79

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1034 SUPREME COURT REPORTS [1979] 3 S.C.R.

A giving him an opportunity to be heard was bad? Ray, C. J., speak­

ing on behalf of himself and his colleagues on the Bench pointed

out that black-listing of a person not only affects

his reputation which

is in Poundian terms an interest both of personality and substance,

but also denies him equality in the matter of entering into contract

with the Government and it cannot, therefore, be supported without

fair hearing.

It was argued for the Government that no person

has

a right to enter into contractual relationship with the Government

and the Government, like any other private individual, has the

absolute right to enter into contract with any one it pleases. But

the Court, spe~king through the learned Chief Justice, responded

that the Government

is not like a private individual who can pick

and choose the person with whom it

will deal, but the Government

is still a Government when it enters into contract or when it is

admin1stering

·largess and it cahnot, without adequate reason, ex­

clude any person from dealing with it or take away largess arbitrarily.

The learned Chief Justice said that when the Government

is trading

with the public,

"the democratic fom1 of Government demands

equality and absence of arbitrariness and discrimination in such

transactions. The artivities of the Government have a public element

and, therefore, there should be fairness and equality. The State nee.d

not enter into any contract with anyone, but if it does so, it must

do so fairly wjthout discrimination and without unfair procedure."

This proposition would hold good in all cases of dealing by the

Government with the public, where the interest songht to be pro­

tected

is a privilege. It must, therefore, be taken to be the law

that where the Government

is dealing with the public, whether by

way of giving jobs or entering into contracts or issuing quotas or

licences or granting other

fotms of largess, the Government cannot

act arbitrarily at its sweet will and, like a private individual, deal

with any person it pleases, but its action must be in conformity with

standard or nornis which is not arbitrary, irrational or irrelevant.

The power or discretion of the Government in the matter of grant

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of largess including award of jobs, contracts, quotas, licences etc.,

must be confined and structured by ration~!, relevant and non-dis­

criminatory standard or norm and if the Government departs from

such standard or norm in any particular case or cases, the action

of the Government would be liable to be struck down, unless it can

be shown

by the Government that the departure was not arbitrary,

but

was based on some valid principle which in itself was not irrational,

unreasonable or discriminatory.

Now, it

is obvious that the Government which represents the

: executive

""lhority of the State, may act through the instrumentality

•

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R. D. SHETTY v. AIRPORT AUTllORITY (Bhagwati, J.) 1035

or agency of natural persons or it may employ the instrumentality or

agency of juridical persons to carry out its functions. In the early days,

when the Government had limited functions, it could operate effec­

tively through natural persons constituting its civil service and they

were found adequate to discharge governmental functions, which were

of traditional vintage. But as the tasks of the Government multi­

plied with the advent of the welfare State, it began to be increas­

ingly felt that the framework of civil service was not sufficient to

handle the new tasks which were often of specialised and highly

technical character. The inadequacy of the civil service

to deal

with these new problems came to be realised and it became neces­

sary .to forqe a new instrumentality or. administr~tive . device for

handling these new problems. It was m these clfcumstances and

with a view to supplying this administrative need that the public

corporation came into being

as the third arm of the Government. As

early as 1819 the Supreme Court of the

United States in Mac Cul/ough

v. MGryfond(') held that the Congress has power to charter corpo­

rations as incidental to or

in aid of governmental functions and, as

pointed out by Mathew, J., in Sukhdev v. Bhagat Ram (supra) such

federal corporations would ex-hypothesi be agencies of the

Govern­

ment. In Great Britain too, the policy of public administration

through separat~ corporations was gradually evolved and the con­

duct of basic industries through giant corporations has now become

a permanent feature of public life. So far as India is concerned, the

genesis of the emergence of corporations as instrumentalities or

agencies of Government

is to be found in the Government of India

Resolution on Industrial Policy dated 6th April, 1948 where it was

stated

inter alia that

"management of State enterprises will as a rule

be through the medium of public corporation under the statutory

control of the Central Government who will assume such powers as

may k necessary to ensure this." It was in pursuance of the polic;

envisaged in this and subsequent resolutions on Industrial Polici ·

that corporations were created by Government for setting up and

management of public enterprises and carrying out other public func­

tions. Ordinarily these functions could have been earrieJ out by

Government departmentally through its service personnel, but the

instrumentality or agency of the corporations was resorted to

in

these cases having regard to the nature of the task to be performed.

The corporations acting as instrumentality or agency of Government

would obviously be subject to the same limitations in the field of

constitutional and administrative law

as Government itself, though

(1) 4 Wheat 315

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SUPREME COURT REPORTS [1979] 3 S.C.R.

A in the eye of the law, they would be distinct and independent legal

entities.

If Government acting through its officers is subject to

certain constitutional and public

law limitations, it must follow a

fortiori that Government acting through the instrumentality or agency

of corporations should equally be subject to the

. same limitations.

/But the question is how to determine whether a corporation is acting

B as instrumentality or agency of Government. It is a question not

entirely free from

difficulty.

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A corporation may be created in one of two ways. It may be

either established by statute or incorporated under a law such

as the

Companies Act 1956 or the Societies Registration Act

1860. Where

a Corporation

is wholly controlled by Government not

.:mly in its

policy making but also in carrying out the functions entrusted to

it by the law establishing it or by the Charter of its incorporation,

there can be no doubt that it would be an instrumentality or agency

of Government. But ordinarily where a corporation is established by

statute, it is autonomous in its working, subject only to a provision,

often

times made, that it shall be bound by any directions that may

be issued

from time to time by Government in respect of policy

matters.

So also a corporation incorporated under law is managed

by a board of directors or committee

of management in accordance

with the provisions of the statute under

whicn it is incorporated.

When does such a corporation become an instrumentality or agency

of Government ? Is the holding

of the entire share capital of the

Corporation by Government enough or is it necessary that in addition,

there should be a certain amount of direct control exercised by

Gov­

ernment and, if so, what should be the nature of such control ? Should

the functions which the corporation

is charged to carry out poi;sess any particular characteristic or feature, or is the nature of the

functi6ns immaterial? Now, one thing is clear that 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

instru1nentali~y or

agency

of Government. But,

~s is quite often the case, a corporation

established by statute may have no shares or shareholders, in which

case it would be a relevant factor to consider whether the administra­

tion

is in the hands of a board of directors appointed by

G;ivernmcnt,

though this consideration also may 11ot be determinative, because even

where

the directors are appointed by Government, they may be

com­

pletely free from governmental control in the discharge of their func­

tions. What then arc the tests to determine whether a corporation

established by statute or incorporated under law

is an instrumentality or agency of Government ? lt is not possible to formulate an all-

•

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) I 037

inclusive or exhaustive test which would adequately answ~r this ques­

tion. There

is no cut and dried formula,

wjiich would provide the

correct division of corporations into those which are instrumentalities

or agencies of Government and those which are not.

The analogy of the concept of State action as developed in the

United States may not, however, be altogether out of place while

considering this question. The decisions of the court in the United

States seem to suggest that a private agency, if suported by extra­

ordinary assistance

given by the

State, may be subject to the same

constitutional limitations

as the

State. Of course, it may be pointed

out that "the State's general common law and statutory structure under

which its people carry

on their private affairs, own property and contrac_t, each enjoying equality in terms of legal capacity, is not such

State assistance as would transform private conduct into State action".

But if extensive and unusual financial assistance is given and the

purpose of the Government in giving such assistance coincides with

the purpose for which -the corporation is expected to use the assistance

and such purpose

is of public character, it may be a relevant circum­

stance supporting an inference that the corporation is an instrumentality

or agency of Government. The leading case on the subject

in the

United States is Kerr v. Eneck Pratt Free Library('). The Library

system

in question in this case was established by

private donation

in 1882, but by 1944, 99 per cent of the system's budget was SUJl'·

plied by the city, title to the library property was held by the city,

employees were paid by the city payroll officer and a high degree

of budget control

was exercised or available to the city government. On th".>e facts the Court of Appeal required the trustees managing the

system

to abandon a discriminatory admission policy for its

library

training courses. It will be seen that in this case there was

considerable amount of State control of the library system in addition

to extensive financial assistanoe and it is difficult to say whether, in

the absence of such control it would have been possible to say that

the action of the trustees constituted State action. Thomas P. Lewis

has expressed the opinion in

his article on

"The meaning of State

Action" (60 Columbia Law Review 1083) that in this case "it is

extremely unlikely that absence of public control would have changed

the result

as long as 99% of the budget of a nominally private insti­

tution.

was provided by government. Such extensive governmental

support should be sufficient identification with the Government to

subject the institution to the provisions of the Fourteenth

Amendment".

(l) 149 F. 2d. 212.

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It may, therefore, be possible to say that where the financial assistance

of the State

is so much as to meet almost entire expenditure of the

corporation,

it would afford some indication of the corporation being

impregnated with governmental character. But where

fmnncit>l assis­

tance is not so extensive, it may not by itself, without anything more,

render the corporation an instrumentality or agency of government,

for there are many privaN! institutions which are in receipt of financial

assistance from the State and merely on that account, they cannot

be classified as State agencies. Equally a mere finding of some control

by the Stnte would not be determinative of the question "since a State

has considerable measure of control under its police power over all

types of business operations". But 'a finding of State financial support

plus an unusual degree of control over the management and policies

might lead one to characterise an operation as State action" vide Sukh­

dev v. Bhagatram (

1

). So also the existence of deep and pervasive State

control may afford an indication that the Corporation

is a State agency

or instrumentality.

It may also be a relevant factor to consider whether

the corporation enjoys monopoly status which

is

State conferred or

State protected. There can be little doubt that State conferred or State

protected monopoly status would be highly relevant in assessing the

aggregate weight of the corporation's ties to the State. Vide the

observations of Douglas,

J., in Jackson v. Metropolitan Edison Co. (

2

)

There is also another factor which may be

r<:garded as having a

bearing

on this issue and it is whether the operation of the corporation

is an important public function.

It has been held in the United States

in a number of cases that the

concept of private action must yield to

a conception of State action where public functions are being per­

formed. Vide Arthur S. Miller : "The ConstitutiolUll Law of the

Security State" ( 10 Stanford Law Review 620 at 664). It was

pointed out by Douglas,

J., in Evans v. Newton(

3

) that

"when private

individuals or groups are endowed by the State with powers or func­

tions governmental in nature, they become agencies or instrumentalities

of the State". Of course, with the growth of the welfare State, it is

very difficult to define what functions are governmental and what are

not, because,

as pointed out by Villmer, L.J., in

Pfizer v. Ministry of

Health,(') there has been, since mid-Victorian times,' "a revolution

in political thought and a totally different conception prevails today

as to what

is and what is not within the functions of

Gvernment".

(I) 11975] 3 S. C.R. 619 at 658.

(2) 419 U.S. 345 : 42 L. ed. 2nd 477.

(3) 382 U.S. 296: 15 L. ed 2nd 373.

(4) [1964] 1 Ch. 614.

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) I 039

Douglas, J., also observed to the same effect in New York v. United

StatesC) : " A State's project is as much a legitimate governmental

activity whether it

is traditional or akin to private enterprise, or con­

ducted for

profit." Cf. Helvering v. Gerhardt('). A State may deem it

as essential to its economy that it own and operate a railroad, a mfll,

or an irrigation system as it does to own and operate bridges, street

lights, or a ·sewage disposal plant. What might have been viewed in

an earlier day

as an improvident or even dangerous extension of state

activities may today

be deemed indispensible. It may be noted that

besides the so called traditional functions, the modern

State operates

a multitude of public enterprises and discharges a host of other public

functions.

If the functions of the corporation

are of public importance

and closely related to governmental functions, it would be a relevant

factor in classifying the corporation

as an instrumentality or agency

of Government. This

is

pr~cisely what was pointed out by Mathew,

J., in Sukhdev v. Bhagat~wi (supra) where the learned Judge said that

"institutions engaged in matters of high public interest or performing

public functions are by virtue of the nature of the functions performed

government agencies. Activities which are too fundamental to the

society are by definition too important not to

be considered govern­

ment

functions."

This was one of the principal tests applied by the United States

Supreme Court in

Marsh v. Alabama(') for holding that a corporation

which owned a Company town was subject to the same con_stitutional

limitations as the State. This case involved the prosecution of Marsh,

a member of the Johevah's witnesses sect, under a state trespass statute for refusing to leave the side walk of the company town where

she. was distributing her religious pamphlets. She was fined $ 5/­

and aggrieved by her conviction she carried the matter right upto

the Supreme Court contending successfully that by reason of the action

of the corporation her religious liberty had been denied.

The Supreme

Court

held that administration of private property such as a town,

though privately carried on, was, nevertheless, in the nature of a public

function and that the private rights of the corporation must therefore

be

cxerci5"d within constitutional limitations and the con~iction fo;

trespass was reversed. The dominant theme of the majority opinion

written by Mr. Justice Black was that the property of the corporation

used

as a town not recognisably different from other towns

lost its

~~:_ati~~-a_s_ purely private property. It was said that a ;own may

(!) 326 u .s. 572.

(2) 304 u. s. 405, 426, 427.

(3) 326 U.S. 501 : 19 L. ed. 265.

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I 040 SUPREME COURT REPORTS (1979] 3 S.C.R.

be privately owned and managed but that does not necessarily allow

the corporation to treat it as if it was wholly in the private sector and

the exercise of constitutionally protected rights on the pablic itreet of

a company town could not be denied by the owner. "The more an

owner, for

his advantage, opens up his property for use by the public

in general, the more do his rights become circumscribed by the

statu­

tory and constitutional rights of those who use it ... Thus, the owners

of privately held bridges, ferries, turnpikes and railroads may not operate

them

as freely as a farmer does bis farm.

Since these facilities are

built and operated primarily to benefit the public and since their

operation

is essentially a public function, it is subject to state

regula­

tion". Mr. Justice Frankfurter, concurring, reduced the case to

simpler terms. He found )n the realm of civil liberties the need to

treat a town, private or not, as a town. The function exercised by the

corporation

was in the nature of municipal function and it was,

there­

fore, subject to the constitutional limitations placed upon State

action.

We find that the same test of public or governmental character

of !he function

was applied by the Supreme Court of the United States in Evans v. Newton (supra) and Smith v. Allwight.(

1

') But

the deci,ions show that even this test of public or governmental charac­

ter of the function is not easy of application and does not invariably

lead to the correct inference because the range of governmental

activity

is broad and varied and merely because an activity may be

such as may legitimately be carried on by Government, it does not

mean that a corporation, which

is otherwise a private entity, would

be an instrumentality or agency of Government

by reason of carrying

on such activity.

In fact, it is difficult to

distingui§h betwe~n govern­

mental functions and non-governmental functions. Perhaps the

distinction between governmental

and non-governmental functions is

not valid any more in a social welfare

State where the laissez faire

is an outmoded concept and Herlx:rt Spencer's social statics bas no

place. The contrast is rather between governmental activities which

are private and private .activities which are governmental. (Mathew,

J.

Sukhdev v. Bhagatram (supra) at p. 652). But the public nature

of

the function, if impregnated with governmental character or "tied

or entwined with Government" or fortified by some other additional

factor, may render the corporation an instrumentality or agency of

Government. Specifically, if a department of Government

is

transfer­

red to a corporation, it would be a strong factor supportive of this

inference.

(I) 321 U. S. 649.

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1041

It will thus be seen that there are several factors which may have

to

be considered in

deN~rmining whether a corporation is an agency

or instrumentality of Government.

We have referred to some of these

factors and they may be summarised as under : whether there

is any

financial assistance

given by the

State, and if so, what is the magni­

tude of such assistance whether there

is any other form of assistance,

given by the

Stare, and if so, whether it is of the usual kind or it is

extraordinary, whether there

is any control of the management and

policies of the corporation by the

State and what is the nature and

extent of such control, whether the corporation enjoys State conferred or

State protected monopoly status and whether the functions carried out

by the corporation are public functions closely related to governmental

functions. This particularisation of relevant factors is however not

exhaustive and by its very nature it cannot be, because with increasing

assumption of new tasks, growing complexities of management and

administration and the necessity

of continuing adjustment in relations

between the corporation and Government calling for flexibility, adapt

ability and innovative skills, it

is not possible to make an exhaustive

enumeration of

the tests which would invariably and in all cases pro­

vide an unfailing answer to the question whether a corporation

is

governmental instrumentality or .agency. Moreover even amongst these factors which we hav'e described, no one single factor will yield

a satisfactory answer to the question and the court will have to con­

sider the cumulative effect of these various factors and arrive at its

decision on the basis of a particularised inquiry into the facts and cir­

cumstances of each case. "The dispositive question in any state

action case," as pointed out by Douglas, J., in Jackson v. Metropolitan

Edison Company (supra) "is not whether any single fact or relation­

ship presents a sufficient degree

of state involvement, but rather

whether the aggregate of all relevant factors compels a finding of state responsibility." It is not enough to examine seriatim each of the

factors upon which a corporation

is claimed to be an

instrumentolity

or agency of Government and to dismiss each individually as being

insufficient to support a finding of that effect.

It is the aggregate or

cumulative affect of all the relevant factors that

is controlling.

Now, obviously where a corporation

is an instrumentality or

ag~ncy

of Government, it would, in the exercise of its power or discretion,

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be subject to the saine constitutional or public law limitations as

Govermnent. The rule inhibiting arbitrary action by Government

which

we have discussed above mnst apply equally where such cor-H

poration

is dealing with the public, whether by way of giving jobs

or entering into contracts or otherwise, and it cannot act arbitrarily

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1042 SUPREME COURT REPORTS [1979] 3 S.C.R.

and enter into relationship with any person it likes at its sweetwill,

but its action must be in conformity with some principle which meets

the test of reason and relevance.

This rule also flows directly from the doctrine of equality embodied

in Art. 14.

It is now well settled as a result of the decisions of this

Court in

E. P. Rayappa v. State of Tamil Nadu(') and Mancka Gandhi

v. Union of India(') that Article 14 strikes at arbitrariness in State

action and ensures fairness and equality of treatment. It requires

that State action must not be arbitrary but must be based on some

rational and relevant principle which

is non-discriminatory : il must not

be guided by any extraneous or irrelevant considerations, because

that would be denial of equality. The principle of reasonableness and

rationality which

is legally as well as philosophically an essential

element of equality

or non-arbitrariness is protected by Article 14

and it must characterise every

State action, whether it be under autho­

rity of

Jaw or in exercise of executive power without making of law.

The

State cannot, therefore act arbitrarily in entering into relationship,

contractual or otherwise with a third party, but

its action must conform

to

some standard or norm which is rational and non-discriminatory.

This principle was recognised and applied by a Bench of this Court

presided over by Ray, C.J., in Erusian Equipment and ChemicaLY v.

State of West Bengal (supra) where the learned Chief Justice painted

out that "the State can carry on executive function by making a law

or without making a law. The exercise of such powers and functions

in trade by the State is subject to Part III of the Constitution. Article

14 speaks of equality before the law and equal protection of the laws.

Equality of oppartunity should apply to matters of public contracts.

The State has the right to trade. The State has there the duty to

observe equality. An ordinary individual can choose not to deal with

any person. The Government cannot choose to exclude persons by

discrimination. The order of black-listing has the effect of depriving

a person of equality of opportunity in the matter of public contract.

A person who

is on the approved list is unable to enter into advan­

tageous relations with the Governm_!'nt because of the order of black­

listing. . . . A citizen has a right to claim equal treatment to enter into

a contract which may be proper, necessary and essential to his lawful

calling

.... It is true that neither the petitioner nor the respondent has

any right to enter into a contract but they are entitled to equal treat­

ment with others who offer tender or quotations for the purchase of

the

(I) [1974] 2 S. C. R. 348.

(2) 1978j 2 S. C.R. 621.

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) I 043

goods." It must, therefore follow as a necessary corollary from the

principle of cqualfry enshrined in Article 14 that though the State is

entitled to refuse to enter into relationship with any one, yet if it does

so, it cannot arbitrarily choose any person it likes for entering into

such relationship and discriminate between persons

sil)1ilarly

c;rcum­

stanced, but it must act in conformity with some standard or principle

which meets the test

of reasonableness and non-discrimination and

any departure

from such standard or principle would be invalid unless

it can

be supported or justified on

some rational and non-discrimina•

tory ground.

It is interesting to find that this rule was recognised and applied

by a Constitut;on Bench of this Court in a case of sale of kendu leaves

by the Government of Orissa in Rashbihari Panda v. State of Orissa.(')

The trade of kendu leaves in the State of Orissa was regulated by the

Orissa Kendu Leaves (Control of Trade) Act, 1961 and this Act

created a monopoly in favour of the State so far as purchase of kendu

leaves from growers and pluckers

was concerned.

Section 10 of the

Act authorised the Government to sell or otherwise dispose

of kendu

leaves purchased in such manner

as the Government might direct. The

Government

first evolved

a scheme under which it offered to renew

the licences of those traders who in its view had worked satisfactorily

in the previous year and had regularly paid the amount due from

them. The scheme

was cha!Jenged and realising that it might be

struck down, the

Government withdrew the scheme and instead, decid­

ed .to invite tenders for advance purchase of kendu leaves but restricted

the invitation to those individuals who had carried out contracts in

the previous year without default and to the satisfaction of the Govern­

ment. This method of sale of kendu leaves

was also challenged by

filing a writ petition on the ground

inter alia that it was violative of

Articles

14 and 19 (1) (g) and this challenge, though negatived by the

High Court,

was upheld by this Court in appeal. The Court pointed

out that the original scheme of offering to enter into contracts with

the old licences and to renew their terms was open to grave objection,

since it sought arbitrarily to exclude many persons interested

in the

trade and the new scheme under which the Government restricted the

invitation to make offers to those traders who had carried out their

<:ontracts in the previous year without default and to the satisfaction

of the Government

was also objectionable, since the right to make

tenders for the purchase of kendu leaves being restricted to a limited

(1) [1969] 3

S.C.R. 374.

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1044 SUPREME COURT REPORTS (1979] 3 S.C.R.

class of persons, it effectively shut out all other persons carrying on

trade in kendu leaves and also the new entrants into that business and

hence it

was ex-facie discriminatory and imposed unreasonable res­

trictions' upon the right of persons other than

t~Je existing contractors

to carry on business. Both the schemes evolved by the Government

were thus held to be violative of Articles

14 and 19(1) (g) because

they

"gave rise to a monopoly in the trade in kendu leaves to certain

traders and singled out other trader. for d;scriminatory treatment".

The argument that existing contractors who had carried out their obli­

gations in the previous year regularly and to the satisfaction of the

Government formed a valid basis of classification bearing a just and

reasonable relation to the object sought to

be achieved by the sale,

namely, effective execution of the monopoly in the public interest,

was

also negatived and it was

po·inted out that : "exclusion of all persons

interes'ted in the trade, who were not in the previous year licencees, is

ex facie arbitrary; it had not direct relation to the object of preventing

exploitation of pluckers and growers of kendu leaves, nor had it any

just or reasonable relation to the securing of the full benefit from the

trade,

to the

State".

The Court referred to the offer made by a well known manu­

facturer of

bidis for purchase

o..f the entire crop of kendu leaws for

a

sum of Rs. 3 crores which was turned down by the Government and

expressed

its surprise that no explanation was attempted to be given

on behalf of the

State as to why such an offer, from which the State

stood to gain more than Rs. 1 crore, was rejected by the Government.

It will be seen from this judgment that restricting the invitation to sub­

mit tenders to a limited class of persons

was held to be violative of

the equality clause, because the classification did not bear any just

and reasonable relation to the object sought to be achieved, namely,

selling of kendu leaves

in the interest of general public. The standard

or norm laid down by the Government for entering into contracts of

sale of kendu leaves with third parties

was discriminatory and could

n~t stand the scrutiny of Article 14 and hence the scheme was held

to be inval:d. The Court rejected the contention of the Government

that ·by reason of section 10 it was entitled to dispose of kendu leaves

in such manner

as it thought fit and there was no limitation upon its

power to enter into contracts for sale of kendu leaves

with such

persons it liked. The Court held that the Government

was, in the

exercise of its power to enter into contracts for sale of kendu leaves,

subject to the constitutional limitation of Article

14 and it could not

act arbitrarily

in selecting persons with whom to enter into contracts

and discriminate against others similarly situate. The Court

criticisea

'"i

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R. D. SllETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1045

the Government for not giving any explanation as to why an offer for

a Jarcre amount was not accepted, the clearest implication being that

the Government must act in the public interest; it cannot act arbitrarily

and without reason and

if it does so, its action would

be liable to be

invalidated. This decision wholly supports the view

we

are taking in

regard to the applicability of the rule against arbitrariness in State;

action.

A

B

We may also in this connection refer to the decision of this Court

in C. K. Achuthan v. State of Kera/a('), where Hidayatullah, J., speak­

ing on behalf of the Court made certain observation which

was strongly

relied upon on

l;chalf of the respondents. The facts of this case were

that the petitioner and

the 3rd respondent Co-operative Milk

Supply

·Union,

Ca~nancre,

submitted tenders for the supply oE milk to the

Government hospital at Cannanore for the year 1948-49. The

Superintendent who scrutinised the tenders accepted that of the peti­

tioner and communicated the reasons for the decision to the Director

of Public Health. The resulting contract in favour of the petitioner

was, however, subsequently cancelled by issuing a notice in terms of

clause (2) of the tender, in pursuance of the policy of the Government

that in the mat\er of supply to Government Medical Institutions the

Co-vpcrativc Miik Supply Union should be given contract on the basis

of prices fixed by the Revenue Department. The petitioner challenged

the decision

of the Government in a petition llilder Article 32 of the

Constitution on the ground

inter alia that there had been discrimination

against him

vis-a-vis the 3rd respondent and as such, there was contra­

vention of Article 14 of the Constitution. The Constitution Bench re­

jected this contention of the petitioner and while doing so, Hidayatullah,

J., made the following observation :

"There is no discrimination, because

it

is perfectly open to the Government, even as it is to a private party,

to choose a person to their liking, to

fulfil contracts which they wish

to

be performed. When one person is choosen rather than another,

the aggrieved party cannot claim the protection of Article 14, because

the choice of the person to

fulfil a particular contract must be left to tfJe Government." The respondents relied very strongly on this obser­

vation in support of their contention that it

is open to the

'State' to

ente.r into contract with any one it likes aµd choosing one person in

preference to another for entering into a contract does not involve

violation of Article 14. Though the language in which this observation

is couched is rather wide, we do not think that in making this observa­

tion, the Court intended to

Jay down any absolute proposition permitting

the state

to act arbitrarily in the matter of entering into contract with

(I) [1959] Supp.

I S C. R. 787.

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1046 SUPREME COURT REPORTS [1979] 3 S.C.R.

third parties. We have no doubt that the Court could not have intended

to lay down such a proposition because Hidayatullah J. who delivered

the judgment of the Court in this case

was also a party to the judgment in Rashbihari Panda v. State of Orissa (supra) which was also a deci­

sion of the Constitution Bench, where it was held in so many terms

that the Stale cannot act arbitrarily in selecting persons with whom to

enter into contracts. Obviously what the Court meant to

say was that

merely because one person

is chosen in preference to another, it does

not follow that there

is a violation of Article 14, because the Govern­

ment must necessarily be entitled to make a choice. But that

does not

mean that the choice be arbitrary or fanciful. The choice must be'

dictated by public interest and must not be unreasoned or unprincipled.

The respondents also relied on the decision of this Court in

Triloc/1111 Mishra v. State of Orissa & Ors.(') The complaint of

the petitioner in that case

was that the bids of persons making the

highest tenders were not accepted and persons

who had made

lesser

bids were asked to raise their bids to the highest offered and their re­

vised bids were accepted. The Constitution ,Bench negatived this

complaint and speaking through Mitter,

J., observed :

'·With regard to the grievance that in some cases the

bids of persons making the highest tenders were not accept­

ed, the facts are that persons

who had made lower bids were

asked to raise their bids to the highest offered before the

same were accepted. . Thus there

was no loss lo Govern­

ment and merely because the Government preferred one

tender

tO another no complaint can be entertained. Govern­

ment certainly has a right to enter into a contract with a

person well known to it and specially one who has faithfully

performed his contracts in the past in preference to an un­

desirable or unsuitable or untried person. Moreover, Gov­

ernment is not bound to accept the highest tender but may

accept a

l.ower one in case it thinks

th~t the person offering

the lower tender

is on an overall

consideratioll to be prefer­

red to the higher 1enderer."

We fai: tc see how this ob~ervation can help the contention of the

respondents.

It does not say that the Government can enter into

contract with any one it likes arbitrarily and without reason.

On the

contrary, it po~tulates that the Government may reject a higher tender

and accept a lower one only when there

is valid reason to do so, as

for example, where it is satisfied that the person offering the !ewer

I) [19711 3 S. C. C. 153.

•

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) I 04 7

tcilder is on an overall consideration preferable to the higher tenderer.

There must be some

relevant reason for preferring one tenderer to

another, and if there

is, the Government

ca1_1 certainly enter into con­

tract with the

form_er

ev~n though his tender may be lower but it

cannot do so arbitrarily or for extraneous reason.

There

was also one other decision of this Court in State of Orissa

v.

Hari11Auayan Jaiswal & Ors.(') which was strongly relied upon on

behalf of the respondents. There the respondents were the highest

bidders at an auction held by the Ori~a Government through the

Exdse Commissioner for the exclusive privilege of selling by retail

country liquor in some shops. The auction

was held pursuant

to an

order dated 6th January, 1971 issued by the Government of Orissa

in exercise of the power conferred under section

29(2) of the Bihar

&

Oris>a Excise Act, 1915 and clause (6) of this Order provided that

"no sale shall be deemed to be final unless confirmed by the State

Government who shall be at liberty to accept or reject any bid with­

out assigning any reason therefor". The Government of Orissa did

not accept any of the bids made at the auction and subsequently sold

the privilege by negotiations with some other parties. O;ie of the

cont.entions raised on behalf of the petitioners in that case was that

the power retained by the Government "to accept or reject any bid

without any reason therefor" was an arbitrary power violative of

Articles 14 and 19(1) (g). This contention was negatived andHegde,

J. speaking on behalf of the Court observed :

"The Government is the guardian of the finances of the

State. It is expected to protect the financial interest of the

State. Hence quite naturally, the legislature has empower­

ed the Government to see that there is no leakage in its

revenue.

It is for the Government to decide whether the

price offered

in

an auction sale is adequate. While accept­

ing or rejecting a bid, it

is merely performing an executive

function. The correctness of its conclusion is not open to judicial review. We fail to see how the plea of contraven­

tion of Article

19(1)(g) or Article 14 can arise in these

cases. The

Governmel]!'s power to sell the exclusive privi·

lcge set out in section 22 was not denied. It was also

not disputed that these privileges could be sold by public

auction. Public auctions are held to get the best possible

price. Once these aspects are recognised, there appears to

be

no basis for contending that the owner of the privileges

(1) [1972] 2 s.c.c. 36.

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1048 SUPREME COURT REPORTS [1979] 3 s.c.R.

in question who had offered to sell them cannot decline to

accept the highest bid if he thinks that the price offered is

inadequate."

It will be seen from these observations that the validity of clause (6)

of the order dated 6th January, 1971

was upheld by this Court on

the ground that having regard to the object of holding the auction,

namely, to raise revenue, the Government was entitled to reject even

the highest bid, if it thought that the price offered

was inadequate.

The Government

was not bound to accept

the tender of the person

who offered the highest amount and

if the Government rejected all

the bids made at the auction, it did not involve any violation of

Article .14 or 19(1) (g). This is a self-evident proposition and we

do not see how it can be of any assistance to the respondents.

The last decision to

which reference was made on behalf

of the

respondents

was the decision in

P. R. Quenin v. M. K. Tendel(1)

This decision merely reiterates the principle laid down in the earlier

decisions

in Trilochan Mishra v.

State of Orissa (supra) and Stale

of Orissa v. Harinarayan Jaiswal (supra) and points out that a con­

dition that the Government shall be at liberty to accept or reject any

bid without assigning any reason therefor

is not violative of Article

14 and that

"in matters relating to contracts with the Government,

the latter

is not bound to accept the tender of the person who offers

the highest

amount". Now where does it say that such a condition

permits the Government to act arbitrarily in accepting a tender or

that under the guise or pretext of such a condition, the Government

may enter into a contract with any person it likes, arbitrarily and

without reason.

In fact the Court pointed out

~t the end of the

jndgment that the act of the Government

was not

"shown to be viti­

ated by such arbitrariness as should call for interference by the

Court'', recognising clearly that if the rejection of the tender

of the

1st respondent were arbitrary, the

Collft would have been justified

in striking it down as invaJid.

Now this rule, flowing as it does from Article 14, applies to every

State action and since "State" is defined in Article 12 to include not

only the Government

of India and the Government of each of the

States, but also

"all local or other authorities within the territory

of Iridia

or under the control of the Government of

India", it must

apply

to action of

"other authorities" and they must be held subject

to the same qonstitutional limitation

as the Government. But the

question arises what are the

"tjther authorities" contemplated by

Article 12

which fall within the definition of 'State'?

On this ques-

(1) [19741 3 S. C.R. 64.

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I!. D. SHETTY v. AIRPORT AUTHORITY (!Jha.gwati, J.) I 04 9

tion considerable light is thrown by the decision of this Court in

Rajasthail Electricity Board v. Mohan Lal('). That was a case in

which this Court was called upon to consider whether the Rajasthan

Electricity Board was an 'authority' within the meaning of the ex­

e!ession "other authorities" in Art. 12. Bhargava, J., delivering

the judgment of the majority pointed out that the expression "other

authorities" in Art. 12 would include all constitutional and slatuto1y

authorities on whom powers are conferred by law. The learned

Judge

a.lso said that if any body of persons has authority to issue

directions the disobedience

of. which would be punishable as a cri­

minal offence, that would be an indication that that authority is

'State'. Shah, J., who delivered a separate judgment, agreeing with

the conclusion reached by the majori~y, preferred to gjve a slightly

different meaning to the expression "other authorities". He said thJlt

authorities, con§!itutional or statutory, would fall within the expres­

•ion "other authorities" only if they are invested with the sovereign

power of the State, namely, the power to mak~ rules and regulations

which have ~he force of law. The ra!io of this decision may thus be

stated to be that a constitution~! or slatutmy authority would be

within the meaning of the expression "other authorities", if it has been

invested with statutory power to issue binding directions

to third par­ties, the disobedience of which would enlai! penal consequence or it

has the sovereign power to make rules and regulations having the force

of law. This test was followed by Ray, C.J., in Sukhdev v. Bhagat

Ram (supra). Mathew, J., however, in the same case, propounded

a broader test, namely, whether the statutory corporation or other

body or authority, claimed to fall within the definition of 'State',

is an

instrumentality or agency of Government

: if it is, it would fall within

the meaning of the expression 'other authorities' and would be 'State'.

Whilst accepting the test laid down in Rajasthan Electricity Board

v. Mohan Lal (supra), and followed by Ray, C. J., in Sukhdev v. Bhagat

Ram (supra), we would, for reasons already discnssed, prefer to

adopt the test of Governmental instrumentality or agency as one more

test and perhaps a more satisfactory one for determining whether a

11tatutory corporation, body or other authority falls within the defini­

tion of 'State'.

If a statutory corporation, body or other authority is an instrumentality or agency of Government, it would be an 'authority'

.and therefore 'State' within the meaning of that expression in

Article 12.

It

is necessary at this stage to refer. to a few decisions of this

Court which seem

to bear on this point and which require a little

(1) [1967) 3

S. C R 377

11-904 SCl/79.

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1050 SUPREME COURT REPORTS [1979] 3 s.C.R.

explanation. The first is the decision in Praga Tools Corporation v. ·

C. A. lmanuel.(') This was a case in which some of the workmen

· songht a writ of mandamus against Praga Tools Corporation which

was a company with 56 per cent of its share capital held by the Cen­

tral Government, 32 per cent by the Andhra Pradesh Government and

12 per cent by private individuals. The Court held that a writ of mj:ln­

drimus did not lie, because Praga Tools Corporation "being a non­

statutory body and one incorporate_d 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 be sought by means of man­

damus, nor was there in its workmen any corresponding legal right

for enforcement

of any such statutory or public

duty." (emphasis

supplied).

It is difficult to see how this decision can be of any

help

in deciding the present issue before us. This was not a case where

Praga Tools Corporation claimed to be an instrumentality of govern­

ment or an 'authority' within the meaning of Article 12. The

only

question was whether a writ of mandamus could

lie and it was held

!hat since there

was no duty imposed on Praga Tool

Corporation by

statute, no writ of mandamus could issue against it.

The second decision to

which we must refer is that in Heavy

Engineering Mazdoor

Union v. State of Bihar(

2

). The question

which arose in this case was whether a reference of an in­

dustrial dispute between the Heavy Engineering Corporation Limited

(hereinafter referred to

as the 'Corporation') and the Union made by

the

State of Bihar under section 10 of the Industrial Disputes Act,

1947 was valid. The argument of the Union was that the industry in

question

was

"carried on under the authority of the Central Govern­

ment" and the reference could, therefore, be i:nade only by the Central

Governmen!. The Court held that the words "under the authority"

mean "i:ursuant to the authority, such as where an agent or a servant

acts under or pursuant to the authority of his principal or master" and

on this

view, the

Court addressed itself to the qu(!stioo. whether !he

Corporatiori could be said to be carrying on business pursuant to the

authority

of the

Central Government. Th~ answer to this ·question

was obviously 'no' because the Corporation was carrying on business

. in virtue of the authority derived from its memorandnm and articles

of

association and not by reason of any authority granted by the

Central

Government. The Corporatiori, in carrying on business, .was acting

on its own behalf and not on behalf of the Central Government and

it

was therefore not a servant or agent of the

Central Government in

B · the sense that its actions would bind the Central Government. There

(!) [1969] 3 S. C. R. 773.

(2) [1%9] 3 S. C.R. 995.

>

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R, Q.1SHETTY v. ;\IRPORT AUTHORITY (Bhagwati, J.) .1051

as· no question in: this case whether the Corporation was an instrn-.A

mentality of the Central Government and therefore an 'authority'

withlh the meaning of Article 12. We may point out here that when

we speak of a Corporation being an instrwnentality or agency of

Govetriment, we do not mean to suggest that the Corporation should

be an agent

of the Government

ii! the sense that whatever it does B

should be binding on the Government. It is not the relationship of /

principal and agent which is relevant and material but whether the

Corporation

is an instrumentality of the

Govern~ent in the sense that

a part

of the governing power of the State

i$ located in the Corpora-

tion and though the Corporation

is acting on its own behalf and not

on behalf

of the

Govel}!_ment, its action is really in the nature of c

State action. Tills decision dealing with an alto~ther different point

has no bearing

on the present issue.

We may then refer to the decision in S. L. Aggarwal v. General

Manager, Hindustan Steel Limited.

(1

1

) This decision has also no

relevance to the point at issue before us, since the on)y question in that

case

was whether an Assistant

Surgeo1;1 in the employment of Hindus­

tan Steel Lintited could be said to be holding a. civil post under the

Union or a State so as to be entitled to the protection of Article 311 (2)

of the Constitution. The Court held that H.industan Steel Limited was

not a department

of the Government nor were its employees holding

posts under the State within the meaning

Qf Article 311 (2). The

decision

was clearly right and indeed it could not be otherwise, since

Hindustan Steel

Lipiited, which was a distinct and independent legal

entity,

was not a

departmeµt of the Government and could not be

regarded

as State for the purpose of Article 311 (2). It may be noted

that the Court

was not concerned with the question whether Hindustan

Slee! Limited was an 'authority' within the meaning of Article 12.

Lastly,

we must refer to the decision in Sarbhajit Tewari v.

Union

of lnd41 & Ors.(2) where the question was whether the Conncil of

Scientific and Indu~trial Research was an 'authority' within the mean­

i~g of Article 12. The Court no doubt took the view ori the basis of

facts relevant to the constitution and functioning of the Council that

it

was not an 'authority', but we do not find any discussion in this

case

as to what are the features which must be present before a cor­

poration can be

reg~rded as an 'authority' within the meaning of

Article 12. This decision 'does not Jay down any principle or test for

·the, purpose of determining when a corporation can be said to be an

'authority'. If at all any t.est can be gleaned from the decision, it is

(!) !19i0] 3 S. C R. 363.

:~) (1975] I S. C. C. 485.

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I 1152 SUPREME COURT REPORTS [·1979] 1 s.c.tt.

A whether the Corporation is "reaJly ~ agency of the Governmeat".

B

c

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E

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B

The Court seemed to hold on the facts that the Council was net an

agency of the Government and was, therefore, not an 'authority'.

W c may examine, in the light of this discussion, whether the 1st res­

pondent,

name!ly, the International Airport Authority of India, can be

said lo be an authority falling within the definition of

'State' in Arti­

cle 12. It is necessary to refer to some of the provisions of the Interna­

tional Airport Authority Act,

1971 (hereinafter referred to as

the Act)

for the purpose of determining this question. Sub-section ( 1) of sec­

tion 3 of the Act provides that the Central Government shall constitute

an authority to be called the International Airport Authority of India,

to whom we shall hereafter refer

as the 1st respondent. Sub-section (2)

states that the 1st respondent shall be a body corporate having

perpetual succession and a common seal and

sulr'section (3) enacts

that the Ist respondent shall consist of a Chairman to be appointed

by

the Central Government,

the Director General of Civil Aviation ex­

oflicio and not

less than six and not more than thirteen members to be

appointed by the Central Government. The term

of office

of every

member of the 1st respondent is prescribed by sub-section ( 1) of sec­

tion 5

to be 3

years, but the Central Government is given under the

Proviso power to terminate the appointment of any member who is not

a servant of the Govemn1cnt after giving him notice as also to terminate

at any time the appointment of any member who is a servant of ·the

Government. The power to remove a member in certain specified cir-.

cumstances

is also vested

b the Central Government under section 6.

Sectio~ J 2, sub-section (1) provides that as from the date appointed by

the Central Government all properties and other assets vested in the

Central Government for the purposes of the airport and administered

by the Director General of

Civil Aviation immediately before such date

shall vest in the 1st respondent and

all debts, obligations and liabilities

incurred, all contracts entered into and

all matters and things engaged

to

be done by, with or for the Central Government immediately before

such date shall

be deemed to have been incurred, entered into and

engaged to be done

by, with or for the !st respondent. This sub-section

also

says that all non-recurring expenditure incurred by the Central

Government for or in connection with the purposes

of the airport upto

the appointed date and declared to be capital expenditnre by

the Central

Govemment shall

be treated as the

capit"l provided by the Central

Government to the 1st respondent and all

sums of money due to the

Central Government in relation to the airport immediately

before the

appointed date shall be deemed to be due to the 1st respondent. The

1st respondent is also given the power to institute or continue all suits

•

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R. D .• SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1053

and other legal proceedings instituted or which could have been institu­

ted by or against the Central Government for any matter in relation

to the airport and every employee holding

any office under

the, Central

Government immediately before the appointed date solely or mainly for

or in connection with the affairs

of the airport shall be treated as on

deputation wlth the 1st respondent. Sub-section ( 1) of section 12 also

enacts similar provisions with regard to the air navigation services and

the buildings used exclusively for such ·services immediately before the

appointed date. The functions of the 1st r•,spondent are specified 1n

section 16 : sub-section (1) provides that, subject to the rules, if any,

made by

the Central Government in this behalf, it shall be the function

of the l st respondent to manage the airports efficiently and

su]:)..,;ection

(2) casts an obligation on the !st respondent to provide at the airports

such services and facilities

as are necessary or desirable for the efficient

operation

of air transport services and certain 'specific functions to be

performed by the lst respondent are particularised in sub-s•cction (3).

Thestl functions were, until the appointed date, being carried out by

the Central Government but now under Section 16 they are transferred

to the I st respondent. Section 20 provides that after making provision

for reserve funds, bad and doubtful debts, depreciation in assets aud all

other matters which are usually provided for by companies, the

!st

respondent shall pay the balance of its annual net profits to the Central

Government.

Section 21 requires the !st respondent to submit for the

approval

of the

Central Govermnent a statement of the programme of

its activities during the forthcoming financial year as wen as its financial

estimate in respect thereof at least three months before the commence­

ment of each financial year and section 24 provides that the accounts of

the I st respondent shall be audited annually by the Comptroller and

Auditor General and the accounts

as certified by the ComptroNer and

Auditor General or auy other

person~ appointed by him in this behalf,

together with the audit report thereon, shall be for;ya:rded to the Central

Government and the Central Government shi!ll cause the san1e to be

laid before both Houses of Parliament. The 1st respoud•ent is also

required by section 25

to prepare and submit to the Central Government,

as soon

as may be after the end of

each finaucial year, a report giving an

account of its activities duriT\g the financial year and this report has to

be

laid. before both Houses of Parliament by the Central Government. The officers and employees of the 1st respondent are deemed by section

28 to be public servants and section 29

gives them immunity from suit,

prosecution

or other legal proceeding for anything in good faith done or

intended to be done

in. pursuance of

the Act or any rule or regulation

made under it. Section 33 confers power on the central Government

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I 054 SUPREME COURT REPORTS

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(1979] 3 S.C.R,

to :•cmporarily divest the 1st re5pondent from the management of any

airport and to direct the 1st respondent to entrust such management to

any other person. The Central Government

is also empowered by section 34 to sup"rsede the 1st respondent under certain 8pecified cir­

cumstllnce5. Section 35 gives power to the Central Government to i:ive

directions in writing from time to time on questions of policy and pro­

vides that the 1st respondent shall in the dischar!je of its functiohs, and

duties, be bound by such directions. Section 36 confers rule making

power on the Central Government for carrying out the purposes of the

Ac: and power to make regulations is conferred on the 1st respondent

under section 37. Section

39 provides that any regulation made by

the

1st respondent under any of the clauses (g) to (m) of sub-section (2)

of section 37 may make it penal to contravene such regulation.

It will be seen from these provisiorus that there am certain features

of

the 1st respondent which are eloquent a'nd throw considerable

light

on the true nature of the !st respondent. In the first place, the chair­

man and members of the !st respondent are all persons nominated by

the Central Government and the Ceittral Government has also the power

to terminate their appointment as also to remove them in certain 'specified

circumstances. The Central Government is also vested with the power

to take away the management of any airport from the !st respondent

and to entrust it to

any other person or authority and for certain

speci­

fied reasons, the Central Government can also supersede the 1st res­

pondent. The Central Government has also power to give directions

in writing from time to time on questio_!ls of policy and these directions

are declared binding on the 1st respondent. The

!st respondent has

no share capital but the capital

needed by it for carrying out its functions

is provided wholly by the Central Government. The balance of the

net profit made

by the 1st respondent after making provision for various

charges, such

as reserve funds, bad and doubtful debts depreciation

ia

assets etc. does not remain with the 1st respondent and is required to be

paid over to the Central Government. The 1st respondent is al~o re­

quired to submit to the Central Government for its approval a statement

of the programme of its activities as also the financial estim~te and it

must follow

as a necessary corollary that

the 1st respondent can carry

out only such activities and incur only such expenditure

as is approved

by the Ce'ntral Government. The audited accounts of the 1st

reSpon­

dent together with the audit rej)ort have. to be forwarded to the Central

Government and they are required to be laid before both Houses

of Parliamc::rt. So far as the functions of the 1st respondent are concern­

ed, the entire department of the Central Govemmel)t relating tci .the

administration. of airports and air nevigation servicel! toiiether with. illl

•

•

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R. D. SHETTY v. AIRPORT AUTHORITY (Bhagwati, J.) 1055

properties and assets, debts, obligations and liabilities, contracts, causes

of action and pending litigation

is transferred to the 1st respondent

and the 1st respondent is charged with carrying ont the same func­

tions which were, until the appointed date, being carried out by the

Central Government. The employees and officers

on the 1st respon­

dent are also deemed to be public servants and the 1st respondent as

well as its members, officers and employees are given immunity for

anything which is in good faith done or intended to be done in

pursu­

ance of the Act or any rule or regulation made under it. The 1st res­

pondent is also given power to frame Regulations and to provide that

contrdvention of certain specified Regulations shall entail ·penal conse­

quence. These provisions clearly show that every test discussed above

is satisfied in the case of the 1st respondent and they leave no doubt

that the 1st respondent

is an instrumentality or agency of the Central

Government and falls within the

definition of 'State' both on the 'nar­

row view taken by the majority in

Sukhdev v. Bhagat Ram (supra) as

also on the broader view

of Mathew, J., adopted by us.

It is, therefore, obvious that both having regard to the constitu­

tional mandate of Article 14 as also the judicially evolved rule of admi­

nistrative law, the 1st respondent was not entitled to act arbitrarily in

accepting the tender

of the 4th respondents, but was bound to con­

form to the standard

or norm laid down in paragraph 1 of the notice

inviting tenders which required that only a person running a register­

ed

llnd Class hotel or restaurant and having at least S years' experi­

ence

as such should be eligible to tender. It was not the contention

of the appellant that this standard

or norm prescribed by the 1st res­

pondent

was discriminatory having no just or

re;i.sonable relation to

the object of inviting tenders namely, to award the contract to a suffi­

ciently experienced person who would be able

to run efficiently a Ilnd

class restaurant at

the ~irport. Admittedly the standard or nonn was

reasonable and non-discriminatory and once such a standard'or norm

for running a

Ilnd Class restaurant should be awarded was laid down,

the 1st respondent

was not entitled to depart

f'om it and to award­

the contract to the 4th respondents who did not satisfy the condition

. of eligibility prescribed by the standard or norm.

If there was no acceptable tender from a person who satisfied the condition of eligi­

bility, the

!st

Nspondent could have rejected the tenders and invited

• fresh tenders on the basis of a less stringent standard or norm, but it

could not depart from the standard or norm prescribed by it and arbi­

trarily. accept the tender of the 4th responde'nts. When the 1st res­

: pondent entertained the te!!Jler of the 4th respondents even though

-,they did not have 5 years' experience of running a Ilnd Class

/

A

c

D

E

F

G

D

B

c

D

F

G

H

I 056 SUPREME COURT REPORTS [1979] 3 S.C.R.

restaurant or hot>el, denied equality of opportunity to others similarly

situate in

the matter of tendering for the contract. There might have

been many other

pernons, in fact the appella'nt himself claimed to be one

such person, who did not have 5 years' experience of running a llnd

Class restaurant, but who were otherwise competent to run such a

restaurant and they

might also have competed with the 4th respon­

dents for obtaining the contract, but they were precluded from doing

so by the condition of eligibility requiring five years' experience. The

action

of the !st respondent in accepting the tender of the 4th

res­

pondents, even though they did not satisfy the prescribed condition of

eligibility,

was clearly discriminatory, since it excluded other person

similarly situate from tendering

for the contract and it was plainly

arbitrary and without reason. The acceptance

of the tender of the 4tb

respondents

was, in the circumstances invalid as being violative of the

C<juality clause of the Constitution as also of the rule of administrative

law inhibiting arbitrary action.

Now, on this view we should have ordinarily set aside the decision

of

the 1st respondent accepting the tender of the 4th respondents and

the contract resulting from such acceptance but in

view of the peculiar

facts and circumstances

of the present case, we do not think it would

be a sound exercise

of discretion on our part to upset that decision and

void the contract.

It does appear from the affidavits filed by the

parties that the appellant has no real interest

in the result

0f the

litigation, but has been put up by

A.

S. Irani for depriving the 4th

respondents of the benefit of the contract secured by them.

We find

that a number

of proceedings have been instituted for this purpose from

time to time by A. S. Ir~ni either personally or by instigating others

to take such proceedings. The first salvo in the battle against the

4th respondents

was fired by K.

S. Irani, proprietor of Cafe Excelsior,

who

filed a suit challenging the decision of the 1st respondent to

ac­

cept the tender of the 4th respondents, but in this suit he failed to

obtain an interim injunction

and his appeal was dismissed by the High Court on 19th October, 1977. It is significant that when the

tenders were opened

in the office of the Airport Director, Cafe

Ex­

celsior was represented by A. S. Irani, which shows that either Cafe

Excelsior was a nominee of A. S. Irani or in any event K. S. Irani,

proprietor of Cafe Excelsior, was closely connected with A. S. _Irani.

Moreover, it is interesting to note that though the tender of the 4th

respondents was accepted as far back

as 19th April, 1977, K. S.

Irani did not adopt any proceedings immediately but filed the suit

only after

A.

S. Irani W!\S jnformed by the Airport Director on 22nd

August, 1977 that a final order has been received from the· Ministry

Y-

•

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.....

l.

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•

R. D. SHETTY v. AIR PORT AUTHORITY (Bhagwati, J.) l 057

requiring A. S. Irani to immediately close dow11 his restaurant and

snack bars.

It is also a circumstance not without significance that

A.

S. Irani did not immediately take any proceeding for challenging

the acceptance ol the tender of the 4th respondents, but

filed a suit in

his own name only after the appeal of K. s. Irani was dismissed by

the High Court on 19th October, 1977. These circumstances clearly

indicate that the suit

was filed by K. s:

Irani at the instance of A. S.

Iran_i or in any event in concert with him and when the suit of K. S.

Irani failed to achieve the dcs_ired result, A. S. Irani stepped into the

arena and filed his own suit. This suit was for a numdatory injunc-

tion seeking removal

of the two snack bars which had in the

mean-

time been put up by the 4th respondents pursuant to the acceptance

of their tender Qy the 1st respondent. But in this proceeding also

A. S. Irani failed to obtain an ad-interim injunction. It was only after

the failure to obtain interim relief

in these two proceedings, one by

K.

S. Irani and the other by A. S. Irani, that the appellant filed the

present writ petition in the High Court of Bombay challenging the

decision of the 1st respondent to accept the tender of the 4th respon­

dents. Now, it appears from the record that the appellant was at the

material time conducting a restaurant called Royal Restaurant and

Store which was owned in partnership by three persons, namely, J. K.

Irani. K. M. Irani and G. S. Irani. G. S. Irani is the brother of A. S.

Irani and he was managing and looking after the restaurant of A. S.

Irani at the airport. It would, therefore, be a fair inference to make

that the appellant

was well connected with A.

S. Irani and from the

manner

in which proceedings with a view to thwarting the attempt of

the

4th respondents to obtain the benefit of their contract, have been

adopted one after the other

in different names, it does appear that

the appellant

has filed the writ petition at the instance of A.

S. Irani

with a view to helping him to obtain the CO!ltract for the restaurant

~,1d the snack bars. It is difficult to understand why the appellant

should have waited until 8th November, 1977 to

file the writ petition

when

the tender of the 4th respondents was accepted as far back as

19th April, 1977. The explanation given by the appellant is that

he

was not aware

of. the acceptance of the tender of the 4th respon­

dents but that

is a rather naive explanation which cannot be easily

accepted. It

is not possible to believe that the appellant

who was so

well connected with A. S. Irani and G. S. Irani did not know that

A. S. Irani had failed to obtain the contract for running the restaurant

and the •nack bars and that t.his contract had been awarded to the

A

c

F

G:

4th respondents as a result of which A. S. Irani was being pressed B

to close down his restaurant and snack bars. We have grave doubts

whether this writ peti.tion was commenced by the appellant bona fide

A

B

c

D

1058 SUPREME COURT REPORTS (1979] 3 S.C.R.

with a view to protecting his own interest. Moreover, the writ peti­

tion was

filed by the

app$llan more than five months after the accep­

tance

of the tender of the 4th respondents and during this period, the

4th respondents incurred considerable expenditure aggregating to

about Rs.

1,25,000/-in making arrangements for putting up the

restaurant and the snack bars and in fact

set up the snack bars and

started running the same.

It would now be most inequitous to set

aside the contracts

of the 4th respondents at the instance of the

appel­

lant. The position would have been different if the appellant had

filed the writ petition immediately after the acceptance of the tender

of the 4th respondents but the appellant allowed a period of over

five

months to elapse during which the 4th respondents altered their

posi­

tion. We are, therefore, of the view that this is not a fit case in

which

we should interfere and grant relief to the appellant in the

exercise of our discretion under Article 136 read with Article 226 of

the Constitution.

We accordingly dismiss the appeal and confirm the order of the

High Court rejecting the writ petition. But

in the circumstances of

the

case there will be no o.rder as to costs throughout.

P. B. R. Appeal dismissed.

,',.

J

'r f

l.

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•