Holding

A Regional Rural Bank is an instrumentality of the Central Government and thus a 'State' under Article 12, but its employee is not a 'public servant' under the U.P. Act; the disciplinary inquiry was vitiated by lack of natural‑justice safeguards, warranting reinstatement.

Summary

The respondent, an employee of Prathama Bank, was dismissed after a disciplinary inquiry in which he was not given adequate opportunity to examine the documents relied upon against him. He filed a suit challenging the validity of the inquiry and seeking reinstatement. The bank contended that the bank was not a "State" within Article 12 and that the employee was not a "public servant" under the U.P. Public Services (Tribunal) Act, 1976, rendering the suit non‑maintainable. The Supreme Court held that a Regional Rural Bank created under the Regional Rural Banks Act, 1976 is an instrumentality of the Central Government and therefore a "State" under Article 12, but the employee does not fall within the definition of "public servant" in the U.P. Act. It also found that the inquiry violated principles of natural justice because the employee was denied a proper chance to inspect the documents. Consequently, the Court quashed the disciplinary proceeding, affirmed the decree of reinstatement with modifications, and dismissed the bank’s appeal.

Issues considered

Whether a Regional Rural Bank established under the Regional Rural Banks Act, 1976 qualifies as a 'State' within Article 12 of the Constitution.
Whether an employee of such a bank is a 'public servant' under Section 2(b) of the U.P. Public Services (Tribunal) Act, 1976, affecting the maintainability of a civil suit.
Whether the disciplinary inquiry violated principles of natural justice by denying the employee adequate opportunity to examine the documents.

Legislation cited

Companies Act, 1956s. 3
Constitution of Indias. Article 12
Regional Rural Banks Act, 1976s. 3
U.P. Public Services (Tribunal) Act, 1976s. 2(b), s. 6

Subjects

StateArticle 12Regional Rural BankPublic servantU.P. Public Services (Tribunal) ActNatural justiceDisciplinary proceedingsReinstatementInstrumentality of Government

Judgment

·i;

PRATHAMA BANK, HEAD OFFICE MORADABAD,
THROUGH ITS CHAIRMAN A
v.
VUAY KUMAR GOEL & ANR.

AUGUST 22, 1989
B
[LAUT MOHAN SHARMA AND J.S. VERMA, JJ.]

Regional Rural Banks Act, 1976: Section 3-'Regional Rural
Bank'-Whether 'State' within Article 12 of the Constitution.

r Constitution of India, 1950: Article 12-'Regional Rural Bank'
notified under Section 3, Regional Rural Banks Act 1976 whether
'State".

U.P. Public Services (Tribunal) Act 1976: Section 2(b)-'Public
c

servant'-Employee of Regional Rural Bank---:-Wh'ether 'Public
servant'. D
The respondent who was an employee of the appellant bank was
. dismissed from service on the basis of disciplinary proceedings
instituted against him. He filed a suit challenging the validity of the
·--( disciplinary proceedings on the ground that the inquiry was vitiated by
serious violation of principles of natural justice. The trial court decreed
the suit. The decree was confirmed by the Additional District Judge in E
appeal, and by the High Court in second appeal.

Before this Court, the appellant contended that (i) having regard
to the nature of relationship of master and servant between the parties,
't the decree of re-instatement of the respondent was illegal, and the suit
F
as framed was not maintainable because the respondent's remedy was a
suit for damages; (ii) alternatively, if the respondent was held to be a
public servant so as to enable him to ask for re-instatement in the
service, the suit Jnust be dismissed as not maintainable in vie'Y of the
provisions of the U.P. Public Services (Tribunal) Act, 1976; and (iii)
there was no violation of the principles of natural justice. ·
G
While confirming the decree with modifications, this Court,

HELD: (1) ·The High Court was right in holding that as the re-
spondent was not given adequate opportunity to examine the docu-
ments, he was handicapped in filing his show cause and defending him-
self effectively. [938C] · H
935
936 SUPREME COURT REPORTS [1989] 3 S.C.R.

(2) The appellant hank is not covered by the definition of 'public
1,
A servant' in section 2(b)-Of U.P. Public Services (Tribunal) Act, 1976. It
has been constituted in exercise of the pilwer conferred by s. 3 of the
Regional Rural Banks Act, 1976, and has been sponsored by the Syndi-
cate Bank, a nationalised Bank. Although fifteen per cent of the total
capital of the Bank has been contributed by the State of Uttar Pradesh,
B it has no controlling power, and none of the conditions mentioned in s.
2(b) of the U.P. Act is satisfied. [939G]

(3) The plaintiff-respondent is not a "public servant" within the
limited meaning of the expression used in the U.P. Act and the courts
i;elow are right in overruiing the defence plea of the bar by the U.P. Act --,
on the jurisdiction of the civil court to entertain the suit. [939H-940A]
c ~
14) The test for determining if an authority falls within the defini-
,tion of State in Article 12 of the Constitution is whether it is an instru-
mentality or agency of the Government. The enquiry has to be not as to
how the juristic person is born but why it has been brought into exist-
0 ence. It is therefore, immaterial whether the authority is created by a
statute or under a statute. [940C]

Ajay Hasia & Ors. v. Khalid Mujib Sheravardi & Ors., [1981] l
sec 722, referred to. 'r
E (5) An examination of the relevant Circumstances in regard to the
appellant Bank leads to the irresistible conclusion that it is an instru-
mentality of the Central Government. By establishing the Rural Banks
the Central Government acts in discharge of its obligations under Arti-
cles 38 and 48 of Part IV of the Constitution through them. [940G, 942C]

f (6) The provisions of the Regional Rural Banks Act, 1976 do not
leave any room for doubt that the Regional Rural Banks are under deep
and pervasive control of the Central Government and have been
established as its instrumentality and, are, therefore, 'State' within
Article 12 of the Constitution. [943A]

G (7) There is no merit in the argument that the Courts cannot
force the services of the respondent on the appellant bank by passing a
decree for his re-instatement in service and all that can be done is to
grant a relief by way of compensation in a properly constituted suit. [943B]

Central Inland Water Tran.sport Corporation Ltd. v. Brojo Nath
H Ganguly, [1986] 3 SCC 156, referred to.
",_,

PRAT!If\MA BANK v. V.K. GOEL [&:!ARMA, J.] 937

(8) Io the instant case, the departmental proceeding against the
A
respondent from 5.7.1983 onwards is quashed and the decree for the
plaintiff's re-instatement in service with consequential benefits is con-
firmed, subject to the modification that if the Bank authorities be of the
view that in spite of the delay of several years the Inquiry ought to be
completed, it will be open to them to proceed with it and to take further
steps in the proceeding from the stage where it stood on 5. 7.1983, in B
accordance with the directions of the Court in this judgment. [943F-G]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3091
of i%5.

From the Judgment and Order dated 30.11.84 of the Allahabad
High Court in S.A. No. 1137 of 1984. c
Kapil Sibal, (N.P.), Mr. Rajiv Dhawan, R.K. Gupta, H. Sharma
and Ms. Indu Sharma for the Appellant.

Salish Chandra, M.C. Goel, K.P. Singh and N.N. Sharma for the D
Respondents.

'"( The Judgment of the Court was delivered by

SHARMA, J. The main question before us is whether a
Regional Rural Bank established by a notification under s. 3 of the E
Regional Rural Banks Act, 1976 is "State" for the purposes of Part III
of the Constitution of India. This appeal by special leave arises out of a
suit by the respondent no. 1, an employee of the appellant Bank,
challenging the validity of a disciplinary proceeding against him and
order of his dismissal from service passed therein. The trial court
decreed the suit and the decree was confirmed by the Additional Dis- F
trict Judge in appeal and by the High Court in second appeal.

2. The facts briefly stated, omitting the details which are not
relevant for the purpose of this judgment, are in a short compass. The
respondent no. 1 was, in 1981, served with a lengthy charge-sheet
containing many accusations, some of them being serious, and he was G
called upon to file his show cause. A large number of documents were
mentioned in the charge-sheet and the respondent demanded copies
thereof for the purpose of filing his reply. According to the appellant
several opportunities were given to the respondent to inspect the docu- ·
ments (excepting a few in respect of which privilege was claimed), but
the respondent did not avail of them with the object of protracting and H
938 SUPREME COURT REPORTS [1989] 3 S.C.R.

frustrating the inquiry. According to the High Court, the opportunity
A
given by the appellant was not adequate. Due to certain circumstances
the inquiry could not make any progress for sometime. A new inquiry
officer entrusted with the proceeding took up the matter on 5.7.1983,
when the respondent no. 1 contended that he must be given an
adequate opportunity of examining the relevant documents for
8 facilitating him to file his written statement. There is serious
controversy between the parties as to the interpretation of the conduct
of the delinquent servant and the approach adopted by the inquiry
officer on the 5th of July and the subsequent dates, but we do not
consider it necessary to deal with this aspect in detail as we agree with
the view of the High Court that as the respondent was not given
adequate opportunity to examine the documents, he was handicapped
c in filing his show cause and defending himself effectively.

3. The suit was filed by the respondent immediately after the
order dated 5th July, 1983 was passed. The disciplinary proceeding,
however, proceeded ex parte and ultimately the respondent was dis-
D missed from service. By an amendment of the plaint, the respondent
was allowed to challenge the dismissal order also.

4. The respondent has asserted that it was the vindictive attitude
of the Bank authorities which led to the initiation of the disciplinary
proceeding against him and the order of his suspension, and the
E inquiry have been vitiated by serious violation of principles of natural
justice. Besides denying these allegations, the appellant Bank con-
tended that having regard to the nature of relationship of master and
servant between the parties, the decree for re-instatement of the
respondent was illegal and the suit as framed was not maintainable.
Even assuming that the respondent proves his case on merits, his re-,
F medy would be a suit for damages. Alternatively, if the respondent is
held to be a public servant so as to enable him to ask for re-instatement
in the service, the suit must be dismissed as not maintainable in view of
the provisions of the U.P. Public Services (Tribunal) Act, 1976. There
has also been a stout denial of the allegations relating to violation of
principles of natural justice.
G
5. Both the learned advocates representing the parties invited us
......
to go deeply into the facts, but we have declined to do so, as all the
three courts below have considered the matter in great detail and we
agree with the High Court that the inquiry officer should have given
adequate opportunity to the respondent to examine the relevant docu-
H ments for the purpose of preparing his reply. Not having done so, the
l'RATHAMA BANK v. V.K. GOEL [SHARMA, J.] 939

further orders in the proceeding must be held to be vitiated. We,
A
however, do not agree with the contention of Mr. Satish Chandra, the
learned counsel for the respondent, that the entire proceeding from its
very inception is fit to be quashed as illegal.

6. Now remains the issue relating to the maintainability of the
suit. So far the provisions of the U.P. Public Services (Tribunal) Act, B
1976 are concerned, they are wholly in-applicable. Section 6 of the Act
bars the jurisdiction of the civil court to entertain a suit against the
State of Uttar Pradesh and certain other authorities by a person who is
or has been a "public servant" as defined in s. 2(.b) of the Act in the
following words:

"2. Definitions.-In this Act-
c

(a)

> _ (b) "public servant" means every person m the
service or pay of- D

(i) the State Government; or

(ii) a local authority not being a Cantonment Board;
or
E
(iii) any other corporation owned or controlled by
the State Government (including any company as defined
in Section 3 of the Companies Act, 1956 in which not less
than fifty per cent of paid up share capital is held by the
State Government) but does not include-
F
( 1) a person in the pay or·service of any other company; or

(2) (a) a member of the All India Services or other
Central Services;"
The appellant Prathama Bank is not covered by the above definition.
It was constituted in exercise of power conferred by s. 3 of the G
I
Regional Rural Banks Act, 1976. It has been sponsored by the Syndi-
I cate Bank, a nationalised bank. Although fifteen per cent of the total
capital of the Bank has been contributed by the State of Uttar Pradesh,
it has no controlling power, and none of the conditions mentioned in
s. 2(b) of the U.P. Act is satisfied. The plaintiff-respondent is, there-
H
fore, not a "public servant" within the limited meaning of the expression
940 SUPREME COURT REPORTS [1989] 3 S.C.R.

used in the U .P. Act and the courts below are right in overruling the ~
A
defence plea of the bar by the U.P. Act.

7. The' main point pressed on behalf of the appellant is that the
Bank cannot be deemed to be 'State' for the purposes of Part III of the
Constitution, and so the decree for re-instatement of the respondent is
B illegal. The learned counsel cited several decisions in support of his ~
argument, but we do not consider it necessary to refer to all of them in
view of the authoritative pronouncements of this Court on this aspect.
In Ajay Hasia and others v. Khalid Mujib Sheravardi and others, [1981]
1 SCC 722, it was held by a Constitution Bench that the test for
determining if an authority falls within the definition of State in Article -,
12 of the Constitution is whether it is an instrumentality or agency of
c the Government. The enquiry has to be not as to how the juristic ....
person is born but why it has been brought into existence. It is, there-
fore, immatrial whether the authority is created by a statute or under a
statute. The Court after examining the Memorandum of Association
and the Rules in that case held the Society which was registered under
D the Jammu & Kashmir Registration of Societies Act to be an 'autho-
rity' within the meaning of Article 12. It was pointed out that the
composition of the Society was dominated by the representatives
appointed by the Central Government and the Governments of several
~
States with the approval of the Central Government; the cost of meet-
ing the expenses came from the Central Government and the Govern-
'
E ment of Jammu & Kashmir; the rules to be made by the Society were
required to have the prior approval of the two Governments; the
accounts had to be submitted to the two Governments for their
scrutiny; the Society was to comply with the directions of the State
Government with the approval of the Central Government; and the
control of the State and the Central Government was thus deep and
f pervasive. Reference was also made to the provisions in regard to the ~
appointment and removal of the members of the Society and to the
constitution and powers of the Board of Governors. An examination
of the relevant circumstances in regard to the appellant Bank in the
light of this decision leads to the irresistible conclusion that it is an
instrumentality of the Central Government. As has been stated
'-' earlier, the Bank was established under the provisions of the Regional
Rural Banks act, 1976. The preamble of the Act which is mentioned I
below clearly indicates that the Regional Rural Banks are established
to discharge the duties which are basically the responsibility of a "
welfare State.

H "An Act to provide for the incorporation, regulal!on and
PRATIIAMA BANK v. V.K. GOEL [SHARMA, J.) 941

winding up of Regional Rural Banks wnn a view to
A
developing the rural economy by providing, for the
purpose of development of agriculture, trade, commerce,
industry and other productive activities in the rural areas,
credit and other facilities, particularly to the small and
marginal farmers, agricultural labourers, artisans and small
entef!Jreneurs, and for matters connected therewith and B
incidental thereto."

Section 3 says that if requested by a Sponsor Bank, the. Central
Government may establish a Regional Rural Bank in the manner pro-
vided therein. The Sponsor Bank in the present case was a nationalised
bank, which has been held to be under the control of the Central
Government and, therefore, covered by the definition in Article 12 of c
the Constitution. The share capital of a Rural Bank is to be subscribed
by the Sponsor Bank which has the further duty of training the person-
nel of the Rural Bank and providing managerial and financial assis-
tance during the initial stage. The duration of such period can be
extended by the Central Government. The Central Government is also D
vested with power to increase or reduce the authorised capital in con-
sultation with the Reserve Bank and the Sponsor Bank. The burden to
subscribe to the capital issued by the Rural Bank is divided-amongst
the Central Government, Sponsor Bank and the State Government,
their respective shares being fifty per cent, thirty five per cent and
fifteen percent. The general superintendence, direction and manage- E
ment of the affairs of the Rural Bank vest in a Board of Directors
which is constituted of two Directions to be nominated by the Central
Government, one Director to be nominated by the Reserve Bank from
amongst one of its Officers, one Director to be nominated by the
National Bank from amongst one of its Officers, two Directors to be
nominated by the Sponsor Bank from amongst its Officers and the · F
remaining two Directors to be nominated by the State Government
from its Officers. In view of the relationship with and control of the
Central Government on the Reserve Bank, National Bank and the
Sponsor Bank, the Central Government gets an effective control over
the Rural Bank. The head office of the Rural Bank is to be located
according to the directions of the Central Government. The remunera- G
tions of the Officers and other employees of the Rural Bank are to be
fixed by the Central Government as indicated in s. 17. Without
attempting to exhaustively deal with the functions of a Rural Bank, s.
18(2) mentions the following types of business within its duty:

'" 18. (1) .. H
(2) . . . . .
942 SUPREME COURT REPORTS [1989] 3 S.C.R.

(a) the granting of Joans and advances, particularly
A to small and marginal farmers and agricultural labourers,
whether individually or in groups, and to co-operative
societies, including agricultural marketing societies,
agricultural processing societies, co-operative farming
societies, primary agricultural credit societies or farmers'
service societies, for agricultural purposes or agricultural
B
operations or for other purposes connected therewith;

(b) the granting of loans and advances, particularly
to artisans, small enterpreneurs and persons of small means
engaged in trade, commerce or industry or other produc-
tive activities, within the notified area in relation to the
c Regional Rural Bank."

It is manifest that by establishing the Rural Banks the Central Govern-
ment acts in discharge of its obligations under Articles 38 and 48 of
Part IV of the Constitution through them. To ensure that the object of
establishing Rural Banks is fully achieved, sub-section (2) of s. 20 of
D
the Act has brought both the houses of the Parliament also in the
picture in the following words:

"(2) The Central Government shall cause every auditor's )
report and report on the working and activities of each
Regional Rural Bank to be laid, as soon as may be after
E they are received, before each House of Parliament."

By s. 24-A the Sponsor Bank is required to periodically monitor the
progress of the Rural Banks and to take connected steps, and to cause
inspection, internal audit et cetra made. The rule making power dealt l
with in s. 29 is vested in the Central Government and the power of the
F Central Government to give directions is mentioned in s. 24, quoted
below:

"24(1) A Regional Rural Bank shall, in the discharge of its
functions, be guided by such directions in regard to matters
of policy involving public interest as the Central Govern-
G ment may, after consultation with the Reserve Bank, give.

(2) If any question arises as to whether any such direction
relates to a matter of policy involving public interest, the
decision of the Central Government thereon shall be
final.''
H
PRATHAMA BANK v. V.K. GOEL [SHARMA, J.I 943
/

The provisions of the Act do not leave any room for doubt that the
A
Regional Rural Banks are under deep and pervasive control of the
Central Government and have been established as its instrumentality
and, are, therefore, 'State' within Article 12 of the Constitution.

8. The learned counsel contended that even if the appellant
Bank is considered to be State, the courts cannot force the services of B
the respondent on it by passing a decree for his re-instatement in
service. All that can be done is to grant a relief of way of compensation
in a properly constituted suit. We do not find any merit in the argu-
ment. The learned counsel relied on the following observations in
paragraph 103 of the judgment in Central Inland Water Transport
Corporation Ltd. and another v. Brojo Nath Ganguly and another
reported in, [1986] 3 sec at page 156:
c
•
·The contesting respondents could, therefore, have
filed a civil suit for a declaration that the termination of
their service was contrary to law on the ground that the said
Rule 9(i) was void. In such a suit, however, they would D
have got a declaration and possibly damages for wrongful
termination of service but the civil court could not have
ordered reinstatement as it would have amounted to grant-
( ing specific performance of a contract of personal service.
As the Corporation is "the State", they, therefore,
adopted the far more efficacious remedy of filing a writ E
petition under Article 226 of the Constitution".

Far from helping the appellant,. the observations clarify the correct
position which is just contrary to the argument of the learned counsel.
r 9. In the result, the departmental proceeding against the respon- F
dent from 5.7.1983 onwards is quashed and the decree for the
plaintiff's reinstatement in service with consequential benefits is con-
firmed. If the Bank authorities be of the view that in spite of the delay
of several years the inquiry ought to be completed, it will be open to.
them to proceed with it and to take further steps in the proceeding
from the stage where it stood on 5.7.1983, but they should indicate G
their intention to do so to the respondent and also serve copies of the
relevant document on him. If they are of the view that any particular
document is confidential in nature and a copy thereof cannot be
handed over to the respondent they may so indicate in writing to the
respondent and it will be open to the inquiry officer to examine whether
the denial of such a copy would amount to violation of principles of H
944 SUPREME COURT REPORTS [1989] 3 S.C.R.

A natural justice. The Bank shall also permit the respondent to join his .4_
post and receive his other benefits before he is called upon to file a
show cause. Subject to the modifications as indicated the decree under
appeal is affirmed. The parties are directed to bear their own costs of
this Court.
B R.S.S.