ivil Appeal No 3091 of 1985
From the Judgment and Order dated 301184 of the Alla habad High Court in SA No 1137 of 1984
Kapil Sibal NP Mr Rajiv Dhawan RK Gupta H Sharma and Ms Indu Sharma for the Appellant
Satish Chandra MC Goel KP Singh and NN Sharma for the 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 section 3 of the is State for the purposes of of the Constitution of India
This appeal by special leave arises out of a suit by the respond ent 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 District Judge in appeal and by the High Court in second appeal
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 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 re spondent to inspect the documents excepting a few in re spect of which privilege was claimed but the respondent did not avail of them with the object of protracting and 938 frustrating the inquiry
According to the High Court the opportunity 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 57
1983 when the respondent No 1 contended that he must be given an adequate opportunity of examining the relevant documents for facili tating 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 in filing his show cause and defending himself effectively
The suit was filed by the respondent immediately after the order dated 5th July 1983 was passed
The disci plinary proceeding however proceeded ex parte and ulti mately the respondent was dismissed from service
By an amendment of the plaint the respondent was allowed to challenge the dismissal order also
The respondent has asserted that it was the vindic tive attitude of the Bank authorities which led to the initiation of the disciplinary proceeding against him and the order of his suspension and the inquiry have been vitiated by serious violation of principles of natural justice
Besides denying these allegations the appellant Bank contended that having regard to the nature of relation ship 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 remedy 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 UP Public Services Tribunal Act 1976
There has also been a stout denial of the allegations relating to violation of principles of natural justice
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 documents for the purpose of preparing his reply
Not having done so the 939 further orders in the proceeding must be held to be vitiat ed
We 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
Now remains the issue relating to the maintainability of the suit
So far the provisions of the UP Public Serv ices Tribunal Act 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 section 2b of the Act in the following words 2 Definitions
In this Act a    b public servant means every person in the service or pay of i the State Government or ii a local authority not being a Cantonment Board or iii any other corporation owned or controlled by the State Government including any company as defined in Section 3 of the in which not less than fifty per cent of paid up share capital is held by the State Government but does not include 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 con ferred by section 3 of the 
It has been sponsored by the Syndicate 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 section 2b of the UP Act is satisfied
The plaintiff respondent is therefore not a public servant within the limited meaning of the expression 940 used in the UP Act and the courts below are right in overruling the defence plea of the bar by the UP Act
The main point pressed on behalf of the appellant is that the Bank cannot be deemed to be State  for the pur poses of Part III of the Constitution and so the decree for re instatement of the respondent is 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 vs Khalid Mujib Shera vardi and others   it was held by a Consti tution 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 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 therefore immaterial whether the authori ty 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 the Jammu  Kashmir Registration of Societies Act to be an authority  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 meeting the expenses came from the Central Government and the Government 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 direc tions 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 pervasive
Reference was also made to the provisions in regard to the appointment and removal of the members of the Society and to the consti tution 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 estab lished under the provisions of the Regional Rural Banks act 1976
The preamble of the Act which is mentioned below clearly indicates that the Regional Rural Banks are estab lished to discharge the duties which are basically the responsibility of a welfare State An Act to provide for the incorporation regulation and 941 winding up of Regional Rural Banks with a view to 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 enterpreneurs and for matters connected therewith and incidental thereto
 Section 3 says that if requested by a Sponsor Bank the Central Government may establish a Regional Rural Bank in the manner provided 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 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 personnel of the Rural Bank and providing managerial and financial assistance during the initial stage
The duration of such period can be extended by the Central Government
The Central Government is also vested with power to increase or reduce the authorised capital in consultation 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 Govern ment their respective shares being fifty per cent thirty five per cent and fifteen percent
The general superintend ence direction and management 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 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 remunerations of the Officers and other employees of the Rural Bank are to be fixed by the Central Government as indicated in section 17
Without attempting to exhaustively deal with the functions of a Rural Bank section 182 mentions the following types of business within its duty 181  2  942 a the granting of loans and ad vances particularly 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 agri cultural credit societies or farmers  service societies for agricultural purposes or agri cultural operations or for other purposes connected therewith b the granting of loans and ad vances particularly to artisans small enter preneurs and persons of small means engaged in trade commerce or industry or other produc tive activities within the notified area in relation to the Regional Rural Bank
 It is manifest that by establishing the Rural Banks the Central Government 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 section 20 of 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 they are re ceived before each House of Parliament By section 24 A the Sponsor Bank is required to periodically monitor the progress of the Rural Banks and to take connect ed steps and to cause inspection internal audit et cetra made
The rule making power dealt with in section 29 is vested in the Central Government and the power of the Central Govern ment to give directions is mentioned in section 24 quoted below 241 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 Government 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
 943 The provisions of the Act 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
The learned counsel contended that even if the appel lant Bank is considered to be State the courts cannot force the services of 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 consti tuted suit
We do not find any merit in the argument
The learned counsel relied on the following observations in paragraph 103 of the judgment in Central Inland Water Trans port Corporation Ltd and another vs Brojo Nath Ganguly and another reported in 1986 3 SCC at page 156 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 9i was void
In such a suit however they would 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 amount ed to granting specific performance of a contract of personal service
As the Corpora tion is the State they therefore adopted the far more efficacious remedy of filing a writ petition under Article 226 of the Consti tution
Far from helping the appellant the observations clarify the correct position which is just contrary to the argument of the learned counsel
In the result the departmental proceeding against the respondent from 571983 onwards is quashed and the decree for the plaintiffs reinstatement in service with consequential benefits is confirmed
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 proceed ing from the stage where it stood on 57
1983 but they should indicate 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 confi dential 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 944 natural justice
The Bank shall also permit the respondent to join his post and receive his other benefits before he is called upon to file a show cause
Subject to the modifica tions as indicated the decree under appeal is affirmed
The parties are directed to bear their own costs of this Court


Summary:
The appellant was a manufacturer of agarbatis dhoop sticks dhoop coil and dhoop powder failing under Tariff Item No 68 of the Central Excise Tariff
It claimed exemp tion from duty of excise on the ground that these items being handicrafts were fully exempt from such payment under notification No 5575
The appellant s further case was that under Notification No 11178 all goods which were exempt from the whole of duty of excise leviable thereon unconditionally were exempted from the operation of Rule 174 of the Central Excise Rules which required a manufacturer to take out a licence
The Collector rejected the claim of the appellant and held that these items were not handicrafts
It was contended before the Tribunal that dhoop sticks coil and power were agarbaties and agarbaties were accepted as handicrafts by various authorities including the Central Government mere use of power in the manufacture of these items did not bar them from being called handicrafts and in any event there was no warrant in invoking longer time limit for five years for raising the demand
The Tribunal rejected the contentions of the appellant
It was found by the Tribunal that the main part of the manufacture of agarbaties etc was done with the aid of power only a very small part of the required work was done by hand and that it was difficult to accept that these were handicrafts merely because some authorities had chosen to treat agarbaties as handicrafts
The Tribunal held that the Revenue was entitled to levy tax for a period of five years prior to the issue of show cause notice and not six months pursuant to rule 92 of the Central Excise Rules
874 Before this court it was contended on behalf of the appellant that in order to sustain the order of the Tribunal beyond a period of six months and upto a period of 5 years under section 11 A it had to be established that the duty of excise had not been levied or paid by reason of either fraud or collusion or wilful mis statement or suppression of facts or contravention of any provision of the Act or Rules made thereunder with intent to evade payment as provided in the proviso to sub section 1 of section 11 A
In this context it was urged that there was scope for believing that agar baties were entitled to exemption and if that was so then there was enough scope for believing that there was not need of taking out a licence under rule 174 of the Central Excise Rules 1944
On the other hand the Revenue contended that the failure to take out the licence and thereafter to take the goods out of the factory gate without payment of duty was itself sufficient to infer that the appellant came within the mischief of section 11 A of the Act
While partly allowing the appeal and remanding the case to the Tribunal to modify the demand this Court HELD 1 In view of the evidence examined by the Tribu nal and in the light of the well settled principle and the background of the definition of handicrafts the Tribunal was right in holding that agarbaties were not handicrafts
881D E MS Company Private Limited vs Union of India SC referred to
2 Failure to pay duty or take out a licence is not necessarily due to fraud or collusion or wilful mis state ment or suppression of facts or contravention of any provi sion of the Act
Suppression of facts is not failure to disclose the legal consequences of a certain provision
884B Collector of Central Excise Hyderabad vs Ms Chemphar Drugs and Liniments Hyderabad 1989 2 SCC 127 referred to
3 Mere failure or negligence on the part of the pro ducer or manufacturer either not to take out a licence in case where there was scope for doubt whether goods were dutiable or not would not attract section 11 A of the Act
884D 4 In the facts and circumstances of the case there were materials to suggest that there was scope for confusion and the 875 appellants believing that the goods came within the purview of the concept of handicrafts and as such were exempt
If there was scope for such a belief or opinion then failure either to take out a licence or to pay duty on that belief when there was no contrary evidence that the producer or the manufacturer knew that these were excisable or required to be licenced would not attract the penal provisions of section 11 A of the Act
If the facts were otherwise then the position would be different
884E F