Holding

The order granting the tapping contract to the second respondent is reasonable, in public interest, and does not violate Articles 14 or 19(1)(g).

Summary

The State of Jammu & Kashmir, seeking to promote industrialisation, allocated 11.85 lakh resin‑tapping blazes in inaccessible forest areas to a private firm (the second respondent) for a ten‑year period, requiring the firm to set up a resin processing plant in the State. The petitioners challenged the order under Article 32, alleging arbitrariness, violation of Articles 14 and 19(1)(g), and that the contract conferred an undue benefit on the second respondent at the State's expense. The Court examined the test of reasonableness and public interest, noting that the State’s policy barred resin export, that the inaccessible blazes could not be auctioned profitably, and that awarding the contract to an experienced firm furthered the State’s industrial policy. It held that the order was a bona‑fide exercise of governmental discretion, satisfying the requirements of reasonableness and public interest, and that no monopoly or unreasonable restriction on the petitioners' trade was created. Consequently, the petitions were dismissed and the order upheld.

Issues considered

Whether the State's order granting the resin‑tapping contract to the second respondent is arbitrary and violative of Article 14.
Whether the order creates an unreasonable restriction on the petitioners' right to carry on trade under Article 19(1)(g).
Whether the State acted in public interest and complied with the test of reasonableness in awarding the contract.

Subjects

government contractsreasonablenesspublic interestArticle 14Article 19(1)(g)Article 32industrial policyarbitrary state actionwelfare state

Judgment

.1 :138

KASTOR! LAL LAKSHMI REDDY
v. .•
STATE OF JAMMU AND KASHMIR & ANOTHER A
May 9, 1980 ~

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

Government co11tracts-Limita1ions -on the Government to gr(lll.t contracts
-Test of reasonableness-Concept of reasonableness and concept of public
interest, explained-Articles 14 & 19 of the Constitution.

Resin is a forest produce extracted from certain pieces of trees popularly /
.C known as Chir trees. The process of extraction is called tapping, involves -"\
several steps, and requires elnployment of skilled labour and involves a consi-
derable a.mount of expenditure. The State of Jammu & Kashmir started tapp-
ing operation in respect of its Chir trees since about 1973 by giving contracts
to private parties for extraction and collection ·of resin. The contracts were
of three types; one was contract on wage basis commonly known as wage· con-
tract which was given by auctioning the blazes to the person who was prepar-
D ed. to undertake the work of extraction and Co11ection of resin at the lo"WeSt
rates of labour charges and in such contract the entire resin extracted and
d.uected by the contractor would belong to the State and the contractor would
be entitled only to the wage or labour charges for ex.traction and collection of
resin; the second type of contract was on the basis of royalty without load and
under this contract which was given by auction stipulating for payment <:I.
royalty per blaze, the entire resin extracted and collected by the contractor
.E 'WDuld belong to him and .he would be free to .sell or process it as he likes; the "I
tmro type of contract ,... on the basis of royalty with load and under this
contract which was also given by auction. the royalty was payable per blaze and
out of resin extracted and collected by the companies, a certain pa.rt would
have to be surrendered to tho Sta.le, while the balance wonld remain with !he •
contractor.

Esery year, the State auctioned the blazes in the different forests within .its
territory and about 40 per cent of the forests were given on royalty basis, some{
wlth load and some without load, while the balance of about 60 per cent were.
given on wage coiitrac:t ·basis. Most of the contractors bidding at the auction'
were having their factories outside Jarnmu & Kashmir ·either in U.P. or in
Punjab. The State in furtherance of its policy to bring about rapid industria, ·
· lisation decided that from the year 1979-80 onwards the resin extracted from its
£oreots should not be allowed to be exported outside the territories of the State
and should be utilised only by industries set up -within the State. The State, in
fact, entered into contracts with three manufacturers, namely, P.rabhat Turpen-
tine & Synthetics Pvt. Ltd., Dujedwala Resin and Turpentine Co. Ltd. and
'l'ine Chemieals Ltd. Under these oontracts the three manufacturera agreed to
set up factories in the State for the manufacture of resin twpentine end other
derh·atives and the State agreed to make available to them respectively an
·e=red supply of 4000, 3500 and 8000 metric tonnes of resin per year. The
·H State had also commitments to supply reSin: to its· own··concerns namely, J&K.
Industries Ltd. which was running a factory for manufacture of resin and tur-
pentine a1 also to various small scale units which are set up in the State. Since
KAStURI LAL LAKSHMI Rl!Dl>Y V. STAT!! OF .r. & K· 1339

1!1e total requirement of theee 24,000 metric tonnes a.lways fell abort it wu A
deeided at a meeting held on 9th Deoember, 1976 of .the .Forest officials that
the increue of target of production could be achievi:d only through replace-
.A ment of royalty contracts by wage contracts wherever possible and hence Jn
future blazes should be auotionecl for tapping only on was• contract baiis.

There were certain forests in Resin and Ramban Division of the State which
was out of access on account of their distance from the roads and so were some B
torests in the Poonch Division near the line of actual control and there were
· 1,28,856 blazes situated in the lower regions of inaccessible forests and no
·contractors could be fowid ·for taking tapping contracts even on the basis of
royalty without load for blazes in the higher regions of the inacoesoible areas.
Jn the Rasi Division out of 6,08, 115 bla.zes which were attempted to be given
"'rfor tapping in the year 1976-77 on royalty contract basis without load, only
"'-1,28,856 blazes were taken by one Prem Kumar Sood and that too on royalty of c
· only Rs. 2.55 per blaze as against royalty of about Rs. 6 per blaze obtained by
the State in other inaccessible areas by giving contract on royalty basis with
load of 3 Kg. per blaze. For the year 1978-79 no one came ·forward to make
.a bid for taking the contract even on royalty basis without load, with the
result that practically no tapping was done from these 6.08,115 blazes in the
forests of the Rasi division upto 1979,80. There were also some new blazes
marked in the forests of the Rasi division for the year 1979-80 "-"" out of them D
4,20,340 blazes were in areas which were inaccessible on account of their being
.at a distance of 8 to 40 kilo-metres from the mad side. Even out of the olli
6,08,115 there were 3,10,604 blazes which were situated in the same category
-Of inaccessible areas. So far as the forests in the Ramban Division are con~
rerned there were 1,24.400 blazes which .were equally inaccessible "due to
tong lead up to coupe boundaries and transit depots" and the position in regard
to 3,39,000 blazes which were under tapping in Poonch Division was also simi- E
lar to that of the inaccessible areas in Rasi and Ramban Division wi~h the addi·
tional handicap of their bein2 situated along the line of actual control. There
were thus in all about 11,85,414 blazes in the Rasi, Ramban and Poonch Divi-
sion which were inaccessible areas and having regard to the high cost of eX·
traction and collection of resin as also the scarcity 61 trained labour in those
.areas it was not possi&te t6 give out those blazes by auction on wage contract
bn.sis. The past experience showed that even on the basis of royalty without F
contractors were not forthcoming for taking contracts in respect of blazetr
be inaccessible areas of the Rasi Division and giving out of the aforesaid
azes fo the Rasi Ramban and Poonch Division on wa~ contract basis was,
'tl>erefore, a.lmost an impossible proposition. The Chief Conservator of Forests
amt other Forest Officer> accordingly decided at the meeting held on Decem-
·ber 9, 1978 that those blat.es could not be tapped through wage contract be-
cause uapart from the total non-availability of local labour in these areas cost G
of.production due to long lead up to coupe boundaries and transit deoots would
te prohibitive" and all ouch areas should, therefore, be excluded from tanping
~ 1"· through wage contract. These decisions taken at the meeting on 9th Decem-
ber, 1978 were confirmed at ~ subsequent meeting which took place between
Forest Minister, the Forest Secretary, the Ch;ef Conservative Forest Officer and
·other .Forest Officen on 26th December, 1978. It was further decided in this
meeting that the "denartrnental tanping through wage contract should be con- H
fined to accessible Chir forests" only and so far as 11.85.414 blazes in the
iuacc...ible areas of the R11si, Rambl!n and Poonch Divbion are concerned
· _1he eomensus was that '~hese blauo should be allotted to oome private party
1340 SUPREMB COURT :REPORTS U980] 3 s.c.a.

A as procurement of resin from them through wage contracts was not feasible
being ddficult and costly" and "the financial stat\.w and experience in extractiOJb.
of resin from fore.-:.t and its distillation in tne factory should be decisive factors''
in 1egard to such allotment. Therefore, the second respondent who had earlier
addressed a letter dated 15th April, 1978 to the State Government offering to
set up a factory for manufacture of resin turpentine oil and other derivatives
in the State with the latest know-how under the supervision of the State . Gov·
B enunent and seeking allotment of 10,000 metric tonnes of resin annually for
the purpose was, by an Order of the State Government dated 27th April, 1979,..
sanctioned allotment of 11.85 la~ blazes in the inaccessible areas of Rasi,_.
Ralnban and Poonch Divisions for a period of 10 years on the terms and con-
ditions set out in the order. ·
The petitioners, thereupon challenged this order made by the State Govern-
ment under Article 32 of the Constitution on the grounds. namely, (a) thaf\/
c the order is arbitrary, 1nala fide and not in public interest, inasmuch as a huge\
beneht has been conferred on the 2nd re1pondents at the cost of the State;..
(h J the order creates monopoly jn favour of the 2nd respondent who is a
private party and constitutes unreasonable restriction on the right of the peti-
tioners to carry on tapping contract business under Art. 19(1)(g) of the Cons-
titution; and ( c) the State has acted arbitrarily i·n selecting the 2nd respondent
for awarding tapping contract, \Vithout affording any opportunity to others to-·
D complete for obtaining such contract and this action of the State is not based
on any rational or relevant principle a:~d is, therefore, violative of Art. 14 of
the Constitution as also of the rule of administrative Law which inhibits arbi-
trary action by the Slate.
Dismissing the petitions, the Court
HEW : (I ) With the growth of the welfare state, new forms of property
E in the shape of Government largess are developing, since the Government is.
increasingly assuming the rqle of regulator and dispenser of social services and
provider of a large number of benefits including jobs, contracts, licences,..-
quotas, mineral rights etc. There is i:i.creasing expansion of the magnitude and
range of governmental functions, as we move closer to the welfa.re state, and'
the result is that more and more of our wealth consists of these new forms..
of property. Some of these forms of wealth maiy be in the nature of privi-
F
lege. The law has however not been slow to recognise the importance of thf"s:
new kind of wealth and the need to protect individual interest in it and wi
that end in view, it has developed new forms of protection. Some interests ·
Qovernment large.o;s, formely rega...ded as privileges, have been recognised aS
rights, while others have been given legal p..otection not only by forging pro-
cedural safeguards but also by confining, structuring and checking Government"
discretion in the matter of grant of such largess. [1354 F-H, 1355 A] -
G
The discretion of the Government is not unlimited in that the Government'
cannot give largess in its arbitrary discretion or at its sweet 'Nill or on such•
terms as it chooses in its absolute discretion. There are two limitatiors impos- "f. •
ed by law which structure and control the discretion of the Government in this
behalf. The first is in regard to the terms on which largess may be granted'
and the other, in regard to the persons who may be recipients of such largess..
H [1355 A-BJ;
So far as the first limitation is concerned, it flows directly from the thesis.
that. unlike a private individua.l, the State cannot act as it pleases in the mattet
KASTURI LAL LAKSHMI UDDY I'. STATE OP J, & K· 1341

cl giving largess. Though ordinarily a private individual would be guided by
<COOOmic considerations of self·gain in any actiqn taken by him, it is always
<>pen to him under the law to act contrary to his self-interest or to oblige an-
othe1 in entering into a contract or dealing with his property. But the Gov·
... -ernment is not free to act as it likes in granting largess such as awarding a· con·
tract or selling or leasing out its property. Whatever be its activity, lhe Gov·
• ernment is still the Government and is, subject to restraints inherent in its posi·
tion in a democratic~ society. The constitutional power conferred on the Gov·
.ernment cannot be exercised by it arbitrarily or capriciously or in an unprin..
8
~ipled manner; it has to be exercised for the public good. Every activity of
_... the Government has a public element in it and it must therefore, be informed
with reason and guided by public interest Every action taken by the Govern-
ment must be in public interest; the Government cannot act arbitrarily and
without reason and if it does, its action would be liable to be invalidated. If
'1.rtbe Government awards a contract or leases out or otherwise deals with its
1 ~roperty or grants any other largess, it would be liable to be tested for its
c
' '\'alidity on the touch-stone of reasonableness and public interest and if it fails
to satisfy either test, it would be unconstitutional and itvalid. [1355 B-F]
Ramana Dayaram Shetty v. The International Airport Authority of India
.& Ors. [1979] 3 S. C. R. 1014, reiterated.
(2) In forming his own conception of what is reasonable, in all the circum- D
-stances of a given case. it is inevitable that the social philosophy and the scale
-of values of the judge participating in th~ decision. would play an important
,part, but even so, the test Of reasonableness is not a wholly subjective test and
its contours are fairly indicated by the Constitution. The concept of reason-
ableness in fact pervades the entire constitutional scheme. The requirement of
reasonableness runs like a golden thread through the entire fabric of fundamen-
iY tal rights and, as several decisions of this Court show, this concept of reason- .E
-ableness finds its positive manifestation and expression in the lofty ideal of
-social and economic justice which inspires and anj.mates the Directive Princi-
ples. Article 14 strikes at arbitrarihess in State action and since the principlo
.of reasonableness and rationality, which is legally as well as philosophically
.an essential element of equality or non-,arbitrariness, is proj::cted by this article,
it must characterise every governmental action, whether it be under the autho-
rity of law or in exercise of executive power without making of law. So also F
"' 1he concept of reasonableness runs through the totality of Art. 19 and requires
Wliat restrictions on the freedoms of the citizens, in order to be permissible, must
lt the teast be reasonable. Similarly Art. 21 in the full plenitude of its activist
~Bgnitude as discovered by Maneka Gandhi's case, insi~ts that no one sha'l be
·deprivf'd of his life or personal liberty except in accordance with procedure
\ .established by law and such procedure must be reasonable, fair and just.
[1355 G-H, 1356 A-DJ G
State of Madras v. V. G. Rao [1952] SCR 597; Maneka Gandhi v. ClniM
-of India f19781 2 SCR 621; E. P. Rqyappa v. State uf Tamil Nadu {1974)
'2 SCR 348 referred to.
(3) The Directive Principles concr~tise and give shape to the concept of
i'eason.ableness envisaged in Artic1" 14, 19 and 21 andother Articles enumerat·
~ the .fundamental rights. By defining the natio'1al aims and thf" <"o.,stitu.. H
tional goals, they set forth the standards or no'111s of reasonableness which must
:auide and animate governmental action. Any action taken by the Government
1342 SUPRl!ME COURT itllfOUS [1980] 3 S.C.R.

A with a. view to giving effect to any one or more of the Directive Principles
would ordinarily, subject to any constitutional or legal inhibitions or other
overriding considerations, qualify for being regarded as reasortable, while an,
action \Vhich is inconsistent with or runs counter to a Directive Principle would
incur the reproach of being unreasonble. [1356 D-FJ

( 4) The concept of public interest must as far as possible receive its ori-
enla.1ion from the Directive Principles. What according to the founding fathers
B constitutes the plainest requirement of public interest io; set out in the Directive
Principles and they embody par excellence the constitutional concept of public-
interest. If, therefore any governmental action is calculated to implement OI'"
give effect to a Directive Principle, it would ordinarily, subject to any other
overnding considerations, be informed with public interest. [1356 .A..-H, 1357 Aj

c ( 5)- Where any governmental action fails to satisfy the test of reasonable-
ness and public interest and is found to be wanting in the qualities of re3.so~~-' i"
bleness or lacking in the element of public interest, it would be liable to ~
stn1ck do,vn as invali;. It must follow as a necessary corollary from this propo--
sit.ion that the Government cannot act in a manner which \\-'Ould benefit a private
party at the cost of the State; such an action would be both unrea<onable and
contrary to public interest. The Government, therefore, cannot, for example,
D give a contract or selJ or Iea~e-out its property for a co'1sideration less than the·
highest that can be obtained for it, unless of course there are other consider·
ations which render it reasonable and in public interest to do so. Such consi·
derations may be that some Directive Principle is sought to be advanced or
implemented or that the contract or the property is given not with a view, te
earning revenue but for the purpose of· carrying out a welfare scheme for the
benefit of a particular group or section of people deserving it or that the person
E who has offered a higher consideration is not otherwise fit to be ~iven the
contract at the property. These considerations are referred to only illustratively· ---.. , _
fo- there may be an infinite vari~ty of considerations which may have. to be
taken into account by the Government in formulating its policies and it is 0tr
a total eva'ufltion of various considerations which have weighed with the
Government in taking a particulars action, that the Court would have t<>'
decide whether the action of the Government is reasonable and in public
F interest. [1357 A-El

But one basic princiole which must guide the Court in arr1v1ng at its /
determination on th:s question is that th~e is always a presumption that Lh!r'
Governmenal action is reasonnble and in public interest and it is for the party1
cha11enging its validity to show that it is wanting in reasonableness or is nOt
informed With public intef'f'st. This burden is a hPavy one and it has to be-
dic:charged to the sa1i.;;faction of the Court by proper and adequate material.
The Court cannot lightly assume that the action taken bv the Government is; •
...
unrea.c:onable or without public interest . because, there are a 1arp
number of policy considerdtions which must nece.~sarily weigh with the
Governrltent in taking action and therefore the Court would not strike dowt):
governmental action as invalid on this ground, unless it is clearly satisfied
that the action is unreasonable or not in public iterest. But where. it- is SO'
satisfied, it would be the plainest duty of the Court under the Constitution 10'
H invalidate the govemmenttt•l action. This is one of the most imnortant fu'nc.--
tion of the Court and al•o QDe of the nwst essential for preservation of dw
role of law. (1357 E-HJ
KASTURI LAL LAKSHMI REDDY v. STATE"OF J. & K· 13.f3

Ii iS imperative in a democracy governed by the rule ol law that govemmel!lltl · A ·
action must be kept with_in the limits Of the law and if there is any transgres-;
sion, the Court must be ready to condemn it, .It is a matter of historical ex-
perience that there is a tendency in every government to assume more and
.J.. more powers and since it is not an uncommon phenomenOn in many countries
that the legisllltive ckeck is getting diluted, it is left to the Court as the only
other reviewing authority under the Constitution to be increasingly- vigilant to
ensure observance with the rule of la·w and in this task, the Court n1ust not B
flin.::h or falter. This ground of invalidity, namely, that the governmental
action is unreasonable .or lacking the quality of pub'ic interest, is different
from that of mala fides though it may, in a given case, furnish evidence of
ma/a (ides. [1358 A-Cl
( 6) The second limitation on the discretion of the Government in. grant of
. largess is in regard to the persons to whom· such largess may be granted. The C
.,, Govemment is not free like an ordinary individual, in selecting the recipients
/"..for its largess and it cannot choose to deal with any person it please! in its.
absolute and unfettered discretion. The law Is now well established that the ·
Government need not deal with anyone, but if it does so, it must. do so fairly
without discrimination am without unfair procedure. [1358 C-E]
Where the Government ia deali.ag with the public, whether by way lilf
giving jobs or entering into contract$ or. granting other forms of largess, the D
Government cannot act arbitrarily at its. sweet will and, like a private ind.iVi~
chl&l, deal with any person- it pleases-,. but its action must be in conformity-
with some standard or norm which is not arbitrary, irrational or irrelevant. The
governmental action must not be arbitrary or capricious, but m1:1St be- based
on some principle which meets the test of reason and relevance. [135& :S-FJ

In the Wtant case; E
A. The impugned order cannot be said to be disadvantageous to the State
or in any way favouring the second respondents at the cost of the State.
[1363 BJ

(i) It was not a tapping contract simpliciter which was intended to be
given to the second respondents. The whole object of the · itnpugnW onler
was to make ava'lable 3500 metric tonnes of resin to the second respondents for
F
''\ tile purpose of running the factory to be set up by them. [1361 H, EJ
~- (ii} 'The advantage to the State was that a new factory for manufacture
' ol :resin, turpentine oil and other derivatives would come up within its- tierri-
tmits offerinJ? more ·job o·ppcnunities to the State and' increasing their pro~nerity
< and augmenting the State revenues- and in addition the State would be assured
• of a definite supply of at least 1500 metric tonnes of resin for itself without a'ly G
fiJ'IAnciat involvement or risk and with thi!t additional quantity of resin available
to it, it would be able to set up another factory:· creating mi)re employment
opportunities. [1361 E-G]

(ili) The Stat~ would be able to secure extraction of resin from the. ina.:-
c~iblC areas on the best poSsihle term instead of allowing them to remaia
tQICxploited or given over at Tidiculously h>w royalty. [1161 E-HJ H ··
(;.) No huge· benefit wa• eonferred on the "'con<! rospondenr. at tlle cost
or Ille State. The 11u·1111 of the cmrract made It cre.r· t!iat the ""'°""
respon-
1U4 SUPREME COURT REPORTS [1980] 3 S.C.tt.

A denll would have to extraot at least 5000 metric tonnes of resin from the blazea
allotted to them in order to be entitled to retain 3500 metric tonnes. [Do~ A·llJ

(v) Under the impugned order the State would get 1500 metric tonnes of
resin at the rate of ,Rs. 114 /-per quintal while the second respondent would
have to pay at the rate of Rs. 474/- per quintal for the balance of 3500 metric

B
tonnes retained by them. Obviously, a large benefit would accrue to tho
State under the impugned Order. If the State were to get the b!az s in these
inaccessible areas tapped through w·age contract, the min:mum cost would be
.,
Rs. 175/- per quintal, without taking into account the additional e·xpenditure
on account of interest, but under the impugned Order the State would get t 500
metric tonnes of resin at a greatly reduced tale of Rs. 114/- per quintal
without any risk or hazard. The State would also receive for 3500 m:tric
tonnes of resin retained by the second respondent 'price or royalty at the rate
c of Rs. 474/- per quintal which would be much higher than the rate of Rs. 260/·
per quintal at which the State was allotting resin to medium scale inJu·trial
units and the rate of Rs. 320/-per qu!ntal at which it was allotting resin of
small scale units within the State. [1362 G-H, 1363 A-BJ

B. The impugned order neither created any monopoly in favour of the
second respondent nor imposed unreasonable restriction on tht: right of the
D petitioner to carry on tapping business under Article 19(l)(g). [1364 DJ

(i) The impugned Order did not hand over the tapping of the entire
forest area in the State exclusively to the 2nd reSpondent so as to deny the
opportunity of tapping Goy forest areas to the petitioner. What was done
under the impugned order was merely to allot 11,85,414 blazes rn the inac~
cessible areas of Rasi, Ramban and Poonch divisions to the 2nd respondent
so that the respondent could have an assured supply of 3500 metric tcnnes
of resin for the purpose of feeding the factory to be set up by them in the
State and a large number of blaz"s amounting to about 60 lacks in other forest
areas of the State were left available for tapping by the petitioners and other
forest contractors. [1364 D-01
(ii) The petitioner and other- forest contractors could bid for wage contract
in respect of the other blazes which were more than five times in number
than the blazes allotted to the second respondent. The pet1t1oners in writ
petition 481 of 1979, in fact, obtained a wage contract for extraction of resin
from an easily accessible forest in Rajouri Division for the aggi egate sµm of
Rs. 2,80,250/· in the year 1979-80 and though it is true that the petitionera in
I,
writ petition No. 482f.79 did not obtain any wage contract for tapping 1n this
year, it was not becauSe blazes were not available -for tapping, but becalise the
petitioner did not get ;heir registration renewed. l1364 F-HJ
G
C. Neither the impugned order in favour, of the second respondents could be
••
said to be arbitrary and unr;sonable. U365 Al

(i) The State was not unjustified in excluding 11,85,414 blazes situated in
tbC inacc~sible areas of Rasi, Ramban and Poonch divisions from the auc.
tiOns, since the past experience showed that e_ven on the basis of royalty with-
H out load. it was difficult to attract bidders and the maximum that could be
obtaine~, and that too only in one solitary year. was Rs. 2-55 per blaze without
load, which was an absurdly low return and it was, therefore, felt quite
KASTURI LAL LAKSHMI REDDY V. STATE OP J, It K· 1345

jUstifiably, that it would be futile to include thcoc blazes in the auctions for A
tapping on wage contract basea. The State also could not award' a contract
1imphci1er for tapping on the basis of royalty with or without load because as a
matter of policy, witb a· view to encouraging industrialisation, the State did not
want resin to go outside its territories but wanted it to be used only for the put·
po~e of feeding industries set up within the State and even if a condition could
legitimately be imposed on the contractor that he shou.d sell the resin extract·
eel and retained by him only to industries within the State, it would be B .
difficult to ensure observance of such condition end moreover the object of the
State to make resin available to the local industries at a reasonable price might
be f. ustrated, because the contractor taking advantage of scarcity tn supp:y of
resin might, and in all probability Would, try to extract a much higher price
from the industries needing resin. It was thus found to be an impracticable
proposition to tap these blazes either on \\Uge contract basis or on the basis
of 1 oyalty with or without load. 11365 A-Fl c
(ii) The impugned Order W88 unquestionable and without doubt in the
interest of the State· and even with a microscopic examination ~er~ in nothing
in it which could possibly incur the reproach of being condemned as arbitrary
<ir irrational. 11366 B-Cl
(iii) It is true the.t no advertisements were issued by the State inviting
tenders for award of tapping contract in respect of these blazes or stating D
that tapping contract would b~ given to any party who is prep;:i.red to put up
.a factory for manufacture of resin, turpentine oil and other derivatives within
the State, but it was not a tapping contract simpliciter which \Vas being given
by the State. The tapping contract was being given by way of allocation ot raw
material for feeding the factory to be set up by the 2nd respOndent. l1366 A-CJ
The predominent purpose of the transaction was to ensure setting up of E
.a. factory by the 2nd respondent as part of the process of industrialh:e.tion of
the State and since the 2nd respondent wanted assurance of a definite supply
of resin as a conditi~n of putting up the factory, the State awarded the tapping
conrtact to the 2nd respondent for that purpose. If the State were giving tap·
ping contract simpliciter there can be no doubt that the State would have to
aucti<.1n or invite tenders for securing the highest price, subject. of course,
to HOY other relevant oveniding considerations of publiJ: weal or interest, F
but in a case like this where the State is allocating resources such as
\vater, power, raw material etc., for the purpose of encouraging: setting up
of industries within the State, the State is nqt bound to advertise and tell the
people that it wants a particular iiidustry to be set uo wthin the State and
invite those interested to· come un w~th proposals for the purpose. The State
may choose to do so if it thinks fit and in a given Situation, it may even tum
out to be advantageous for the Sttl1e to do so, but if any private party comes G
before the State and offers _to set up an industry, the State would not be com~
olittine brea"h of anv conc;fitutional or legal ob 1 i~tion if it negotiates which
liJch party and agrees to prov•de resources and other facilities for the purpose
of setting up the industry. The State is not obliged to tell such party'. "P 1P.llSe
~it-I will first adv"rticie, see wh ..th"r any other offers are forthcoming and then
aftf"f c0nc;idering all off,,.rs. dec:de whether I should let you set up the inducitry'',
It _would b"' moc;t unr,,aJistic to •nsist on such a procedure, particularly H
hi an area like Jammu and Kashmir which on account of historical. rolitical
alid other reasons, is not yet fodustrially developed and. where entrepreneurs
mve to be Offered attractive terms in Order to ptrsuade them ·lo set Up an
1346 SUPRllMB COURT REPORTS £1980] 3 S.C.R.

A industry. The Stale must be free in such a case to negotiate with a prival!>·
entreprenetir with a view to inducing him to set up an industry within tbe,:
State and if the State enters into ·a contract with such entrepreneur for pro- ·.
viding resources and other facilities for setting up an industry, the contract ,
cannot be assa1ed as invalid so long as the Stnote has acted bona fide, reason-.
ably and in public interest. If the terms and conditions of the contract or
the surrounding circumstances show that the State has acted ma/a fide or out of
. B, improper or corrupt motive or in order to promote the prh·note interests of
some one at the cost of the State, the Court will undoubtedly interfere and
strik~ down State action as arbitrary, unreasonable or contrary to public
interest. But so long as the State action is bona fide and reasonable, tbe-
Court will not interfere merely on the ground thut no advertisement was giveD:
or publicity made or tender> invited. 11366 C-H, 1367 A-DJ

c ORIGINAL JURISDICTION : wr;t Petitions Nos. 481482 of 1979.
(Under Article 32 of the Constitution of India).
K. N. Bhatt for the Pet;tioner.
Altaf Ahmed for Respondent No. 1.
D E. C. Agarwal for Respondent No. 2.
The Judgment of the Court was delivered by,
BnAGWATI, J.-These two writ petitions under Art. 32 of the Con·
stitution raise questions of some importance in the field of constitu·
tional law, but they are not exact questions which can be divorced
E from the facts giving rise to them and in order to resolve them satis·
factorily, it is necessary to state the facts in some detail. TJ;ough the
petitioners in the two writ petitions are different, the respondents are
the same and the same Order of the State of J ammu and Kashmir is·
challenged in both the writ petitions. Hence whatever we say in
regard to the first writ petition, applies equally in regard to the second.
F
The dispute in these writ petitions relates to the validity of an Order
dated 27th Apri~ 1979, passed by the Government of Jammu and
Kashmir, allotting to the 2nd respondents 10 to 12 lacs blazes annuiilly·
for extraction of resin from the inaccessible chir forests in Poonch,.
R easi and Ramban Divisions of the State for a period of 10 years on the
f
G terms and conditions set out in the Order. The valjdity of the Order
has been challenged on various grounds which we shall presently 'set
out, but in order to understand and appreciate these grounds, it is neces~.
sary to state br:efly the circumstances in which the Order came to be·
passed by the Government of J ammu and Kashmir. There is a commo· ·
dity called Oleo-resin, which we shall hereafter refer shortly as resin,·
ff which is a forest produce extracted from certain spec:es of trees popu-
larly known as chir trees. The process of extraction is called 'tapping'.
· antl it involves several steps. Chir trees are annually given one or t'il!I)'
llASTUIU LAL LAKSHMI lll!DDY v. STATE OF J. & K. (Bhagwati, !.) 1347·
I .

wounds which are technically called blazes and cups and lips are fixed
at the bottom of each blaze for collection of resin. The actual collection
of resin starts from 1st April an~ ends on 31st October every year. The
maximum fiow of resin from blazes is during the months of May and
June and in the subsequent months of the working season, namely. July
to October, the fiow gradually decreases due to the rainy season follow-
ed by fall in temperature. The tapping of resin is a· continuous process
and the initial blazings have to be followed by freshenings given every
week. If the blazes are not freshened regularly, the resin ducts get
blocked and the blazes become dry and once a blaze bee: mes dry, the
fiow of resin stops completely. The resin that is collected in the cups is
transferred to tin containers every week-end or earlier :r required, and
the tin· containers· are then tran,ported to the transit depots fer being
c
carried to the destination. This process of tapping requires employment
of skilled labour and involves a considerable amount of exp:nditure.
The State of Jarnmu and Kashmir started tapping operations in respect
of its chir trees since about 1973 by g'ving contracts to private parties
for extraction and collection of resin. The contracts were of three
types :
(I) One was contract on wage basis, commonly known as wage
contract, which was given by auctioning the blazes to the
person who was prepared to undertake the wcrk of extrac-
tion and collection of resin at the lowest rates of labour
E
charges and in such contract, the entire res;n extrac· ed and
collected by the contractor would belong to the State and ·
the contractor would be entitled only to the wage or labour
charges for extraction and collection of resin.
'2) The second type of contract was on the basis cf royalty
without load and under th's contract, which was again given F
by auction stipulating for payment of royalty per bia.le, the
entire resin extracted and collected by the contractor
would belong to him and he would be free to sell or pro-
cess it as he liked.
(3) The third type of contract given by the S•ate was on the G
basis of royalty with load and under th's contract, which
was al<o given by aucti n, the royalty was payable per blaze
0

and out of the resin extracted and collected by the con-
tractor, a certain part would have to be surrendered to the
State while the balance would remain with the contractor.
B
l:very year the State auct'oned the blazes in the different fore<ts within
u ter1itory and about 40 per cent of the forests were given on royalty
1348 SUPREME COURT REPORTS [1980] 3 S.C.lt.

A basis, some with load and some without lead, while the balance of about
60 per cent were given on wage contract ba,is.

The resin, wh.ch was thus obtained by the State by giving out blazes
on contract whether on royalty-cum-load or on wage basis, was auc-

8
tioned by the State !rem time to time ard manu.acturers hav ng factories
for manufactures of resin, turpentine and other derivatives purchased it
·•
at the auctions. It is common ground that most of these purchasers
were manufacturers having their factories in Hoshiarpur district of
Punjab and at the material time, they depended for their requirement of
raw-material solely on the resin available at the auct.on held by the
State since supply of resin had ceased to be available from Uttar Pradesh
c and Himachal Pradesh on account of the policy adopted by the Govern-
ments in these territories. The State, however, in furtherance of its
policy to bring about rapid indus ria'irnti n, dee ded that from the year
1979-80 onwards, the resin extracted from its forests should not be
allowed to be exported outside the territories of the S ate and should be
utilised only by industries set up w thin the Sta e. The s·ate ·n fact en-
D tered into contracts with three manufacturers, namely, Prabhat Turpen-
tine and Synthetics Pvt. Ltd., Dujodwala Resin and Turpentine Pvt. Ltd.
and Pine Chemicals Ltd. under wh'ch these three manufacturers agreed
to pvt-up factories in the State for mannfacture of resin, turpent ne and
other derivat,ves and the State agreed to make available to them respec-
E tively an assured supply of 4,000, 3500 and 8000 metric tonnes of resin
per year. The validity of thece contracts was challenged before us in
_writ petitions Nos. 37-38 of 1979, but these writ peti ions were d smissed
by us by an Order made on 21-12-79. The Sate had a'so ccmmitments
to supply resin to its own concern, namely, J & K Indus tr.es L d., which
was running a factory for manufacture of resin and turpentine as also to
F various small scale units wh ch were set-up in the State. It appears that
the total requirements of the State for the purpose of meeting these
commitments was in the pdghbourhood of 24,000 metric tonnes of resin.
Now ir. view of the fact that quite a large n11mber of forests were being
given out by the State for tapping on royalty contract basis, sometimes
w·th load and som'times ern without I ad, the aggrega e quant ty of
G resin whicli was being collected by the state was very much short of
the total requirement of 24,000 metr:c tonnes and it was. therefore, felt
to be abrnlutely necessary for the State to increase its procurement of
resin so as to be able to meet its commitments. With this end in view
a meeting of the Chief Conservator of forests and other forest officials
was held on 9th December, 1978 for the purpose of discu's·ng ways and
means for achieving a higher target of production of resin. Jt Wai
decided at this meeting that the increa~ect target of production could be
achieved only through replacement of royalty contracts by wage con-
.)(ASTUlll LAL LAKSHMI IU!DDY v. STATE OP J."' K· (Bhagwati, J.) 1349
trncts wherever possible and hence in future blaze should be auctioned A
for tapping only on wage con\f'dct basis.

Now there were certa.n fores's in Reasi and Ramban Divisions of
the State which were difficult of acce8s on acccunt of their & tance from
• the roads and so were some forests in the Poonch Division near the line
of actual control. So far as the forests in the Rea i Division were con- ' a
cerned, there were 6,08,115 blazes which were attempted to be given
for tapp:ng in the year 1976-77 on rcyalty contract bas,s w'thcut load
but out of them only 1,28,856 blazes were tzken by one Prem Kumar
Sood and that too on a royalty of only Rs. 2.55 per blaze, as against
royalty of about Rs. 6/- per blaze obtained by the State in other in-
accessible areas by giving contract on royal y basis with I' ad cf 3 Kg. C
per blaze. Moreover, these 1,28,856 blazes· were situate in the lower
reaches of inaccessible forests and no contractors could be found for
taking tapping contracts. even on the basis of royalty without load, for
blazes in the h:gher regions of the inaccessible areas. The same
1,28,856 blazes were again put-up for auction for the year 1977-78, hut
no bidders came forward to take a contract even on royal y with0ut D
load basis. Then for the year 1978-79, out of these 1,28,856 biazes,
72.951 blazes were once again pu'-up fer auction and thrugh th'se were
situate in less inaccessible areas than the rest of the blazes, the response
was most diecouraging and no one came forward to make a bid for tak-
ing the contract even on royalty basis without le ad. The result was
that practically no tapping was dcne frcm these 6,08,115 blazes in the
&
forests of the Reasi Division upto 1979-80. There were also sorre new k

blazes marked in the forests of the Reasi D.vi ion for the year 1979-80
and out of them, 4,20,340 blazes were in areas which were inaccess'ble
on account of their being at a distance of 8 to 40 k.ms. frcm !he road-
side. Even out of the o'd 6,08,115 blazes there were 3,10,674 blazes
which were situate in the same ca' egory of inaccessible areas. So far
f as the forests in the Ramban Divis.on are ccncerned, :here were 1,24,400
blaze:, which were equally inaccessible "due to long lead upto coupe
boundanes and transit depots" and the position in regard lo 3,30,000
blazes which were under tapp'.ng in Poonch Division, was also similar
to that of the inaccessible areas in Reas[ and Ramban Divisions \\ ith G
the additional handicap of their being situate along the line of actual
control. There were thus in all about I l,85,414 blazes ;n the Reasi,
Ramban and Poonch Divisions which were in inaccessible areas and
having regard to the high cost of extraction and collection of resin as
also the scarcity of trained labour in those areas, it was not poss'ble
to give out these blazes by auction on wage contract basis. The past K
experience showed that even on the basis of royalty without load,
contractors were not forth-coming for taking contracts in respect of
1350 SUPREME COURT REPORTS 11980] 3 S.C.R.

blazes in the inaccessible areas of the Reasi Division and giving out of
the aforesaid blazes in the Reasi, Ramban and Poonch Divisions on
wage contract basis was, therefore, almost an impdssible proposition,
The Chief Conservator of Forests and other forest officers accordingly
decided at their meeting of December 9, 1978 that these blazes could
not be tapped through wage contract because "apart from the total
non-availablity of local Jabour in these areas, cost of· production due
to long lead upto coupe boundaries and transit depots would be pro-
hibitive" and all such areas should, therefore, be excluded from tap-
ping wage contracts.

These decisions taken in the meeting of 9th December, 1978 were
c confirmed at a subsequent meeting which took place between the Fomt
Minister, the Forest Secretary, the Chief Conservator of Forests and
1other forest officers on 26th December, 1978. It was further decided
in this meeting that "the departmental tapping through wage contracts
should be confined to accessible chir forests" only and so far as
11,85,414 blazes in the inaccessible areas of the Reasi, Ramban and
D Poonch Divisions were concerned, the consensus was that "these blazes
should ~ allotted to some private party as procurement of resin from
them through wage contracts was not feasible, being difficult and
costly" and "the financial status and experience in extraction of resin
from forests and its distillation in the factory should be decisive fac-
tors" in regard to such allotment. Now it is necessary to point out that,
E prior to the date of this meeting, the 2nd respondents had addressed a
letter dt. 15th April 1978 to the Minister for Industries, offering to set-
up a factory for manufacture of resin, turpentine oil and other deriva-
tives in the State "with the latest know-how under t11e supervision of the
State Government" and seeking allotment of 10,000 metric tonnes of
F resin annually for that purpose. The 2nd respondents pointed out in
their ktter that they possessed vast exper'ence in processing of resin
and re-processing of resin and turpentine oil and manufacture of a wide I
(
range of derivatives, since they had 2 factories for manufacture of resin
and turpentine oil, one in Hoshiarpur and the other in Delhi and more-
over, they had also ·been working as resin extraction contractors since
G 1974 antl were also bulk purchasers of resin at the auctions held by the
·state. It was also stated by the 2nd respondents that they had reliably
learnt that Camphor and Allied Products Ltd. and Prabhat General
Agencies were being considered by the State for allotment of resin to
feed the units to be set-up by them within the State and they expressed
their willingness to take the allotment df resin for their proposed· factory
U on the same terms and conditions. This offer of the 2nd ·respondents
was forwarded to the Forest ·Minister, but despite the policy of the Slate
!o encourage setting-up of resin:based industrial ullits in the State, it
'' ,, :

.. ~ASl'UB.l LAL LAKSlJMI IU!4ll)l' v. STATE pp J, it K· (Bhagwati, J.)1351

;was not found possible, having regard to the commitments already .made
by the State, to .make any allotment of resin to the 2nd respondents. A
~ was, therefore, mooted by the forest offic;ah that about 10 to
..1£ lacs blazes in inaccesaible areas could be made available for tapping
to the 2nd respondents on certain terms and conditions, so that out of
.the .quantity tapped, a certain portion could be retained by the 2nd res-
·{IDlldents for be:ng utilised in the factory to be .set-up by them within B
.the State and the balance could be surrendered to the Government. The
• 2nd respondents were .agreeable to this proposal and in fact
they put it forward as an alternative proposal for consideration by the
Stale, but no decision was taken on it until the meeting of 26th
December, 1978. When, as a re!il/!t of di&cnssions at this meeting, · c
.the consensus was reached that 11,85,414 blazes in the inaccessible
areas of Reasi, Ramban and Poonch Divisions should be allotted to
some private party for ensuring supply of resin to be utilised in the
factory to be set-up by such party within the State, !he proposal of the
2nd respondents was considered alongwith the applications of some
others including the petitioners in the light of· the factors agreed upon D
lit the meeting and having regard to the vast experience of the 2n~
1'espondents in extraction and processing of resin and in view <if the
fact that they were large purchaser_s of resin at the auctions held by
the State, it was decided that the case of the 2nd respondents should
be processed for submission to the Government.

It appears that J & K Resin Contractors Association (hereinafter
referred to as the association) came to know sometime in October,
1978 that the 2nd respondents had approached the State Government
·1111d .there was a propllSal to allot to them "certain resiri coupes on
royalty system of 10 years" on the basis that they would install a
ftctory for manufacture of resjn and turpentine at J ammu w:th sizable F
investment. The association thereupon add~ed a letter to the Chief
• Minister in Ocotber, 1978 pamplaining against giving of contract to
an outllide party by private negotiations and pleading that contract,
·Whether on royalty basis or otherwise, should be given only by open
"• 11uction. It is significant to note that no offer was made by the asso-
ciation in this letter to set up a· resin-based industrial unit in the ')tate G
·and the only plea was that tapping contract should not be given by
"""'* 1 'PfiV&te negutiations to a non-state party; but should be given only
·by open auction. Since the decision was taken at the meetings of 9th
:December, 1976 ana 26th Dl:cember, 1978 that blazes in"the inacces·.
-sible areas of Reasi, Ramban and Poonch Divisions should not bel
-given on wage contract basis, they were excluded from the auctions
-held by the State and the association, therefore, addressed .a letter
',ll, ;Jfated 22nd Jannuaryi 1979 to the Chief Conservator of Forests
f
1352 SUPREME COURT l\l!PORTS C1980] 3 s.c.a..

A requesting . him to include these blazes in the auctions. This was.
followed by another letter dated 5th Febru1ry, 1979' addressed by the
association to the Forest Minister where the request for inclusiou of
these blazes in the auctions was repeated by the association. The
assoclat:on also pleaded with the Forys! Minister that instead · of
adopting the wage contract method for giving out blazes for tapping
B
contracts, "The system of rciyalty contract with increased load"'
should be continued in the forests divisions including Reasi, Ramban
and Poonch. The same request was repeated by the association :n a
letter dated 8th March, 1979 addressed to the Chief Minister. There
was obviously no reply to these communications since it had already
c been decided that tapoing of blazes in the accessible chir forests
should be done only through wage contracts and 11,85,414 b'azes ini
the inaccess'ble areas of Reasi Ramban and Poonch Divisions shculd
be allotted to some private party, which was prepared to set-up a '
factory for manufacture of resin, turpentine and other derivatives in
the State.
D
The 2nd respondents presumably, on coming to kn0w that their
alternative proposal for allotment of 10 to 12 lacs blazes in inacces-
sible areas was being processed by the Government, addressed a
letter dated 22nd February, 1979 to the Secretary to the Forest
Department formulating the broad terms of the proposal and'
E requesting the State Government to cons· der the proposal favourably
and come to a decision immediately. since the tapping season was
I commencing from 1st April, 1979. The association by its letter dated'
18th March, 1979 addressed to· the Chief Min;ster pretested a~ainst
the blazes in the Reasi, Ramban ard Poonch Divisions being gven to•
the 2nd respondents by negotiations on royalty basis for 10 years and
F urged that doing so would be contrary to Wie interests of the local
contractors and local labour and "will also be a source of huge loss to
the Government exchequer" since the price of resin was increasing
. day by day. Once again a plea was made by the association that
these blazes should be' given out for tapping contract by public auc-
f
tion. The petitioners also complained to the Chief Minister by a letter
G addressed in March, 1979 against giving of contract to the 2nd·
respondents who were an outside party and offered to take "all the
unt1ooed forests in the State 0n 2 to 3 years' lease on r<'tational bas's"
stating that they would pay 50 oaise per blaze more than that offered·
••
under any other proposal and that out of the quantity tapped by them
they would retain 3,000 metric tonnes which thev 'Would utilise for
H manufacturing resin, turpentine oil artd other derivatives in a new
modem factol')< tc, be set-up by them in some backward are• of the
State. The State did not acoept this offer made by the P!ltitioners and .,,.
· KASTURI LAL LAKSHMI REDDY V. STATI! OF J, & K· (B/tagwaJi, /.).1353
'
..,
decided to go ahead with giving tapping contrac~ in respeC1j of these
blazes to the 2nd respoodnts.

The State accordingly, passed an Order dated 27th April, 1979
sanctioning allotment of 11.85 lacs blazes in the inaccessible areas of
Reasi, Ram.ban and Poonch Divisions to the 2nd respondents for a
B
period of 10 years on the terms and conditions set out in the ordei:•
• The 2nd respondents were required by clause II (iii) of the Orde1· to ·
surrender 25 % of the annual resin collected by them, subject to a
minimum of 1500 metric tonnes per annum, to the State for feeding
. the new resin 4istfilation plant which J & K Industries Ltd. proposed
to set up Rajouri/Sunderbani and they could retain the balance of c
_X the extracted resin subject to a maximum of 3500 metric tonnes per
annum. Clauses lI (iv) and V of the Order provided that the 2nd
respondents shall set-up a resin distillation plant in the small scale
sector for processing of npto 3500 metric tonnes of resin and the
extracted resin which is allowed to remain with them under the Order
shall be utilised only in the plant to be set-up by them and shall not D
be removed outside the State. Clause Il(v) of the Order stipulated
that the 2ud respondents shall : 1,

"(a) be paid the same wages for part of the resin extracted
and delivered to the depai:\!n~nt as would be sanc-
tioned by the Forest Department from Ytlll! to year E
for other departmental resin extruction contracts for
the adjoining blocks in the ·respective locality;
{b) get proportionate rebate in royalty on the quantity
thus surrendered (i.e. no royalty shall be charged for.
such quantity) ; and F
( c) deliver such resin at the JKL factory at Rajouri/
Sunderbani fur which no transport charges will. be
allowed.

Cause m provided that the price of resin retained by the 2nd respon"
dents shall be Rs. 350/- per quintal and it shall be subject to review . G.
after three years and every year thereafter and so far as the royalty
is concerned, Clause IV stated that it shall be worked out by a com-
.mittee, the basis of calculation being the cost of resin extraction. and
collection in adjoining areas given ont on wage-contracts from year
to year and the sale price of resin as fixed at Rs. 350/- .per quinta!,
fur a period of three years after which it shall be reviewed annually." H
This Order made by the State Government is being challenged in the
present pet:tions filed under Art. 32 of the Constitution.
27-610 SCI/80
1354 SUPIUlME COURT ~EPORTS [1980] 3 S.C.R.

A There were in the main three grounds on which the validity of
the Order was assailed on behalf of the petitioners. They were as.
follows:
(A) That the Order1is ar_]]itrary, nialafide and not in public
interest, inasmuch as a huge benefit has been con-
B ferred on the 2nd respondents at the cost of the State.
(B) The Onler creates monopoly in favour of the 2nd·
respondents who or a private party and constitutes
unreasonable restriction on the right of the petitioners
to carry on tapping contract business under Art. J9·
(I) (g) of the Constitution.

(C) The State has acted arbitrarily in selecting the 2nd'
·x_.·
respondents for awanling tapping contract, without
affording any opportunity to others to compete for
obtaining such contract and this action of the State
is not based on any rational or relevant principle and
D
is ther~fore, violative of Art. 14 of the Constitution
as also of the rule of administrative law which inhi-
bits arbitrary action by the State.

We shall examine these grounds in the order in which we have set
them out. but, before we do so, we may preface what we have to say
E
by making a few preliminary observations in regard to the law on tho:
subject.
'It was pointed out by this Court in "Ramana Dayaram' Shetty v.
The International Airport Autlwrfty of India & Ors.''(') that with the
growth of the welfare state, new forms of property in the shape of
1" Government largess are developing, since the Government is increas-
ingly ass\:mllng the role of regulator and dispenser of social services(
and provider of a large number of benefits including jobs, contracts,
licences, quotas, mineral rights etc.? There is increasing expansion of'
the magnitude and range' of ,governmental functions, as we move
G closer to the welfare state, and the result is that more and more of our .(
wealth consists of these new forms of property. 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. The la>y has however not been ~·~
slow to recognise the importance of this new kind of wealth and tile
need to protect individual interest in it and with that end in view, it
B has developed new forms of protection. Some interests in Govern-
ment largess, formerly regarded as privileges, 1\ave been recognised:
(1) [1979] 3 S C. R. 1014.
\

XASTURI LAL LAKSHMI ltl!DDY v. STATE OF J. & K· (Bhagwati, J.) 1355

all rights, while others have been given legal protection not only by A
forging procedural safeguards but also by confining, structuring and
checking Government discretion 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 largess in its arbitrary discretion
or as its sweet will or on sucl'.I terms a8 it chooses in its absolute dis-
cretion. There are two limitations imposed by law which structure B
and control the discretion of the Goemment in this behalf. The fits!
is in r~gard to the terms on which largess maY be granted and the
other, m regard to the. persons who may be receipients of such largess.

So far as the first limitation is conce!ned, it fiows directly from the
'}::, thesis that, unlike a private individual, the State cannot act as it pleases c
in the matter of giving largess. Though onlinarilyi a private individual
wotild be guided by economic considerations of self-gain in any action
taken by him, it is always open to him under the law to act contrary
to his self-inte1cst or to oblige another in entering into a contract or
dealing with his property. But the Gdvernment is not free to act as it
lil:es in granting largess such as awarding a contract or selling or D
leasing out its property. Whatever· be its activity, the Government
is still the Government and is, subject to restraints inherent in its posi-
tion in a democratic society. The constitutional power confened on
the Government cannot be exercised by it arbitrarily or capriciously or
in and unprincipled manner; it hllS to be exercised for the public good.
Every activity of the Government has a public element in it and it E
must therefore, be informed with reason. and guided by public interest.
Every action taken by the Government must be in public interest; the
6overriment cannot act arbitrarily and without reason and if it does,
its action wouTci be liable to be invalidated. If the Government awards
a contract or leas'es out or otherwi!le deals with its property or grants
F
any other largess, it would be liable to be tested for its validity on the
·~ touch-stone of reaSo!lableness and public interest and if it fail~ to
' satisfy either best, it would be unconstitutional and invalid.

Now what is the test of reasonableness which has to be applied in
order to determine the validity of governmental action. It ts un- . G
doubtedly true, as poirited out by Patanjali Shastri, J. in State of
Madra.i 'v. V. G, Rau,(') that in forming his own conception of what
is reasonable, in all the dreumstaDccB of. a given case, it is inevitable
that the social philosophy and the acale of values of the judge parti-
cipating in the decision, would play an important part, but even so,
·the test of reasonableness is not a wholly subjective test and its con- H
tours are fairly indicilted by the Constitution. The concept of reason-
(I) [1952] SCR 597.
!t
1356 SUPREMI!: COUltT REPORTS [1980] 3 S.C.R.

Aableness in fact pervades the on.tire constitutional scheme. The inter-
action of Arts. 14, 19 and 21 lllfl,YiC(lby this Conrt in Maneka Galtdhi
v. Union of India('), clearly dclllOllltratea that the requirement of
im.ronableness runs like a golden thread through the entire fabric of
fundamental rights and, as several decisions of this Court show, 1his
concept of reasonableness finds ilii positive manifestation and expces-
B sion in the lofty ideal of social and economic justice which inspires
and animates the Directive Principle&. It has been laid down by< this
Court in E. P. Royappai v. State of Tamil Nadu,( 2 ) and Maneka
Gand/u's case (supra) that Art. 14- ~!riles at arbitrariness in Sl!lte
action and since the princip~ of rusonableness and rationality, which
is legally as well as philosophically an essential element of equality
.c or non-arbitrariness, is pro(jected byi this article, it must characterise ,,,~
every governmental action, whether it be under the authority of law
or in exercise of· executive power without making of law. So also
the concept of reasonableness runs through the totality of Art. 19 and
requires that restrictions on the freedoms of the citizen, in order to be
D permissible, must at the best be reasonable. Similarly Art. 21 in the
full plenitude of its activist magnitude as discovered by Manelca
Gandhi's case, insists that no one shall be deprived of his life or per-
sonal liberty except in. accordance with procedure established by Jaw
and such procedure must be rea.wnable, fair and just. The Directive
Principles concretise and give shape to the concept of reasonableness
E envisaged in Articles 14, 19 and 21 and other articles enumerating the
fundamental rights. By defining the national aims and the constitu-
tional goals, they setforth the standards or norms of reasonableness
which must guide and animate governmental action. Any action taken
by the Government with a view to giving effect to any one or more
.of the Directive Principles would ordinarily, subject to any constitu-
F tional or legal inhibitions or other over-riding considerations, qualify
for being regarded as reasonable, while an action which is inconsistent
with or runs counter to a Directive Principle would incur the reproach
f
of being wrreasonable. ' ·
. · ·

I
G So also the concept of public interest must as far as possible
receive its orientation from the Directive Principles. What according
to the founding fathers constitutes the plainest requirement of public
interest is set out in the Directive Principles and they embody par
excellence the constitutional concept of public interest. If, therefoce, any
governmental action is calculated t1> ilmplement or give effect to a
H
(1) [1978] 2 SCR. 621.
(~) (1974] 2 SCR. 348.
KASTURI LAL LAKSHMI REDDY v. SYATI! OF J. & K. (Bhagwati, /,) 1357

Directive Principle, it would. ordinarily, subject to any other ovC{f' A
riding considerations, be informed with public interest. ·

Where any governmental action tails to satisfy the test of reason-
.ableness and public interest discusaed above and is found to be wanting
in the quality of reasonableneSI or lacking in the element of public
interest, it would be liable to be struck down as invalid. It must follow
as a necessary corollary from this proposition that the Government
•
cannot act in a manner which would benefit a private party at the cost.
of the State; such an actilon would be both unreasonable and contrary
to public interest. The Government, therefore, cannot, for example,
give a contract or sell or lease out its property for a consideration
less than· the highest that can be obtained for it, unless of coune c
there are other comiderations which render \t fe\\SOnable and in public
interest to do so. Such considerations' may be that some DirectiY~
Principle is sought to be advanced or implemented or that the contract
or the property is given not with a view to earning revenue but for
the purpose of carrying out a welfare scheme for the benefit at. a
particular group or section of people deserving it o~ that the person D
who has offered a higher consideration is not otherwise fit to be given
the contract 0r the property. We have referred to these considerations
only illustratively, for there may be an iinfinite variety of considera-
tiOllS which may have to be taken into account by the Government
in formulating its policies and it is on a total evaluation of various
E
considerations which have weighed with the Government in taking a
particular action, that the Court would have to decide whether the
action of the Government is reasonable and in public interest. But
one basic principle which must guide the Court in arriving at its
detennination on this question is that there is always a presumptioo
tkat the Governmental action is r~ble and in public in~eat
and it is for the party challenging its validity to show that it is want-
\f ing in reasonableness or is not informed with public interest: This
burden is a heavy one and it has to be discharged tci the satisfaction
of the Court by proper and adequate material. The Court cannot
lightly assume that the action taken by the Government is unreason-
able or without. public interest because, as we said above, there are G
a large number of policy considerations which must necessarily weigh
with the Government in taking action and therefore tho Court would
not strike down governmental action as invalid on this ground, unleM
it is clearly satisfied that the action is unreasonable or not in public
interest. But where it is so satisfied, it would be the pla.ines.t duty
of the Court under the Constitution to invalidate the governmenta.l B
action. This is one of the most important functions of the Court
anll also one of the most essential for preservatim ol the. rule of law.
1358 SUPREME COURT REPORTS [1980] 3 S.C.R,

A It is imperative. in a democracy governed by the rule of law that f!l:Y
vernmental action must be kept within the limit~ of the law if t~
is any transgression, the Court must be ready to condemn it. It is a
matter of historical experience that there is a tendency in every
government to assume more and more powers and since it is not an
uncommon phenomenon in countries: that the legislative check is
B getting diluted, it is le¥'! to the Court as the only other reviewing
authority under the Constitution to be increasingly vigilant to ensure
observance with the rule of law and in tl1iB task, the court must
not flinch or falter. It may be pointed out that this gronnd of invalidity,
namely, that the governmental action is unreasonable or lacking in
c the quality of public interest, is different from that of mala-(ides '#'
though it may, in a given case, furnish evidence of mala-fides. ~

The second limitation on the discretion of the Government in
grant of largess is in regard to the persons to whom such largess
may he granted. It is now well settled as a result of the decision of
this Court in Ramona D. Shelly v. International Airport Authority of
D India & Ors. (supra) that the Government is not free like an ordinary
individual, in selecting the recipients for its largess and it cannot
choose to deal with any person it pleases in its abs<>lute and un-
fettered discretion. The law iS now well established that the Govern-
ment need not deal with anyone, but id'. it does so, it must do so faidy
E without discrimination and without unfair procedure. Where the Go-
vernment is dealing with the public, whether by way 'of giving jobs or
entering into contracts or granting other forms of largess, the Govern-
ment ernnot act arbitrarily at its sweet will and, like a private indivi-
dual, deal with any person it pleases, but its actioq must be ill
conformity with some standard or norm which is not arbitrary, ma-
F tional or irrelevant. The governmental action must not be arbitrary ,
or capricious, but must be based on some principle which meets the ' r
test of reason and relevance· This rule was enunciated by the Court f,
as a rule of administrative law and it Was also validated by the Courll'
as an emanation flowing directly from the doctrine· of equality
embodied in Art. 14. The Court referred to the activist magnitude
.G of Art. 14 as evolved in E. P. Royapp(i v. Sttite of Tamil Nadu (supra)
and Maneka Gandhi's case (supra) and observed that it must follow •
"as a necessary corollary from the p<:inciple of equality enshrined in
Art. 14 that though the State is entitled to refuse' td enter into relation-
ship with anyone, yet if it does so, it cannot arbitrarily ,choose any
person it likes for entering into such relationship and discriminate
II between persons similarly circumstanced, 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
KASTURI LAL. LAKSHMI REDDY v. STATI! OF J. & Ko (Bluigwa.t.i, J.)1359
' '

principle would be invalid unless it can be supported or justified on
BOme rational and non-discriminatory> ground." This decision ~ re-
aftirmed the principle of reasonableness and non-arbitrarine!ls in
.A- governmental action which lies at the core of our entire constitutional
scheme and structure.
It is in the light of ihese two limitations on the discretiton of th~
Government in the matter of grant of !!rgess that we must proceed to B
examine the grounds of attack urged on behalf of the petitiop.ers.
Re Ground A:
The argument under this head of challenge was that the State h(id

.'°"'
. under the impugned Order. granted tapping c01;itmct to the 2nd res-
pondents on terms which were highly disadvantageous to the State
./'-and involved considerable loss of f(Wenue to the Government ex-
c
chequer. 1be petitioners contended that the price of resin realised at
the auction held in December 1978 was Rs. 484/- per quintal; it was
Rs. 520/- per quintal at the auc;tion h<;ld in January 1979 and it rose
to Rs. 720/- per quintal at the auction held in April 1979 but des-
. pite this phenomenally high price which could have been obtained D
in auctibn, the State chose to sell resin to the 2nd respondents at a
low price of Rs. JSOi- per quintal foe a period of 3 years under the
impugned Order, conferring huge benefits on the 2nd respondents at
the cost of the Government exchequer. The impugned Order there-
fore, said the petitioners, was wholly arbitrary, unreasonable and
contrary to public interest and was liable to be struck down as invalid. E
This argument plausible though it may seem at. first blush, is in our
opinion not well founded and a closer look at the facts will clearly
show that it cannot be sustained.
We may first clear the ground by stating a few undisputed facts.
The practice which was being followed by the State until the yeru: F
. , 1979-80 wa§ to give out blazes in the chir forests either on wage
l
contract basis or on royalty basis with or without load. The result
was that about 50 per cent of the resin extracted used to be take~
away 1\Y the contractoi:s and the balance of 50 per cent remained
\ with tht) State which the State partly made available to its ow'n fao-
tories and small scale units in the State and partly sold by auotioni G
and out of the quantity auctioned the bulk was purchased by manu-
~ "f facturers having factories in Hoshiarpur. It appears that from about
1975 onwards the State embarked upon a policy of industrialisation
and in furtherance of this policy, it decided some time in the later
half of J978, that from the year 1979-80, no resin should be allowed
to be expotted outside the Stare tecritories and that it should be' H
made available for being utilised ooly in industries set up witJ¥n the
State. But this measure by itself was not enough, because so long as
1360 SUPREME COURT ~EPORTS [1980] 3 S.C.R.

A contracts for extracting resin were given on royalty basis with oc
without lood, a sizable quantity of resin extracted would g0 into the
hands of the contractors and would not become avail.able to the
State for fulfilling its commitments. The State, thereifore, decid!P
as a matter of policy to replace royalty can.tracts by wage contracts
wherever pos&ble and to auction blazes for tapping only on wagei
B contracts basis. But, as pointed out a_bove, there were certain forests
in Reasi, Ramban and Poonch Divisions which were difficult of access
on account of their distance from the roads and some of the foresta
in Poonch Division were near the line of actual control and conse-
quently it was found impracticable to give them for tapping on wage
con~act basis. It. was difficult .to give th".111 for tapping even on thq .#'
c ba&tS of royalty without load and the maxunum that could be obtain- /'\._
ed for a part of the blaz.es in the Reasi, Division in the year 1976-77
was royalty of Rs. 2.55 per blaze without load. It was, therefore,
decided by the State to exclude about 11,85,414 blazes in the Reasi,
Ramban and Poonch Divisions from tapping through wage contract
and they were kept out of the auctions held by the State. The
D Association undoubtedly made representations requesting the State to
include these blazes in the auctions, but as is evident from the letters
dated 5th February 1979 and 8th March 1979 addressed respectively
to the Forest Minister and the Chief Minister, the emphasis of the
Association was that 'the system ofj working should be changed from
wage contract to royalty contract" and that these blazes should be put
E to auction on royalty basis. Tire State obviously, in view of its policy,
could not accede to this request made on behalf of the Association
and since, having regard to past experience, it was felt that it would
be futile to offer these blazes for tapping through wage contract, the
State was not unjustified in not including them in the auctions. Now
F the second respondents offered to set up a factory for manufacture
of resin, turpentine oil and other derivatives in the State and requested /'
to State to make allotment Qf resin annually fur this purpose on the f
same terms and conditions on which allotment was propos~ to be<
made to Camphor and Allied Products Ltd. and· Prabhat General
Agencies. The State, in view of its policy of Industrialisation, was
G interested in the setting up of the factory by the second respondents,
particularly since! the second respondents had two factories- for manu-
. · facture of resin, turpentine oil and other derivatives and they pos-
sessed larger experience in processing of resin and reproces-
sing of resin, turpentine oil and other derivatives. But, having
regard to the commitments already llll!de by it, it was not possible
H for the State to make any definite allotment of resin to the second
respondents. The State, however, had these blazes in the Reasi, Ram-
ban and Poonch Divisions which it was finding impracticable to tap
KASTURI LAL LAKSHMI REDDY v. STATE OF J. & K· (Bhagwati, !.) 1361

tllrough wage clmtraet and the State, therefore, decided to give them A
for tapping to the second respondents on certain terms and conditions,
so that th~ second responde11ts could if they were prepared to tap
these blazes in inaccessible areas, secure an assured supply of 3500
metric tonnes of resin for the purpose of the factory to be set up
by them within the State. It was in these circumstances that the
impugned Order dated 27th April 1979 ciµne to be passed by B
the State.
It is clear from the back-drop of the facts and circumstances in
which the impugned Order came to be made and terms and condi-
tions set out in the impugned prder that it was not a tapping con-
tract simpliciter which was intended to be given to the second respon-
dents. The second respondents wanted to be assured of regular
supply of raw material in the shape of resin before they could decide
to set up a factory within the State and it was for the purpose of
ensuring supply of such raw material that the impugned Order was
made giving tapping contract to the second respondents. It was
really by way of allocation of raw material for running the factory
that the impugned Order was passed. The terms of the impugned D
Order show beyond doubt that the second respondents were under
an obligation to set up a factory within the State and that 3500 metric
tonnes of resin which was permitted to be retained by the 8econd res-
pondents out of the resin extracted by them was required to be utilised
in the factory to be set up by them and it was provided that no part of
the resin extracted should be allowed to be removed outside the State. E
The whole object of the impugned Order was to make available 3500
metric tonnes of resin to the second respondents for the purpose of
running the factory to be set up bY' them. The advantage to the State
was that a new factory for manufacture of resin, turpentine oil and
other derivatives would come up within its terriiories offering more job
F
' opportunities to the people of the State increasing their prosperity and
I l augmenting the State revenues and in addition the State would be
assured of a definite supply of at !east 1500 metric tonnes of resin for
itself without any financial involvement or risk and with this addition.al
quantity of resin available to it, it would be able to set up another fac-
tory creating more emploYll!ent opportunities and, in fact, as the G
counter affidavit of Ghulam Rasul, under secretary to the Govern-
ment filed on behalf of the State shows the Government lost no time in
taking steps to set up a public sector resin distillation plant in a far
tlung area of the State, namely, Sundarbani, in Rajouri District.
Moreover, the State would be able to secure extraction of resin from
these inaccessible areas on the best possible terms instead of allowing R
them to remain unexploited or given over at ridiculously low fOYll:lty.
We cannot ·accept the contention of the petitioners tht under the im-
1362 SUPREME COURT REPORTS [1980] 3 S.C.R.

pugned Order a huge benefit was conferred on the second respondents
at the cost of the State. It is clear from !he terms of the impugned
Order that the second respondents would have to extract at least 5000
metric .tonnes of resin from the blazes allotted to them in order to be
entitled to retain 3500 metric tonnes. The counter affidavit al
Ghulam Rasul on behalf of the first respondent and Guran Devaya Oii
behalf of the second respondents show that the estimated cost of ex-
traction and collection of resin from these inaccessible areas would be
at the least Rs. 175/- per quintal, though according to Guran Devaya
it would be in the neighbourhood of Rs. 200 per quintal, but even if
we take the cost at the minimum figure of Rs. 175 / per quintal, the
total cost of extraction and collection would come to Rs. 87,50,000,i-
c and on this .investment of Rs. 87 ,50,000 /- required to be made by the
second respondents the amount of interest at the prevailing bank rate
would work out to about Rs. 13,00,000/-. Now, as against this ex-
penditure of Rs. 87,50,000/- plus Rs. l3,00,000/- the second respon-
dents would be entitled to claim from the State, in respect of 1500
metric tonnes of resin to be delivered to it only at the rate sanctioned
D, by the Forest Department for the adjoining accessible forests which
were being worked on wage contract basis. It is stated in the counter
affidavits of Ghulam Rasul and Guran Devaya and this statement is
not seriously challenged on behalf of the petitioners, that the cost of
extraction and collection as sanctioned by the Forest Department for
the adjoining accessible forests given on wage contract basis in the year
1979-78 was Rs. 114 /- per quintal and the second respondents would,
thus, be entitled to claim from the State no more than Rs. 114/- per
quintal in respect of 1500 metric tonnes to be delivered to it and apart
from bearing the difference between the actual cost of extraction and
collection and the amount received from the State at the rate of Rs.
.F 114/- per quintal in respect of 1500 metric tonnes, the second respon-
dents would have to pay the price of the remaining 3500 metric tonnes
to be retained l:iy them at the rate of Rs. 350/- per quintal. On this
reckoning, the cost of 3500 metric tonnes to be retained by the second
respondents would work out at Rs. 474/- per quintal. The result
I
would be that under the impugned OrdeL the State would get 1500
metric tonnes of resin at the rate of Rs. 114 /- per quintal while the
second respondents would have to pay at the rate of Rs. 474/- per
quintal for the balance of 3500 metric tonnes retained by thelll.
Obviously, a large benefit wouhl accrue to the State under the impngJl-
ed Order. If the State were to get the blazes in these inaccessible area.>
tapped through wage contract, the minimum cost would be Rs. 175/-
JI per quintal, without taking into account the additional expenditure on
account of interest, but under the impugned Order the State would get
1500 metric tones of resin at a greatly reduced rate of Rs. 114/- per
KASTURI LAL LAKSHMI REDDY v. STATE OF J. & K· (Bhagwati, l.) 1363

quintal without any risk or hazard. The State would also receive for A
3500 metric tonnes pf resin retained by the 2nd respondents price or
royalty at the rate of 474/- per quintal which would be much higher
than the rate of Rs. 260/- per quintal at which the State was allottiog
resin to medium scale industrial units and the rate of Rs. 320/- pe~
quintal at which it was allotting resin to small scale units within the
B
State. It is difficult to see how on these facts the impugned Order
could be said to be disadvantageous to the State or in any way favour-
ing the second respondents at the cost of the State. The argument of
the petitioners was that at the auctions held in December 1978,
January 1979 and April 1979, the price of resin realised was as much
as Rs. 484/", Rs. 520/- and Rs. 700/- per quintal respectively and c
when the market price was so high, it was improper and contrary to
public interest on the part of the State to sell resin to the second res-
pondents at the rate of Rs. 320/- per quintal under the impugned
Order. This argument, plausi11!e though it may seem, is fallacious
because it does not take into account the policy of the State not to
allow export of resin outside its territories but to allot it only for use D
in factories set up within the State. It is obvious that, in view of this
policy, no resin would be auetioned by the State and there would be
no question of sale of resin in the open market and in this situation,
it would be totally irrelevant to import the concept of market price
with reference to which the adequacy of the price charged by the State
to the 2nd respondents could be judged. If the State were simply E
selling resin, there can be no doubt that the State must endeavour to
obtain the highest price subject, of course, to any other overriding con-
mderations of public interest and in that event, its action in giving resin
to a private individual at a lesser price would be arbitrary and cont-
rary to public inte,rest. But, where the State has, as a matter of policy,
stopped selling resin to outsiders and deci<jed to allot it only to indus- F
\ tries set np within the State for the purpose of encouraging industriali-
l sation, there can be no scope for complaint that the State is giving
resin at a lesser price than that which could be obtained in the open
market. The yardstick of price in the open market would be whoHy
inept, because in view of the State policy, there would be no question
of any resin being sold in the open market. The objeet of the State in G
such a case is not to earn revenue from sale of resin, but to promote
the setting up of industries within the State. Moreover, the prices
realised at the auctions held in December 1978, January 1979 and
April · 1979 did not reftect the correet and genuine price of
resin, because by the time these auctions came to be held, it had become
known that the State had taken a policy decision to ban export of H
resin from its territories with effect from 1979-80 and the price8
:realised at the auctions were therefore scarcity prices. In fact, tire
1364 SUPREME COURT REPORTS [1980] 3 S.C.R',

A auction held in April 1979 was the last auction in the State and
since it was known that in future no resin would be available for saie"
by auction in the open market to outsiders, an unduly high price of
Rs. 700/· per quintal was offered by the factory owners having their
Jo.
factories outside the State, ~o that they would get as much resin or the )..
~

purpose of feeding their industrial units for some time. The counter
B affidavits show that, in fact, the average sale price of resin realised dur•
ing the year 1978-79 was only Rs. 433 /- per quintal and as compared
to this price, the 2nd respondents were required to pay price of royalty
at a higher rate of Rg. 474/- per quintal for 3500 metric tonnes of
resin to be retained by them under the impugned Order. It is in the
circumstances impossible to see how it can at all be said that any
c benefit was conferred on the second respondents at the cost of the State.
The first head of chaHenge against the impugned Order must, there•
;{
fore, be rejected.

D RE. GROUND "8" :

It is difficult to appreciate how the impugned Order could be
assau1ted on the ground that it created monopoly in favour of the 2nd
respondents or imposed unreasonable restriction on the right of the
petitioners to carry on tapping business under Article 19 (1 )(g) . The
E impugned Order did not hand over the tapping of the entire forest area
in the State excl\isively to the 2nd respondents so as to deny the
opportunity of tapping any forest areas to the petitioners. What was
done under the impugned order was merely to allot 11,85,414 blazes
in the inaccessible areas of Reasi, Ramban and Poonch divisions to
the 2nd respondents so that the 2nd respond.ents could have an assured
F ~upply of 3500 metric tonnes of resin for the purpose of feeding the
factory to be set up by them in the State and a large number of blazes
amounting to about 68 lacs in other forest areas of the State were left
,
{
available for tapping by the petitioners_ and other forest s;ontractors.
No monopoly was created in favour of the·second respondents; the
petitioners and other forest contractors could bid for wage contract in •
respect of the other blares ~hich were more than five times in number
1
G
than the blazes allotted to the second respondents. The petitioners in
writ petition 481 of 1979, in fact, obtained a wage contract for extrac~
tion of resin from an easily accessible forest in Rajouri Division for ~·
the aggregate sum of Rs. 2,80,250/- in the year 1979-80 and though
it fa true that the petitioners in writ petition No. 482/79 did not obtain
H any wage contract for tapping in this year, it was not because blazes
were not available for tapping, but because the petitioners did. not get
their registration renewed.
KASTURI LAL LAKSHMI REDDY v. STATE OF J. & K. (Bhagwati, J.) 1365

RE. GROUND "C'
The third and last ground of c_hallenge is also difficult to sustain;
.~;-'We fail to see how the action of the State in makin~ the iJllp~ecl
Omer in favour of the 2nd responden~ could be said to be arbitrary
_. or unreasonable. It is clear from the facts we have narrated above
and we need not repeat those facts again, that the State was not un- B
justified in excluding 11,85,414 blazes 11ituate in the inaccessible areas
of Reasi, Ramban and Pooncbi Divisiom from the auctions, since the
put" experience showed that even on the basis of royalty without load,
it was difficult to attract bidders and the maximum !tha~ could be
. obtained, and that too ooly in one solitary year, was Rs. 2.55 per blaze
~ without load, which was an absurdly low return and i~ was, therefore, c
~ felt quite justifiably, that it would be futile to include these blaze8 in
the auctions for tapping on wage contract basis. The state also could
not award a contract simpliciter for tapping on the basis of royalty
with or without load, because, as a matter of policy, with a view to
encouraging industrialisation, the State did not want resin to go outside
itll territories but wanted it to be used only foc the purpo8e of feeding D
industries set up within the State and even if a: condition could legiti-
mately be imposed on the contractor that he should sell the resin;
extracted and retained by him only to industries within the State, it
would be difficult to ensure observance of such condition and more-
over the object of the State ta make resin available to the local indus-
tries at a reasonable price might be frustrated, because the eontrattor
E
taking advantage of scarcity in supply of resin, might, and in all proba-
bility would, try to extract a much higher price from the industries
n~ding resin. It was thus found to be an impracticable proposition
to tap these blazes either on wage contract basis or on the basis of
royalty with or without load. p
'l Now the 2nd respondents had 'made an offer far putting up .:t
modem plant for manufacture of resin, turpentine oil and other deri·
vatives within the State provided they were assured a definite supoly
of resin every year. But having regard to the commitments already
made by it, it was not possible for the State to make any definite G
allocation of resin ta the 2nd respondents and a proposal was there-
fore mooted that 11,85,414 blazes in inai:cessible areas oe Reasi,
Ramban and Poonch Divisions could be allocated to the 2nd respon-
dents for tapping on certain terms and conditions, so that the 2nd res-
pondents could tap these blazes and out of the resin extracted, obtain
for themselves an assured supply for running the factory to be set uo H
by them and make the balance quantity available to the State for ;ts
own purpose. The 2nd respondents wece agreeable to this proposal
•
1366 SUPREME COURT REPORTS [1920] 3 s.c.R.

A and they accordingly put forw11Id an alternative propo!ial on these
lines for the consideration of the Slate and even~y. the impugned
Order crune to be made in favour of the 2nd respondents. We ,,,-, .
have already discussed the tenns of the impugned Order and it is cleat A'-•
from what we have said that the impugned Order was unquestionable
and without doubt, in the interest of the State ancl even with a micros-
B copic examination we fail to see anything in it which could possibly
incur the reproach of being condemned as arbitrary or irrational. It
is true that no advertisements were issued by 'the State inviting tenders
for award of tappmg contract in respect ot these blazes or stating that
tapping contract would be given to any party who is prepared to put
up a factory for manufacture of resin, turpentine oil and other deriva- ·'Ir
c lives within the State, but it must be remembered that it was not a /'"\,._
tapping contract simpliciter which was being given by the State. The
tapping contract was being given by way of allocation ,,f raw material
for feeding the factory to be set up by the 2nd respondents. The pre-
dominant purpose of the transaction was to ensure setting up of a
factory by the 2nd respondents as part of the process of industrialisa-
D tion of the State and since the 2nd respondents wanted assurance of a
definite supply of resin as a condition of putting up the factory,, the
State awarded the tapping contract to the 2nd respondents. for that
purpose. If the State were giving tapping contract si;mpliciter there
can be no doubt that the State would have to auction or invite tenders
for securing the highest price, subject, of course, to any other relevant
E
overriding considerations of public weal or interest, but in a ~ase like
thi~ where the State is allocating resources such as water, power, raw
materials etc . for the purpose of encouraging setting up of industries
within the State, we do not think the State i~ bC)und to advertise and
tell the people that it wants a particular industry to be set up within
F
I
the State and invite those interested to come up with proposals for the·
purpose. The State may choose( to do so, if it thinks fit and in a given
situation, it may even tum to be advantageous for the State to do
so, but if any private party comes before the State and offers to set UP'
an industry, the State would not be committing breach of any consti-
tutional or legal obligation if it negotiates with such party and agrees i
G to provide resources and other facilities for the purpose of setting up
the industry. The State is not obliged to tell such party; "Please wait.
I will first advertise, see whether any other offers are forthcoming and
then after considering all offers, decide whether I should let you set
up the industry." It would be most unrealistic to insist on such a
procedure, particularly in an area like Jammu and Kashmir which
H on account of historical, political and other reasons, is not yet indus-
\ trially developed and where entrepreneurs have to be offered attractive
tenns in order to persuade them to. set up an industry. · The State·
KASTURI LAL LAKSHMI
- REDDY
- V. STATE OF J, & K. (Bhaglvati,
. .. J,) 1367

must be free in such a case tlJ negotiate with a private entrepreneur A
with a view to inducing him to set up an industry w,ithill the State and
~if the State enters into a. ~~ntract wi~ such entre_preneur for providing
....._ - ~esources and other facilities for setting up an mdustry, the contract
cannot be assailed as invalid so long as the State had acted bona fide,
reasonably and in public interest. If the terms and conditions of the
contract or the surrom1ding circumstances show that the . State j.las B.
acted !'Ulla fide or out of in1proper or corrup~ motive or in order to
promote the private interest_s of some one at the cost of the State, the
Court will undOllbtedly interfere and strike down State action as arbi-
irary, unreasonable or contrary to publid interest. But so long as the
State action is bona fide and reasonable, the Court will not interfere
-,._, merely on the ground that no advertisement was given or publicity c
made or tenders invited. Here, the 2nd respondents approached the
State for the purpose of setting up a modern factory for manufacture
of resin, turpentine oil and other derivatives and asked for allocation
of resin and the State, with a view to offering an incentive to; the 2nd
respondents to set up the factory, made the impugned Order awarding
D
the tapping contract in respect of these blazes to the 2nd respondents
as a part of a package deal. We have already pointed out and we
need not repeat again, that the impugned Order was reaspnable and in
the interest of the State and in the circumstances, we are clearly of the
view that it cannot be assailed as invalid merely, because no advertise-
ments were issued inviting offers for setting up a factory and tal<lng the E
tapIJing contract as an integral part of the transaction.

It may, however, be pointed out that though no advertisements
were issued by the State, the Chief Minister of J ammu iind Kashmir
had in. the course of three speeches' delivered by him--<me in Bombay,
the other in Calcutta and the third in New Delhi invited entrepreneurs
F
to set up industries within the State with a view to bringing about rapid
industrialisation and economic development of the State by utilising
its "peculiar natural resources" and converting them into finished or
semi-finished products and pronrising "various fonns of assistance and·
incentives" for the purpose. These speeches were widely advertised
in the newspapers and it_ was, therefore, kno'wn to entrepreneurs that
the State would be willing to provide resources and other facilities to
those who were interested in setting up industries within the State and,
in fact, the State was anxious to attract entrepreneurs to start indus-
i'ries and it was in pursuance of this invitation that Prabhat Tarpens
and Synthetics Private Limited, Dujodwala Resins and Terpens Pvt.
Ltd., Pine Chemicals Limited and the see-0ncl respondent~ made their B
respective offers for putting up factories within the State. It is, there-
fore, in any event not correct to say! that the petitioners had no oppor-
SUPREME COURT REPORTS [1980] 3 S.C.R.

tunity oi making an offer of setting up a factory and obtaining a tap- ,'\.'

ping contract for the purpose. ·

.
It is also necessary to p01nt out that
th 1 . . f h .. ,-J,.
.
e c aims o t e petJ.ttoners lit
writ petition No. 481 of 1978 and some others were considered by tho ;,..
Forest Minister and other forest officials at the meeting held on 25tb
December, 1978 and applying the criterion of "financial status and its.
distillation in the factory"-which criterion cannot be said to be irra-
tional or irrelevant-the application of the 2nd respondents was un-
a.filmously accepted. This decision cannot be said to be ma/a fide: or
prompted by improper or corrupt motive. There is, in fact, no evi-
dence before us to show or even as much a~ to, suggest that any favour . ··'It'
was conferred on the 2nd respondents at the cost of the State or tMt ~
the 2nd respondents were preferred to some others without any basis
or justification. The petitioners in writ petition No. 481 of 1979 had
very little experience of extraction of resin, since they had taken tap-
ping contract for the first time only in 1978-79 and so far as processing
of resin is concerned, !hey had no experience at all, as they did not
have any factory for processing of resin nor had they at any time in the
past, participated in any auction of resin. The petitioners in writ peti-
tion No. 481. of 1979 were principally grocery and provision mer-
chants and thongh they had taken some tapping contracts in the past,
they had no experience at all in processing of resin since they did not
own any factory. The 2nd respondents, on the other hand, had large
experience in extraction of resin from inaccessible forests of Poonch
Division and they also possessed considerable experience in distilla-
tion and processing of resin since they had two factories, one iD.
Hoshiarpur and the other in Delhi. The State had in fact given two
F contracts to the 2nd respondents in the year 1974-7 5 to install facto-
ries for manufacture of resin and turpentine oil in the public sector and
these contracts have been carried out by the 2nd respondents to the
f
entire satisfaction of the State. Therefore, !IO far as the relative' merits
of the petitioners on one hand and the 2nd respondents on the other
were concerned, the 2nd respondents were definitely superior and it
·G ca..'lnot be said that the State acted unreasonably or contrary to publio
interest in preferring the 2nd respondents and permitting them to put
up a factory within the State and awarding them tapping contract in
respect of these 'blazes for the purpose of the factory. It may be
pointed that the petitioners in writ petition No. 482 of 1979 bad not
even got their registration renewed for the year 1979-80 and hence •
no tapoing contract could possibly he given to them. We must,
accordingly, reject the third ground of challenge urged on behalf of
the petitions.
I KASTUIU LAL LAKSHMI REDDY v. STATE OF J. & K· (Bhagwati, /.) 1369

I
We are, therefore, of the view that there is no subst:mce in. any A
of dm contentions raised on behalf of the petitioners and it was for
this reason that by an Order dated 15-2-1980, we dismissed both tbese
writ petitions· with no order as to costs. ·

S.R. Petitions dismissed•

•

~tGSCI/80