Welfare State Functions, Charitable Acts Can't Be Regarded As 'Industry': Centre Tells Supreme Court In 9-Judge Bench Hearing
The Union Government on Tuesday (March 17) told the Supreme Court that welfare activities and charitable functions undertaken by the State cannot be treated as “industry” under labour law, cautioning against an overbroad application of the test laid down in Bangalore Water Supply and Sewerage Board v. A. Rajappa (1978).
Appearing before a nine-judge Constitution Bench, Attorney General for India R. Venkataramani submitted that while the “triple test” evolved in the 1978 judgment may be logically sound, its indiscriminate application has led to an unwarranted expansion of the definition of “industry”.
Colonial understanding of sovereign does not apply anymore: AG
“The triple test… is a good law,” the AG said, “but the issue arises in its overly broad application,” which risks bringing within its fold welfare schemes and governmental functions not intended to be treated as industrial activity.
He emphasised that modern governance cannot be confined to traditional sovereign functions such as defence and maintenance of public order. Instead, the State operates as a welfare entity implementing wide-ranging socio-economic policies. Such activities may involve organisational elements resembling industrial undertakings, but these “incidental operational aspects” cannot be isolated and treated as independent industrial activity.
"Social welfare activities and schemes are the enterprises undertaken by the government department that cannot be considered as industrial activity for the purpose. Caution must be taken while applying the triple test to different activities, especially in relation to charitable organisations and government departments carrying out sovereign functions, government functions, constitutionally mandated functions," he said.
The AG further argued that the 1978 ruling adopted a restrictive, colonial understanding of “sovereign functions,” which must now be revisited in light of India's constitutional framework. He also suggested that the Industrial Relations Code, 2020, though not directly applicable, could serve as an interpretative aid to avoid excessive expansion of the term “industry”.
"The modern state operates as a welfare state task in implementing wide-ranging socio-economic and development policies. Such activities undertaken by the state frequently involve organisational-operational elements, superficially resembling industrial undertaking; however, such incidental operational aspects deserve closer scrutiny and can't be isolated and treated as independent industrial activities which may undermine the broader government purposes," AG Venkataramani said.
A nine-judge Bench headed by Chief Justice of India Surya Kant and comprising Justices BV Nagarathna, PS Narasimha, Dipankar Datta, Ujjal Bhuyan, Satish Chandra Sharma, Joymalya Bagchi, Alok Aradhe and Vipul M. Pancholi is currently examining whether the expansive interpretation adopted in Bangalore Water Supply requires reconsideration.
Supporting the AG's position, Additional Solicitor General KM Nataraj (for State of UP) submitted that the concept of sovereign functions must be understood in the context of a constitutional democracy, rather than through a colonial lens. He pointed out that the 2020 Code exempts not only sovereign functions but also activities relatable to them.
On a query by Justice BV Nagarathna as to whether a defence canteen would be exempt, the ASG responded in the affirmative, stating that such establishments fall within “relatable sovereign functions”. When asked about remedies available to employees in such cases, he indicated that they could approach civil courts, invoke writ jurisdiction under Article 226, or move administrative tribunals.
Bench expresses reservations about using the 2020 Code to examine the 1978 judgment
The Bench, however, expressed reservations about relying on subsequent legislation to interpret the 1978 judgment. Justice Joymalya Bagchi cautioned that using the 2020 Code as an interpretative tool could effectively give retrospective operation to a law intended to operate prospectively.
On ASG saying the 2020 Code is clarifactory in nature, Justice Bagchi posed a question: "Would it not in effect, give a retrospective operation to the labour code when the legislature gave operative of the labour code from a posterior date of its passing, that is, from 2025? Now, if we in order to interpret or revisit the judgment, use 2020 as interpretative rules, would it not fall in re-legislating a prospective law as a retrospective law?"
ASG clarified that he cautiously said that it is like a clarificatory law.
On this, Justice Bagchi remarked: "Are you going to pass off a wolf in a sheep's clothing?... Once we interpret Bangalore in the shadow of the 2020 code, and we carve out sovereign functions by giving it a wider interpretation as learned Attorney and you are proposing, we are importing the restrictions of the 1982 amendment and the 2020 labour code, although the legislature did not introduce them retrospectively. Now, in this interpretation, the danger is that disputes in existence at various stages of adjudication will now be covered by our interpretation, which will be binding as per Article 141?
Clarifying the scope of the reference, the CJI stated that the Court cannot rely on the unnotified 1982 amendment or the 2020 Code to revisit Bangalore Water Supply. The Court would instead confine itself to examining whether the 1978 judgment was correctly decided.
Justice Narasimha then flagged the pitfalls of the legislature failing to give proper definition and leaving the matter to the interpretation of the Courts.
"Instead of keeping case by cases basis and burdening the court to identify which is a sovereign activity, like the contracts and labour act and many other statutes, wherever you think an industry is necessary to be excluded from the provisions, indicate in the schedule. You don't do any of that. You just leave the expression and today, the whole thing depends upon how we define that expression sovereign...Use such expression so open-ended and textual, and then litigation is unabated. It is a classic example of how a definition can fail."
Is this a proper reference
When AG was referring to the 2005 judgment from which the present reference ultimately arises, Justice Datta asked if it's a valid reference.
Justice Datta asked: "Just one question. Where do we find in the judgment what are the pressing demands of the competing sector and what difficulties were faced by legislature and executive to enforced the amended definition which compelled the five judges to make reference, where is that discussion?...This is the final conclusion that because of demand and helplessness of legislature and executive that the reference is made, where is the discussion?"
When the AG said that there is no material relied on by the bench, Justice Datta asked how the Court then concluded there were pressing demands.
He added: "They say the legislature and executive are helpless in bringing in force the amendment act. That was 1982, that was not there in Bangalore water supply. What prevented the legislature to enforce the amendment which is compelling the five judges? At least, I would be questioning you, whether it's a valid reference? Bench in para 24 repeatedly said it's not a unanimous opinion, of the 7, five were on one side, and two were on the other- how is that relevant? Seven judge bench has to be considered as seven."
Senior Advocate Shekhar Naphade, appearing for the State of Maharashtra, criticised the “triple test” itself, arguing that it was borrowed from Australian jurisprudence and lacks a coherent doctrinal basis. He contended that the judgment adopted a “value-loaded approach” and wrongly expanded the scope of “industry”. He further submitted that institutions such as universities, which perform essential governmental functions, ought not to be treated as industries.
Background
The Constitution Bench is examining whether the broad interpretation of “industry” adopted in the 1978 judgment authored by Justice VR Krishna Iyer requires reconsideration.
In the Bangalore Water Supply case, a seven-judge bench had laid down a sweeping interpretation of the term “industry” under the Industrial Disputes Act, 1947. The Court held that any systematic activity organised by cooperation between employer and employee for the production or distribution of goods and services could fall within the definition of industry, even if the organisation was not engaged in profit making.
In the order passed on February 16, the three-bench led by CJI observed that the following issues broadly emerge :
(i) Whether the test laid down in paragraphs 140 to 144 in the opinion rendered by Hon'ble Mr. Justice V.R. Krishna Iyer in Bangalore Water Supply and Sewerage Board's case (supra) to determine if an undertaking or enterprise falls within the definition of “industry” lays down correct law? And whether the Industrial Disputes (Amendment) Act, 1982 (which seemingly did not come into force) and the Industrial Relations Code, 2020 (with effect from 21.11.2025) have any legal impact on the interpretation of the expression “industry” as contained in the principal Act?
(ii) Whether social welfare activities and schemes or other enterprises undertaken by the Government Departments or their instrumentalities can be construed to be “industrial activities” for the purpose of Section 2(j) of the ID Act?
(iii) What State activities will be covered by the expression “sovereign function”, and whether such activities will fall outside the purview of Section 2(j) of the ID Act?
The reference arises out of a 2002 appeal. In 2005, a five-judge bench, headed by Justice N.Santosh Hegde, referred the Bangalore Water supply case to a larger bench, in State of Uttar Pradaesh v. Jai Bir Singh. In 2017, a 7-judge bench referred the matter to a 9-judge bench, since Bangalore Water supply case was rendered by a 7-judge bench.
Arguments will continue.
Case Details : STATE OF U.P. Vs JAI BIR SINGH | C.A. No. 897/2002