Full Judgment Text
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PETITIONER:
REGIONAL DIRECTOR EMPLOYEES A STATE INSURANCE CORPORATION TR
Vs.
RESPONDENT:
RAMANUJA MATCH INDUSTRIRS
DATE OF JUDGMENT27/11/1984
BENCH:
MISRA RANGNATH
BENCH:
MISRA RANGNATH
SEN, AMARENDRA NATH (J)
CITATION:
1985 AIR 278 1985 SCR (2) 119
1985 SCC (1) 218 1984 SCALE (2)815
CITATOR INFO :
RF 1991 SC1806 (8)
RF 1992 SC 573 (11)
ACT:
Employees State Insurance Act 1948 section 2(9)
’employee’-Meaning of Partners of a firm receiving salary
or of her remuneration - Whether employee.
Indian Partnership Act 1931 sections 4 and 30(1)
’partner’ - ’partners in a firm’ - Not employees.
Interpretation of statutes: Beneficent legislation
to receive liberal interpretation - However Court not to
travel beyond scheme of statute and extend scope of statute
on pretext of extending statutory benefit to these not
covered by the scheme of the statute.
HEADNOTE:
The Respondent-firm was engaged in the manufacturing
of matches. The Inspector of the Employees State Insurance
Corporation who inspected the firm found that there were
18 regular employees and three of the partners worked
regularly for wages. As the number of employees were over
20 he held that the Respondent-firm incurred liability for
contribution under the Employees State Insurance Act 1948.
The Respondent challenged its liability before
the Employees Insurance Court by contending that partners
were not employees and that when the three partners were
excluded, the total number of employees did not exceed the
statutory minimum. The Insurance Court found in favour of
the respondent. The Employees State Insurance Corporation
appealed to. The High Court, which held following its
earlier decision in Regional Director of E.S.I. Corporation
v. Mls. Oosmalua Tiite Works, Alwayes I.L.R. 1975(2)
Kerala 201 that partners were not employees. In the
appeal to this Court on the question whether a partner of a
firm is an "employee’l within the meaning of section 2(9)
of the Employees State Insurance Act 1948, H
120
Dismissinhe Appeal,
^
HELD: 1. The three partners were not employees. On this
admitted fact the total number of employees would be less
than 20. The Employees State Insurance Act 1948 would not
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therefore be applicable to the respondent-establishment.
[128C]
2. The term ’employee’ has been defined in section
2(9) of the Employees State Insurance Act 1948 to mean
any person employed for wages in or in connection with the
work of a factory or establishment to which the Act
applies...". Wages") has been defined in sub-section (22)
of that section to mean all remuneration paid or payable, in
cash to an employee, if the terms of the contract of
employment, express or implied, were fulfilled...". In
order that some one may be an employee within the meaning
of the Act, he has to be employed for wages. The concept
of wages would bring in the contract of employment, and
the concept of employee would take with it the correlation
of the employer. The term ’employer’ has not been defined
in the Act. In the absence of an employer who would
provide the employment, there would be no employee. (122D-
F)
3. A partnership firm is not a legal entity. In a
partnership each partner acts as an agent of the other. The
position of a partner qua the firm is thus not that a master
and a servant or employer and employee which concept
involves an element of subordination but that of
equality. The partnership business belongs to the
partners and each one of them is an owner thereof. In
common parlance the status of a partner qua the firm is
thus different from employees working under the firm, it may
be that a partner is being paid some remuneration for any
special attention which he devotes but that would not
involve any change of status and bring him within the
definition of employee.
Seth Hira Lal & Anr-v. Sheikh Jammaluddin and
anr. [1946] 224 Indian Cases 1O6 & Regional Director of E.S.
1. Corporation v. M/s. Osmanja Tile Works, Alwaye, I.L.R.
1975 (2) Kerala 207 approved.
Regional Director of E.S.I. Corporation, Jaipur v.
P.C. Kasliwal and Anr. (1931) Labour & Industrial Cases 671
reversed 4. In the United States, Great Britain and
Australia, a partner is not treated as an employee of his
firm merely because he receives a wage or remuneration for
work done for the firm,
which is in complete accord with the jurisprudential
approach. [127D-E]
Dube v. Robinson 92 N 312. United States Fidelity
JUDGMENT:
Smith 202 N.Y.S. 514 & Berger v. Fldility Union Casualty
Co, Tayes, 293 S.W. 235 & Weaver v. Wcinberger 392 F.
Suppl. 721 Crooks v. Glena Falls Indemnity Co, 268 P. 2d.
203 & Morfci Corporation v. US.D.C. California, 500 F.
Suppl. 714 & Burker v. Friedman, 556 F. 2d 687 & Wright v.
Deareter 442 P. 2d 888 Ellies v. Joseph & Co. [1905]
121
K B. 324 & Rose v. Federal Commissioner of Taxation [1951]
84 C.L R. 118 A referred to.
5. Beneficial legislation should have liberal
construction with a view to implementing the legislative
intent but where such beneficial legislation has a scheme of
its own there is no warrant for the Court to travel beyond
the scheme and extend the scope of the statute on the
pretext of extending the statutory benefit to those who are
not covered by the scheme. [127F-G]
6. The employees State Insurance Act 1948 covers all
factories or establishment with 20 or more employees and the
benefit is intended to be given to institutions with more
than that number. Because the legislation is beneficial it
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should also apply to factories or establishments with less
than 20 employees is not the contention on behalf of the
appellant. If that be not so, in finding out whether a
partner would be an employee a liberal construction is not
warranted. [127H, 128A]
&
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3500 of
1984.
Appeal by Special leave from the Judgment and order
dated the 3rd August, 1981 of the Kerala High Court in
M.F.A. No. 442 of 1979.
M.K. Banerjee, Addl. Sol. General, Girish Chandra and
R.N. Poddar for the Appellant.
The Judgment of the Court was delivered by
RANGANATH MISRA, J. The short point which arises for
determination in this appeal by special leave is as to
whether a partner of a firm is an "employee ’ within the
meaning of Section 2(9) of the Employees State Insurance
Act, 1948 (hereinafter called ’the Act’). Respondent
Ramanuja Match Industries which is a firm is engaged in
manufacturing of matches within the Trichur area of Kerala
State and the question as to whether it is covered under the
provisions of the Act fell for consideration. The Inspector
found that there were 18 regular employees and three of the
partners who worked regularly for wages were to be put
together. Thus the number of 20 employees as required by the
Act was satisfied and the respondent did incur liability for
contribution The respondent challenged its liability before
the Employees Insurance Court at Calicut by contending that
partners were not employees and when the three partners were
excluded, the total number of employees did not exceed the
statutory minimum. The
122
Insurance Court found in favour of the respondent and an
appeal under the Act was carried to the High Court by the
appellant and a Division Bench of that Court following its
earlier decision in Regional Director of E.S.I. Corporation
v. M/s. Oosmanja Tile Works, Alwaye,(l) held that partners
were not employees. It is against this decision that the
present appeal has been carried.
There is no dispute that under the Act, liability to
pay contribution arises only when 20 or more persons are
employed for wages. It is also not disputed that in the case
of the respondent unless the three partners are included,
the basic number of 20 is not reached and no liability under
the Act accrues.
The term ’employee’ has been defined in s. 2(9) of the
Act to mean "any person employed for wages in or in
connection with the work of a factory or establishment to
which the Act applies and-"one of the alternative in clauses
(i), (ii) or (iii). ’Wages’ has been defined in sub-s. (22)
of that section to mean "all remuneration paid or payable,
in cash to an employee, if the terms of the contract of
employment, express or implied, were fulfilled.. " It is
thus clear that in order that some one may be an employee
within the meaning of the Act, he has to be employed for
wages. The concept of wages would bring in the contract of
employment. The Shorter oxford English Dictionary gives the
meaning of ’employ’ to be "to use the services of for some
special business; to have or maintain in one’s service". In
common parlance the concept of employee would take with it
the correlation of the employer. The term ’employer’ had not
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been defined in the Act but in the absence of an employer
who would provide the employment, there would indeed be no
employee. In fact, that concept is clear in the scheme of
the Industrial Disputes Act of 1947 and the definition of
the term ’employer’ in s. 2(g) of that Act makes the
position clear.
It is appropriate that at this stage we refer to the
position of a partner qua the firm. Section 4 of the
Partnership Act, 1932 defines ’partnership’ and one of the
essential requisites of a partner ship is that there must be
mutual agency between the partners.
(1) I.L.R. 1975 (2) Kerala 207.
123
Full Bench of the Patna High Court in Seth Hira Lal & Anr.
v. A Sheikh Jamaluddin and Anr.,(1) rightly emphasised upon
the position that an important element in the definition of
partnership is that it must be carried on by all or any one
of the partners acting for all. Section 18 of the
Partnership Act statutorily declares every partner to be an
agent of the firm for the purposes of the business of the
firm and Section 19 states that an act of a partner which is
done to carry on, in the usual way, business of the kind
carried on by the firm, binds the firm. A partnership firm
is not a legal entity. This Court in Champaran Cane Concern
v. State of Bihar and Anr.,(2) pointed out that in a
partnership each partner acts an agent of the other. The
position of a partner qua the firm is thus not that of a
master and a servant or employee which concept involves an
element of subordination but that of equality. The
partnership business belongs to the partners and each one of
them is an owner thereof. In common parlance the status of a
partner qua the firm is thus different from employees
working under the firm, it may be that a partner is being
paid some remuneration for any special attention which he
devotes but that would not involve any change of status and
bring him within the definition of employee.
Learned counsel for the appellant strongly relied on a
case of the Rajasthan High Court in Regional Director of
E.S.I. Corporation, Jaipur v. P.C. Kasliwal and Anr.,(3) The
learned Single Judge has taken the view that a partner can
be employed by the firm and if he draws emoluments within
the prescribed limits for the work of the factory, he would
be an employee under s. 2(9) of the Act. In the same
decision it has also been held that a sleeping partner
drawing a monthly allowance merely because he is a partner
would not come within the ambit of the Act as an employee
and contribution in respect of such partner would not be
payable. As against this view there is a Division Bench
decision of the Kerala High Court in Regional Director of
E.S.I. Corporation v. M/s. Oosmanja Tile Works, alwaye
(supra), where it has been held that a managing partner of a
firm is not an employee if merely he receives salary or
other remuneration. Strong reliance has been placed by
(1) [1946] 224 Indian Cases 106.
(1) [1964] 2 S.C.R. 921.
(2) [1981] Labour & Industrial Cases 671.
124
the Kerala High Court on the position that such managing
partner is not an employee who is working under a contract
of service. In fact, in the present case support has been
drawn from this decision of the High Court as a precedent
and following the ratio of that decision, the High Court has
decided against the appellant. The Rajasthan High Court has
obviously not been alive to the definition of the term
’employee’ in s. 2(9) of the Act though the definition has
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been extracted in extenso. The status of a partner qua the
firm with reference to the provisions of the Partnership Act
the concept of "employer" and "employee" and the importance
of the definition of "wages" have also been lost sight of in
adjudicating whether a partner is an employee. We are,
therefore, not inclined to accept the view of the Rajasthan
High Court. On the other hand, the view taken by the Kerala
High Court seems to be the correct one and fits in with the
position of a partner qua his firm and the jurisprudential
approach to the matter.
The respondent did not choose to appear in this Court
to support the order of the High Court. We have, however,
come across several judicial opinions of American and
English Courts taking the view that a person cannot be the
employee of the firm of which he is a partner. In Words and
Phrases Permanent Edition Vols. 14 and 14A (1974 reprint),
several such decisions of the American State Courts have
been referred to in support of the view that a partner
cannot be an employee of his firm and we propose to refer to
some of the more apt ones. In Dube v. Robinson(1) it has
been held that in a partnership each partner is an agent of
the others as well as a principal; but he is not in hire as
an employee and that he may perform labour even with the
employees of the partnership and of the same kind as they
perform does not make him an employee of the other partners
or of the partnership, and hence such partner cannot be
counted to constitute one of the workmen’ necessary for
application of the Employers’ Liability and Workman’s
Compensation Act to the partnership business. In United
States Fidelity & Guarantee Company v. Neal(2) it has been
held that a partner not an employee of the partnership
within the Compensation Act though at the time of the injury
he was performing special services under contract with his
partner,
(1) 92 N.H. 312.
(2) 188 Ga. 105.
125
separate and independent from the articles of partnership,
and is A being paid compensation therefore in addition to
his shale in profits. Again, in Le Clear v. Smith,(1) it was
held that a partner, though he received a salary in addition
to his share of the profits, was an employer and an not
employee entitled to compensation under the Workman’s
Compensation Law, where the insurer did not insure the
employers. In Berger Fidelity Union Casualty Co., v.
Texas,(2) it has been held that a member of an employer firm
cannot be an employee thereof. In Wearer v. Weinberger,(3)
it was held that "employee" is a person who renders service
to another, usually for wages, salary or other financial
consideration, and who, in performance of such service, is
entirely subject to the direction and control of the other,
such other being the employer. Crooks v. Glena Falls
Indemnity Co.,(4) is an authority for the view that an
employee is one who is subject to the absolute control and
direction of the employer in regard to any act, labour or
work to be done in course and scope of his employment. In
Morici Corporation v. U.S.D.C. California.,(5) the Court
held that the test to determine whether one person is
another’s employee, is whether or not he is subject to
control of the other person. In Burker v. Friedman,(6) it
was held that partners cannot be regarded as employees
rather than as employers who own and manage operation of
business, and, hence, cannot be included as employees.
Wright v. Deareter(7) took the view that partners were not
employees for purposes of requirement that compensation law
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be complied with when there are three or more employees.
Though we have not come across any decision of the U.S.
Supreme Court on the point, these authorities under various
legislations are clearly indicative of the principle that a
partner who belongs to the class of employer cannot rank as
employee because he also works for wages for the
partnership. Undoubtedly the term employee is the co-
relative of employer.
(1) 202 N.Y.S. 514.
(2) 293 S.W. 235.
(3) 392 F. Suppl.
(4) 268 P. 2d. 203.
(5) 500 F. Suppl. 714.
(6) 556 F. 2d 827.
(7) 442 P. 2d 888.
126
We may usefully refer here to an English decision. The
Court of Appeal in Ellis v. Joseph Ellis & Co.,(1) was
called upon to decide whether a partner of a firm could be
its employee. The short facts relevant for our purpose
available in the judgment of Collins M.R. are:
"The deceased appears to have been a skilled workman
and, by agreement with his partners, he worked at the
mine, sometimes on the surface and sometimes under
ground, for wages; and, while working underground, he
met with an accident which occasioned his death. His
representative thereupon claimed compensation under the
Workman’s Compensation Act, 1897, on behalf of her self
and his children. The question is whether, having
regard to his position as one of the partners, he can
be regarded as a workman in the employ of the
partnership, and the partners as his employers within
the meaning of the Act. When one looks at the
provisions of the Act, they do not appear to be
applicable to a case like the present. The supposition
that the deceased man was employed, within the meaning
of that term as used in the Act (not very different
from the definition here), would appear to involve that
he, as one of the partners, must be looked upon as
occupying the position of being one of his own
employers. It seems to me that, when one comes to
analyse an arrangement of this kind, namely, one by
which a partner himself works, and receives sums which
are called wages, it really does not create the
relation of employers adjusting the amount that must be
taken to have been contributed to the partnership
assets by a partner who has made what is really a
contribution in kind, and does not affect his relation
to the other partners which is that of co-adventurer
and not employee".
Lord Justice Mathew pithily but with emphasis added:
"The argument on behalf of the applicant in this appeal
appears to involve a legal impossibility, namely, that
the same person can occupy the position of being both
master and servant, employer and employed."
(1) [1905] 1 K.B. 324.
127
Lord Justice Cozens-Hardy also spoke in the same strain:
"All that our decision in this case amounts to, I
think, is that the Act only applies where there is on
one side an employer, and on the other side a workman,
who are different persons."
This is in complete accord with our view.
F.C. Bock and F.F. Manix in their book, the Australian
Income Tax Law and Practice (1960 Edn., Vol. 3, page 3092)
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have said:
"The decision of the High Court in Rose v. Federal
Commissioner of Taxation(l) established that there is
nothing in the relevant income-tax legislation to
warrant treating a partnership as a distinct legal
entity. A partner cannot therefore, also be an employee
of the partnership, for a man cannot be his own
employer .......... "
It is thus clear that in the United States, Great
Britain and Australia, a partner is not treated as an
employee of his firm merely because he receives a wage or
remuneration for work done for the firm. This view is in
complete accord with the jurisprudential approach. In the
absence of any statutory mandate, we do not think there is
any scope for accepting the view of the Rajasthan High
Court.
Counsel for the appellant emphasised on the feature
that the statute is a beneficial one and the Court should
not interpret a provision occurring therein in such a way
that the benefit would be withheld from employees. We do not
doubt that beneficial legislations should have liberal
construction with a view to implementing the legislative
intent but where such beneficial legislation has a scheme of
its own there is no warrant for the Court to travel beyond
the scheme and extend the scope of the statute on the
pretext of extending the statutory benefit to those who are
not covered by the scheme. The Act covers all factories or
establishment with 20 or more employees and the benefit is
intended to be given to institutions with more than that
number. It is not the
(1) [1951] 84 C.L.R. 118.
128
contention of counsel that because the legislation is
beneficial it should also apply to factories or
establishments with less than 20 employees. If that be not
so, in finding out whether a partner would be an employee a
liberal construction is not warranted. A person who would
not answer the definition cannot be taken into account for
the purpose of fixing the statutory minimum. We are-
therefore, not inclined to accept the contention of counsel
that on the basis of the statute being beneficial, a partner
should also count as an employee.
Once we hold that the three partners were not
employees, on the admitted fact the total number of
employees would be less than 20, the Act would not be
applicable to the establishment in question. There is no
merit in the appeal and the same is, therefore, to be
dismissed. At the hearing the respondent was not
represented; we, therefore, make no direction for costs.
N. V. K. Appeal dismissed.
129