Full Judgment Text
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PETITIONER:
EMPLOYEES STATE INSURANCE CORPORATION
Vs.
RESPONDENT:
HOTEL KALPAKA INTERNATIONAL
DATE OF JUDGMENT15/01/1993
BENCH:
MOHAN, S. (J)
BENCH:
MOHAN, S. (J)
SAWANT, P.B.
CITATION:
1993 AIR 1530 1993 SCR (1) 219
1993 SCC (2) 9 JT 1993 (1) 139
1993 SCALE (1)130
ACT:
Employees State Insurance Act, 1948:
Sections 1(4), 26, 28, 38, 40 and 45-A-Contribution under
the Act-Liability of Employer-Closure of establishment-
Liability prior to closure-Commencement of recovery
proceedings after closure-Validity of.
HEADNOTE:
The Respondent-Hotel which was also running a Bar for
sometime, closed down its business after several years. Th
Inspectors of the appellant-Corporation verified the records
of the establishment and reported that at certain point of
time the employment strength of the establishment including
the bar was more than 19. Therefore, the establishment was
treated as covered provisionally under the Employees State
Insurance (ESI) Act, 1948. Since the final date of coverage
could be decided only after verifying all the records, the
Respondent was asked to produce them. The Respondent did
not avail the opportunity afforded to it Though the
Respondent sent Its explanation, It was not acceptable to
the appellant Corporation and so it passed a detailed order
under S.45-A calling upon the Respondent to pay the
contribution with interest at 6% failing which It would be
recovered as arrears of land revenue. Since this order and
the reminder thereto, did not evoke any response from the
Respondent, the appellant sent a claim in Form-19 to the
District Collector requesting him to recover the said amount
The Respondent challenged the proceedings by filling an
application under S.75 of the Act before the ESI Court,
which upheld the assessment made by the appellant-
Corporation, but stated that recovery steps were not
justified after the closure of the establishment, and only
prosecution as contemplated u/s. 85 of the Act was
attracted.
The appellant-Corporation preferred an appeal against the
said decision of ESI Court The High Court dismissed the
appeal and held that since the scheme was made after the
closure of the establishment, the 219
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appellant was not justified in proceeding against the
Respondent
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Being aggrieved by the judgment of the High Court, the
appellant Corporation preferred the present appeal
contending that so long as the establishment was covered by
the provisions of the Act, the Respondent could not
circumvent its liability by claiming that before actual
recovery proceedings, it had closed down the establishment.
Allowing the appeal, this Court,
HELD: 1.1. Admittedly the hotel industry like that of
the respondent has been notified by the Government thus
extending the provisions of the Employees State Insurance
Act to hotel industry. Therefore, on the date of
commencement of its business, namely, 11.7.85, there was a
liability on the Respondent to contribute to the ESI fund.
Under section 40 the primary liability is on the employer to
pay, not only his contribution but also the employees
contribution. As such the employer can not plead that since
he had not deducted the employees’ contribution from their
wages, he could not be made liable for the same. After all
when he makes employees’ contribution he is entitled to
deduct from the wages. Thus by force of the application of
the statutory provisions, the liability to contribute during
the relevant period, namely, 11.7.85 to 31.3.88, arose.
[226E-G]
1.2. The Insurance Court as well as the High Court have
correctly upheld the demand for contribution. But it is
rather strange to conclude that the demand could not be
enforced against a closed business. If this finding were to
be accepted it would not promote the scheme and avoid the
mischief. On the contrary, it would perpetrate the
mischief. Any employer can easily avoid his statutory
liability and deny the beneficial piece of social security
legislation to the employees, by closing down the business
before recovery. That certainly is not the indentment of
the Act. It is equally fallacious to conclude that because
the employees had gone away there is no liability to
contribute. It has to be carefully remembered that the
liability to contribute arose from the date of commencement
of the establishment and is a continuing liability till the
closure. The very object of establishing a common fund
under section 26 for the benefit of all the employees will
again be thwarted if such a construction is put. [227D-F]
R.M. Lakshmanamurthy v. The Employees’ State Insurance
Corporation, Bangalore, [1974] 4 SCC 365, relied on.
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2. The proceeding for the recovery is in respect of the
dues of contribution which arose prior to the closure on
31.3.88. Therefore, it matters little when notice was issued
calling upon the establishment to pay the contribution.
Such a notice is only a reminder to the employer to
discharge his statutory obligation. The appellant-
corporation is thus entitled to proceed with the recovery
proceedings in accordance with law. [227H, 228A]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1854 of 1992.
From the Judgment and Order dated 18.12.1990 of the
Kerala High Court in M.F.A. No. 800 of 1990.
M.L. Verma, V.J. Francis, V. Subramanian and Padmakumar
for the Appellant.
P.S. Poti and R. Sasiprabhu for the Respondent.
The Judgment of the Court was delivered by
MOHAN, J. This appeal by special leave is directed
against i.e. judgment of the High Court of Kerala in M.F.A.
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No. 800/90 dated 18.12.90. The short facts leading to this
appeal are as under:
The respondent-Hotel is situated in Kaloor, Cochin 17.
It is a commercial establishment. In July, 1985 this
establishment obtained a Bar licence whereupon a Bar was
started. After running the business for some time it was
closed down with effect from 31.3.88.
The Insurance Inspectors of the appellant verified the
records of the respondent-establishment on 29.9.87, 9.10.87
and 19.10 87. It was reported that the employment strength
of the respondent-establishment including Chembaka
Restaurant and Mayuri Bar was more than 19 as on 17.7.85.
Therefore, it was treated as covered under the Employees’
State Insurance Act, 1948 (hereinafter referred to as the
Act) with effect from 11.7.85 provisionally. The fact of
coverage was intimated to the respondent by notice dated
21.3.88. Since the final date of coverage could be decided
only after verifying all the records pertaining to the date
of functioning of the establishment, the respondent was
requested to produce all the records such as attendance
register, wage register, ledgers etc. from the date of
starting of the establishment. The respondent was also
called upon to start
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compliance under the Act with effect from 11.7.85. But there
was no compliance. Hence, a notice was issued in Form C-18
dated 26.3.88 along with a draft order for contribution
amount of Rs. 49,399.75 which was assessed under section 45-
A of the Act for the period 11.7.85 to 313.88. Though the
respondent was afforded an opportunity to appear before the
officer, it was not availed of However, a letter dated
13.7.88 was received but the explanations were not
acceptable to the appellant. Subsequently, a detailed order
dated 3.8.88 under section 45-A of the Act was passed
calling upon the respondent to pay a contribution of Rs.
49,399.75 together with interest at 6 per cent, failing
which it would be covered as an arrears of land revenue.
Again, reminder was sent on 22.9.88. No reply was received.
Hence, in order to recover the contribution under section
45-A of the Act, a claim in Form-19 was sent to the District
Collector, Ernakulam on 31.10.88 requesting to recover the
contribution for the period from 11.7.85 to 31.3.88.
Challenging these proceedings the respondent filed an
application under section 75 of the Act before the
Employees’ Insurance Court, Alleppey. Inter alia it was
contended that the applicant (respondent in this appeal) at
no time employed 20 or more persons during the relevant
time. The order was illegal because under section 45-A of
the Act the respondent was entitled to a reasonable
opportunity of being heard. That was not afforded.
These contentions were refuted by the appellant. It
was incorrect to state that on no occasion the respondent
employed 20 or more workmen since the inspection report
dated 8.12.86 clearly established to the contrary.
The contention that no opportunity had been afforded
before initiating the revenue recovery proceedings, was also
denied in view of Form C-18 dated 23.6.88, show cause notice
dated 3.8.88 and reminder dated 22.9.88.
By its order dated 6th June, 1990 the Employees’
Insurance Court, Alleppey came to the following conclusion:
"In the result, I can only uphold the
assessment made by the ESI Corporation. But
when the question of recovery is considered,
certain other aspects cannot be ignored. The
adhoc assessment itself was made by the
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opposite party after the
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closure of the entire establishment. All the
employees working in the establishment had
left by that time after accepting the
termination of their services. In respect of
those employees who had already left, the ESI
Corporation is now trying to recover
contribution. Now the position emerges is
that despite the collection of contribution it
will be impossible to bring under coverage
those employees, because, they are not at all
available for coverage and for enjoying the
benefits under the scheme. Therefore, even if
the proceedings initiated earlier were sus-
tainable, so long as the employees are not
available for the purpose of coverage, there
is no meaning in collecting contribution
alone. In these circumstances, I can only
hold that the applicant had failed to comply
with provisions of the ESI Act at the
appropriate time. Therefore, according to me,
after the closing of the establishment such
recovery steps are not justified but only the
prosecution as contemplated under sec. 85 of
the ESI Act is attracted. Therefore, it is
upto the ESI Corporation to decide whether any
prosecution should be launched against the
applicant for the contravention or
noncompliance of the requirements of the ESI
Act and Rules.’
Aggrieved by the same the appellant-Corporation preferred
an appeal in M.F.A. No. 800 of 1990. A Division Bench of
the Kerala High Court by its order dated 18th December, 1990
posed the question for determination as to whether the
appellant could proceed against respondent for realisation
of contribution under the ESI scheme, after the closure of
establishment.
The High Court upheld the finding of Insurance Court that
the respondent had failed to comply with the provisions of
the Act at the appropriate time. However, it proceeded to
hold that the respondent-establishment was closed on
31.3.88. Ext. P3 notice calling upon the respondent to pay
the contribution was only on 23.6.88. Since the scheme was
made after the closure of the establishment, the appellant
was not justified in proceeding against the respondent. In
this view, it dismissed the appeal. It is under these
circumstances, the ESI Corporation has come up by way of
special leave to appeal.
Mr; M.L. Verma, learned senior counsel for the appellant
urges the
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following:
1. The closure of the respondent-establishment was on
31.3.88 but the liability with reference to contribution
arose earlier. The demand is for the period 11.7.85 to
31.3.88. So long as the establishment is covered by the
provisions of the Act it is not open to the respondent to
circumvent its liability by contending that before actual
recovery proceedings it had closed down. If the finding of
the High Court is accepted it would be the easiest way to
evade the provisions of the Act.
In R.M. Lakshmanamurthy v. The Employees’ State Insurance
Corporation, Bangalore, [1974] 4 SCC 365. This Court has
held that it is a beneficial piece of social security
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legislation in the interest of labour. Further, the
provisions of the Act will have to be construed with that
end in view in order to promote the scheme and avoid the
mischief.
Under section 26 of the Act all contributions are paid
into a common fund. Such a fund will have to be
administered for the purposes of the Act as indicated under
section 28. Therefore, the employer cannot contend that he
did not collect the employees’ contribution and hence, he
cannot be called upon to pay. Thus the impugned judgment is
wrong and is liable to be set aside.
Per contra, Mr. P. Surbramanian Poti, learned senior
counsel for the respondent would argue that the contention
of the respondent throughout was that at no time it engaged
20 or more employees. Therefore, it was under the belief
that the Act would not be applicable. In that belief the
employer did not recover from the employees any
contribution. Nor was the employer called upon during that
relevant time to comply with the provisions of the Act. It
was entirely due to the fault of the Officers of the
appellant, the respondent did not make the contribution.
In any event, the establishment had been closed down on
31.3.88. It will be unjust to enforce the provisions of the
Act and to seek to recover contribution after the closure,
more so, when the employees have settled their claims and
have gone away. Certainly, such a situation is not con-
templated under the Act. From this point of view the
judgment of the High Court is right and does not call for
any interference.
In order to appreciate the rival contentions, it would be
useful to set
225
out the necessary legal background.
The Employees State Insurance Act is an act for certain
benefits to employees in cases of sickness, maternity and
employment injury and to make provision for certain other
matters in relation thereto. Section 1(4) makes it
applicable to all factories, in the first instance’ Under
sub-section (5) of the said section, the Government may, by
a Notification, extend the provisions of the Act to any
other establishment or class of establishment; industrial,
commercial, agricultural or otherwise. Admittedly, in this
case, the hotel industry like that of the respondent has
been notified under the Act. Under section 26, a fund
called Employees’ State Insurance Fund is created by all the
contributions paid under this Act, the purposes, for which
it may be expended, are cataloged under section 28.
Section 38 requires all employees in factories or
establishments shall be insured. Section 39 talks of
contribution. In respect of an employee it shall comprise
of contribution payable by the employer (employer’s con-
tribution) and contribution payable by the employee. It is
this contribution which has to be paid to the Corporation.
Section 40 imposes the liability to pay contributions, in
the first instance, on the principal employer. After such
contribution the employee’s contribution could be deducted
from his wages. Sub-section (4) of section 40 is important.
That says as follows:
"(4) Any sum deducted by the principal
employer from wages under this Act shall be
deemed to have been entrusted to him by the
employee for the purpose of paying the
contribution in respect of which it was
deducted." (Emphasis supplied)
Therefore, this sub-section puts the matter beyond doubt
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that there is an entrustment. In other words, the employer
is a trustee.
Under section 44 there is an obligation on the employer to
furnish returns and maintain registers.
The benefits available to the insured persons are stated in
section 46:
1. Sickness
2. Maternity
3. Disablement
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4. Injury
5. Medical treatment for and attendance on insured persons.
Lastly, there is power to prosecute under section 85
which includes punishment for failure to pay contributions
as well as for contravention of or non-compliance with any
of the requirements of the Act. In the above legal
background we may analyse the factual situation.
Two facts stare at us.
1. The liability to contribution of the respondent-
employer relates to a period between 11.7.85 to 31.3.88.
2. The respondent-establishment was closed on
31.3.88.
The contention of the respondent that at no time there
were 20 or more employees in his establishment has to be
rejected because at no point of time the respondent sought
an adjudication on this aspect. On the contrary, the
inspections made by the officials of the appellant on
8.12.86, September 87 and October 87 state to the contrary.
Therefore, we have to proceed on the basis that the
provisions of the Act are applicable to the respondent-
establishment, since (i) it is a notified industry, (ii) in
the establishment more than 20 employees were working at the
relevant time.
From the above provisions it is clear that from the date
of his commencement of business, namely, 11.7.85, there was
a liability to contribute. It has already been seen under
section 40 the primary liability is his, to pay, not only
the employer’s contribution but also the employee’s
contribution. Therefore, he cannot be heard to contend that
since he had not deducted the employee’s contribution on the
wages of the employees, he could not be made liable for the
same. The object of making a deeming entrustment sub-
section (4) of section 40 will be altogether rendered
nugatory if such a contention were to be accepted. After
all, when he makes employee’s contribution he is entitled to
deduct from the wages. Therefore, by force of the
application of the statutory provisions, the liability to
contribute, during this relevant period, namely, 11.7.85 to
31.3.88, arose. There is no gain saying in that. Hence, we
reject the arguments of Mr. Subramanian Poti, learned senior
counsel for the respondent.
From the above statutory provisions, it would be clear
that from out
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of the common fund maintained under section 26, the
employees derive various benefits like sickness, maternity,
disablement, injury, medical treatment for and attendance on
insured persons. Therefore, it is a beneficial piece of
social security legislation. As a matter of fact, this
Court had occasion to consider the same in B.M.
Lakshmanamurthy’s case (supra). At page 370, paragraph 16
it was held :
"The Act is thus a beneficial piece of social
security legislation in the interest of labour
in factories at the first instance and with
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power to extend to other establishments.
Provisions of the Act will have to be
construed with that end in view to promote the
scheme and avoid the mischief."
Mr. M.L. Verma, learned senior counsel for the appellant
is right in his submissions in this regard.
The Insurance Court as well as the High Court have
correctly upheld the demand for contribution. But it is
rather strange to conclude that the demand could not be
enforced against a closed business. If this finding were to
be accepted it would not promote the scheme and avoid the
mischief. On the contrary, it would perpetrate the
mischief. Any employer can easily avoid his statutory
liability and deny the beneficial piece of social security
legislation to the employees, by closing down the business
before recovery. That certainly is not the indentment of
the Act. To hold, as the High Court has done, would set at
naught all these beneficial provisions.
It is equally fallacious to conclude that because the
employees had gone away there is no liability to contribute.
It has to be carefully remembered that the liability to
contribute arose from the date of commencement of the
establishment and is a continuing liability till the
closure. The very object of establishing a common fund
under section 26 for the benefit of all the employees will
again be thwarted if such a construction is put.
We cannot also accept the finding of the High Court that
because Ext. P3 notice was issued on 23.6.88 after the
closure of the respondent establishment on 31.3.88, the
appellant was not justified in proceeding against the
respondent. The proceeding for the recovery is of the dues
of contribution which arose prior to the closure on 31.3-88.
Therefore, it matters little when notice was issued, calling
upon to pay the contribution.
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In our considered view, such a notice is only a reminder to
the employer to discharge his statutory obligation.
For all these reasons, we have little hesitation in
setting aside the impugned judgment of the High Court which
in turn upholds the order of Employees’ State Insurance
Court. The appellant will be entitled to proceed with the
recovery proceedings in accordance with law.
Accordingly, the appeal will stand allowed with costs.
G.N. Appeal allowed.
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