MR BHANU PRAKASH PAI vs THE STATE OF KARNATAKA
- Court
- Karnataka High Court
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
TH
DATED THIS THE 27 DAY OF OCTOBER, 2026
BEFORE
THE HON'BLE MR. JUSTICE RAVI V HOSMANI
CRIMINAL PETITION NO. 8645 OF 2019
BETWEEN:
1 . MR BHANU PRAKASH PAI
S/O SHRI PAI
AGED ABOUT 59 YEARS
DIRECTOR
SOUTHERN CHIPS AND CIRCUITS (P) LTD.
NO.58/4, MUNI REDDY INDUSTRIAL AREA
KUDLU VILLAGE, SINGASANDRA POST
BANGALORE - 560 068.
2 . MR SUNIL O G
S/O SHRI GOPINATHAN
AGED ABOUT 58 YEARS
DIRECTOR
SOUTHERN CHIPS AND CIRCUITS (P) LTD.
NO.58/4, MUNI REDDY INDUSTRIAL AREA
KUDLU VILLAGE, SINGASANDRA POST
BANGALORE - 560 068.
Digitally
signed by
ANUSHA V
Location:
High Court of
Karnataka
3 . MR RAJISH D NAMBIAR
S/O SRI DHAMODARAN
AGED ABOUT 51 YEARS
DIRECTOR
SOUTHERN CHIPS AND CIRCUITS (P) LTD.
NO.58/4, MUNI REDDY INDUSTRIAL AREA
KUDLU VILLAGE, SINGASANDRA POST
BANGALORE - 560 068.
…PETITIONERS
[BY SRI VENKATESH S ARBATTI, ADVOCATE]
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AND:
1 . THE STATE OF KARNATAKA
REP BY STATION HOUSE OFFICER
PARAPPANA AGRAHARA POLICE STATION
JAIL ROAD, OPP. CENTRAL JAIL
SAI SREE LAYOUT
BENGALURU - 560 100.
2 . EMPLOYEES PROVIDENT FUND ORGANISATION
SUB-REGIONAL OFFICE,
BOMMASANDRA
BHAVISHYANIDHI BHAVAN
ANNAPOORNESHWARI COMPLEX
TH
NO.37/1, 6 MAIN,
SINGASANDRA
BANGALORE - 560 068.
REP BY ITS ENFORCEMENT OFFICER
MR J C SHASHIDHAR KUMAR.
…RESPONDENTS
[BY SRI MAHESHA P., HCGP FOR R1;
SMT.NANDITA HALDIPUR, ADVOCATE FOR R2]
THIS CRIMINAL PETITION IS FILED U/S.482 CR.P.C
PRAYING TO QUASH ENTIRE PROCEEDINGS IN
C.C.NO.6398/2019 PENDING IN THE COURT OF IV ADDITIONAL
CHIEF METROPOLITAN MAGISTRATE AT BENGALURU AND SET
ASIDE THE ORDER DATED 15.03.2019 PASSED THEREIN FOR
OFFENCE P/U/S.406, 409 OF IPC.
THIS PETITION IS HAVING BEEN HEARD AND RESERVED
FOR ORDERS ON 01.09.2026, THIS DAY, THE COURT,
PRONOUNCED THE FOLLOWING:
CORAM: HON'BLE MR. JUSTICE RAVI V HOSMANI
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CAV ORDER
Challenging order dated 15.03.2019 passed by IV ACMM,
Bengaluru in CC no.6398/2019, taking cognizance of offences
punishable under Sections 406 and 409 of Indian Penal Code,
1860 ( IPC ) as well as for quashing of entire proceedings therein,
this petition is filed.
2. Sri Venkatesh S Arbatti , learned counsel for petitioners
submitted that petitioners were accused no.1 to 3 ( petitioners )
in a complaint filed by respondent no.2 - JC Shashidhar Kumar
( complainant ) on 12.11.2014, stating that he was an
‘Enforcement Officer’ appointed under Section 13 of Employees'
Provident Funds and Miscellaneous Provisions Act, 1952 ( EPF Act )
by Central Government / State Government and attached to office
of Regional Provident Fund Commissioner ( PFC ), Bengaluru. It
was stated that Bhanu Prakash Pai (accused no.1), Sunil OG
(accused no.2) and Rajish D Nambiar (accused no.3) were
directors and responsible for conduct of business of 'M/s. Southern
Chips & Circuits Pvt. Ltd.' ( Company ) an establishment under EPF
Act since 01.07.2003 with Code no.PY/BOM/34503. It was alleged
that having deducted employees’ share of provident fund ( PF )
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contribution of Rs.2,68,686/- for period from July 2011 to May
2014, deliberately failed to remit same within due date despite
repeated request and thereby committed offences punishable
under Sections 406 and 409 of IPC.
3. It was stated such conduct would also be in violation
of provisions of Employees Provident Funds Scheme, 1952
( Scheme ). Paragraph 30 of Scheme requires Management to
deduct employee’s share of PF contribution from their wages and
Paragraph 38 of Scheme mandates deposit of same into State
th
Bank of India, EPF Account no.01 on or before 15 day of each
month. It was stated as per sub-paragraph 32 of Scheme, PF
deduction from wages of employees would be deemed to be
entrusted for remittance to PF Authorities. While Explanation to
Section 405 of IPC, stipulates that default in PF remittance after
deduction from employees’ wages to be dishonestly used by him.
It was alleged, as there was failure by management to remit PF
amount after deduction from Employees wages, Section 405 of
IPC would be attracted. Said complainant was registered as Crime
no.449/2014 against accused no.1 to 3. And after filing of charge
sheet, learned Magistrate took cognizance for offences punishable
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under Sections 406 and 409 of IPC against petitioners. Aggrieved,
this petition was filed.
4. At outset, it was submitted that initiation of
proceedings was riddled with various fatal errors. It was
submitted, person contemplated to be prosecuted for offences
punishable under Sections 405 and 406 of IPC was ‘employer’,
which in this case was a registered Company. Therefore, initiating
criminal proceedings against petitioners (i.e., Directors) alone,
without arraigning Company would be illegal. It was further
submitted, since default amount was with Company and not in
personal accounts of petitioners, offence would have to be
deemed committed by Company itself, learned Magistrate erred in
taking cognizance of offences against petitioners. It was submitted
that this Court in Sri Prakash R Kota & Ors. v. State of
Karnataka & Anr . [ 2022:KHC:19676 ], quashed proceedings
against directors on this ground alone.
5. Further, default period was three years from July 2011
to May 2014 and Assistant PF Commissioner, SRO, Bengaluru
issued a notice dated 17.10.2014 called upon petitioners to
appear for hearing at 11:00 a.m. on 19.11.2014. It was submitted
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that with malafide intention and without even providing
opportunity, complaint was filed on 12.11.2014.
6. It was submitted that petitioners were not persons
who had deducted and failed to remit PF deductions. It was
submitted that this Court in Ms.Swapna & Anr. v. State of
Karnataka & Anr. [ 2024:KHC:18170 ], had clarified that
proceedings could not be initiated if PF deductions were not made.
7. In support of submission that employer for purposes of
Sections 406 and 409 of IPC was Company and not individual
Directors, he relied on decision of Hon’ble Supreme Court in
Employees' State Insurance Corporation v. S.K. Aggarwal &
Ors. reported in (1998) 6 SCC 288 . In said decision, term 'a
person being an employer' under Explanation 2 of Section 405 of
IPC was held referred to Company. Therefore, in absence of
express provision under IPC, individual directors cannot be
prosecuted for offence of criminal breach of trust.
8. It was lastly submitted that failure to make
remittances to PF Authorities was due to financial constraints
caused on failure by BPL Electronics to make payments of
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amounts due to Company. It was submitted, Company had later
made full remittances with penalty, damages and interest.
Therefore, allegation of criminal breach of trust consequent to
dishonest misappropriation would be uncharitable and
unsustainable. On above grounds sought for allowing petition.
9. On other hand, Sri Mahesha P, learned counsel for
respondent no.1 - State, opposed petition.
10. Even Smt.Nandita Haldipur, learned counsel for
complainant opposed petition. It was submitted Form-5A filed in
compliance with mandate of Paragraph 36-A of Scheme showed
petitioners as directors and they admitted themselves to be in-
charge of and responsible for conduct of business of Company.
Therefore, Company was not required to be arrayed as accused
and Directors could be prosecuted. Insofar as contention about
lack of opportunity, it was submitted, petitioners were given no
less than 10 opportunities on various dates from November 2013
till August 2014. Therefore, contention was untenable.
11. It was submitted though late remission was
permissible, same would not cure or efface offence committed. It
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was submitted that High Court of Calcutta in case of Ajay Jalan
and Ors. v. State of West Bengal and Anr. reported in 2018
SCC OnLine Calcutta 1367, held bare deduction and retention
would constitute an offence inviting liability and late remission
could not be a ground for quashing of proceedings. It was lastly
submitted that petition was not bonafide as remittance was only
after filing of complaint. And prayed for dismissal.
12. Heard learned counsel, perused impugned order and
material on record.
13. This petition is by accused challenging order taking
cognizance as well as for quashing of entire proceedings for
offences punishable under Sections 406 and 409 of IPC.
14. Main ground of challenge is non-arraignment of
Company who was ‘Employer’ as accused and untenability of
proceedings after remittance with penalty, damages and interest.
Petitioners being directors of Company, deduction of employees
contribution to Provident Fund for period from July 2011 to May
2014 from their wages and failing to remit it within time to PF
Authorities are not in dispute.
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15. Both above contentions are covered by decision in
case of S.K. Aggarwal 's case (supra), wherein Hon’ble Supreme
Court held:
“… The respondents were, at the material time,
Directors of a company M/s Indo-Japan Steel Ltd.
The Company has a factory and Head Office at
Calcutta. Under the provisions of Section 40 of the
Employees' State Insurance Act, 1948, the
“principal employer” is required to pay, in respect
of every employee, whether directly employed by
him or by or through an immediate employer,
both the employer's contribution and the
employee's contribution. Under sub-section (2) of
Section 40, the principal employer, in the case of
an employee directly employed by him, is entitled
to recover from the employee the employee's
contribution by deduction from his wages. Under
sub-section (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.
The complainant who is the appellant before us
inspected the Head Office of the Company and
found that the Company had deducted a sum of
Rs 2,223.50 as the employees' share of
contribution from their wages during the period
February 1981 to September 1981. The employer,
however, had failed to deposit the said amount in
the Employees' State Insurance Fund within the
specified time.
2. Thereupon the appellant lodged a complaint
against the respondents of criminal breach of trust
under Section 405 Explanation 2 of the Penal
Code, 1860 read with Section 406 of the Penal
Code, 1860. On the basis of this complaint, the
learned Magistrate took cognizance and issued
summons against the respondents to stand trial.
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The learned Magistrate also issued a search
warrant for seizure of certain records of the
Company as prayed for by the complainant.
Aggrieved thereby, the respondents filed an
application under Sections 401/482 of the
Criminal Procedure Code for quashing the
proceedings in the said case. The High Court by its
impugned judgment has quashed the proceedings
on the ground that the respondents cannot be
considered as “employers” within the meaning of
Explanation 2 to Section 405 read with Section
406 of the Penal Code, 1860. Hence they were not
liable for prosecution under Section 406. From this
judgment, the present appeal has been filed by
the original complainant.
3. Section 405 Explanation 2 is as follows:
“405. Criminal breach of trust.—Whoever, being in
any manner entrusted with property, or with any
dominion over property, dishonestly
misappropriates or converts to his own use that
property, or dishonestly uses or disposes of that
property in violation of any direction of law
prescribing the mode in which such trust is to be
discharged, or of any legal contract, express or
implied, which he has made touching the
discharge of such trust, or wilfully suffers any
other person so to do, commits ‘criminal breach of
trust’.
Explanation 1.—*
Explanation 2.—A person, being an employer, who
deducts the employee's contribution from the
wages payable to the employee for credit to the
Employees' State Insurance Fund held and
administered by the Employees' State Insurance
Corporation established under the Employees'
State Insurance Act, 1948, shall be deemed to
have been entrusted with the amount of the
contribution so deducted by him and if he makes
default in the payment of such contribution to the
said Fund in violation of the said Act, shall be
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deemed to have dishonestly used the amount of
the said contribution in violation of a direction of
law as aforesaid.”
Explanation 2 was inserted by the Employees'
State Insurance Amendment Act 38 of 1975.
Explanation 2 makes “a person being an
employer” who deducts the employee's
contribution from the wages payable to the
employee liable for criminal breach of trust if he
commits a default in the payment of such
contribution to the Employees' State Insurance
Fund. Under Section 11 of the Penal Code, 1860,
the word “person” includes any company or
association or body of persons whether
incorporated or not. The High Court has held that
the term “a person being an employer” in
Explanation 2 to Section 405 of the Penal Code,
1860 can refer only to the company who had
employed the employees in question. The
directors of that company could not be considered
as employers under Explanation 2 to Section 405
of the Penal Code, 1860. The complainant,
however, contends that Explanation 2 to Section
405 of the Penal Code, 1860 should be read in the
light of the Employees' State Insurance Act, 1948.
Under Section 40 of the Employees' State
Insurance Act, the obligation to pay contribution
in the Employees' State Insurance Fund has been
cast on the principal employer. The relevant
provisions of Section 40 are as follows:
“40. Principal employer to pay contributions in the first
instance.—(1) The principal employer shall pay in
respect of every employee, whether directly
employed by him or by or through an immediate
employer, both the employer's contribution and
the employee's contribution.
(2) Notwithstanding anything contained in any other
enactment but subject to the provisions of this Act
and the regulations, if any, made thereunder, the
principal employer shall, in the case of an
employee directly employed by him (not being an
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exempted employee), be entitled to recover from
the employee the employee's contribution by
deduction from his wages and not otherwise:
Provided that no such deduction shall be made
from any wages other than such as relate to the
period or part of the period in respect of which the
contribution is payable, or in excess of the sum
representing the employee's contribution for the
period.
(3) *
(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.
(5)*”
The term “principal employer” has been defined in
Section 2(17) of the Employees' State Insurance
Act, 1948 as follows:
“2. (17) ‘principal employer’ means—
(i) in a factory, the owner or occupier of the factory
and includes the managing agent of such owner or
occupier, the legal representative of a deceased
owner or occupier, and where a person has been
named as the manager of the factory under [the
Factories Act, 1948 (63 of 1948)], the person so
named;
(ii) *
(iii) in any other establishment, any person
responsible for the supervision and control of the
establishment;”
Section 2(17) defines the “principal employer” in a
factory as the owner or occupier of the factory.
“Occupier” of a factory is defined in Section 2(15)
as having the same meaning assigned to it in the
Factories Act, 1948. Section 2(n) of the Factories
Act, 1948 as it stood at the relevant time, defined
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an “occupier” to mean the person who has
ultimate control over the affairs of the factory.
Section 100 of the Factories Act dealt with the
determination of occupier in certain cases. Under
sub-section (2), where the occupier was a
company, any directors thereof could be
prosecuted and punished for any offence for which
the occupier was liable.
4. Section 2(17) of the Employees' State Insurance
Act, however, defines the principal employer as
either owner or occupier — taking care of all
eventualities. When the owner of the factory is the
principal employer, there is no need to examine
who is the occupier. The owner will be the
principal employer under Section 40.
5. The Employees' State Insurance Act does not
define the term “employer” although under
Sections 85-B and 85-C of that Act, the term
“employer” is used.
6. The provisions of Section 40 in the light of these
definitions have been considered by various High
Courts in order to decide whether a director of a
limited company can be considered as the
principal employer liable to pay contribution under
Section 40. A Division Bench of the Bombay High
Court in the case Suresh Tulsidas Kilachand v.
Collector of Bombay [1984 Lab IC 1614 : 1984
LLN 312 (Bom)] held that a director of a company
by virtue of being a director is not the principal
employer contemplated by Section 2(17) of the
Employees' State Insurance Act. He is not
personally liable to pay employer's contribution
under the Act. In the context of Section 2(17)
read with Section 2(15), the Court held that
whether a person is occupier or not has to be
ascertained with reference to whether he is in
ultimate control over the factory. When the
definition of principal employer in Section 2(17)
refers to the “owner” or “occupier” of a factory,
the principal employer can be either the owner or
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the occupier depending upon the facts of each
case. When there is an owner of the factory, that
owner must be considered as the principal
employer liable for contribution.
7. Under Section 40 [sic 2(17)] the words “owner”
and “occupier” have been used disjunctively. The
Court also referred to Section 100 of the Factories
Act and said that even under the Factories Act,
1948, the legislature has clearly contemplated
that in the case of a factory, a company can be
the “occupier”. Therefore, when the owner of a
factory is a company, it is the company which is
the principal employer and not its director. The
Bombay High Court overruled the judgment of the
Single Judge of the Bombay High Court in so
deciding.
8. The same view has been taken by the Madhya
Pradesh High Court in the case of ESI Corpn. v.
Kailashchandra [1989 Lab IC 760 (MP)] . The
Madhya Pradesh High Court also said that when
there is a default in the payment of contribution
by the company, the managing director, or other
directors cannot be made personally liable. The
contribution can be recovered from the company
as the principal employer.
9. In the case of ESI Corpn. v. Gurdial Singh [1991
Supp (1) SCC 204 : 1991 SCC (L&S) 833 : 1991
Lab IC 52] this Court held that the directors of a
private limited company were not personally liable
to pay contributions under the Employees' State
Insurance Act, 1948. The Court was considering a
case where a private limited company was the
owner of the factory and the occupier of the
factory had been duly named under the Factories
Act, 1948. The Court said that the directors did
not come within the definition of clause 1 of
Section 2(17) of the Employees' State Insurance
Act. This Court also disapproved of the decision of
a Single Judge of the Bombay High Court which
has been subsequently overruled by the Division
Bench of the Bombay High Court in the case of
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Suresh Tulsidas Kilachand v. Collector of Bombay
[1984 Lab IC 1614 : 1984 LLN 312 (Bom)] .
10. Therefore, even if we read the definition of
“principal employer” under the Employees' State
Insurance Act, 1948 in Explanation 2 to Section
405 of the Penal Code, 1860, the Directors of the
Company, in the present case, would not be
covered by the definition of “principal employer”
when the Company itself owns the factory and is
also the employer of its employees at the Head
Office.”
16. Though above ratio was laid down in light of provisions
under Employees' State Insurance Act, 1948, while quashing of
prosecution for offences under IPC, similar conclusion was arrived
at by this Court in Crl.P.no.8544/2018 [ 2021:KHC:25238 ] while
quashing of prosecution of Directors without arraying Company for
offences under Sections 409 and 420 of IPC for non-remittance of
Employees’ contribution under EPF Act. And in Crl.P.no.2529/2021
[ 2021:KHC:20148 ] prosecution of Directors without arraying
Company for offences under Sections 406 and 409 of IPC were
quashed. Even decisions in Ms Swapna and Sri Prakash R.
Kota 's cases (supra) passed by this Court are on similar lines.
17. Further, three Judges Bench decision of Apex Court in
Aneeta Hada v. M/s.Godfather Travels & Tours (P) Ltd. ,
reported in (2012) 5 SCC 661 , wherein interpreting Section 141
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of Negotiable Instruments Act, 1881 pari materia to Section 14A
of EPF Act, it was held:
"58. Applying the doctrine of strict construction,
we are of the considered opinion that
commission of offence by the company is an
express condition precedent to attract the
vicarious liability of others. Thus, the words “as
well as the company” appearing in the section
make it absolutely unmistakably clear that when
the company can be prosecuted, then only the
persons mentioned in the other categories could
be vicariously liable for the offence subject to the
averments in the petition and proof thereof. One
cannot be oblivious of the fact that the company
is a juristic person and it has its own
respectability. If a finding is recorded against it,
it would create a concavity in its reputation.
There can be situations when the corporate
reputation is affected when a Director is indicted.
59. In view of our aforesaid analysis, we arrive
at the irresistible conclusion that for maintaining
the prosecution under Section 141 of the Act,
arraigning of a company as an accused is
imperative. The other categories of offenders can
only be brought in the drag-net on the
touchstone of vicarious liability as the same has
been stipulated in the provision itself. We say so
on the basis of the ratio laid down in C.V. Parekh
[(1970) 3 SCC 491 : 1971 SCC (Cri) 97] which is
a three-Judge Bench decision. Thus, the view
expressed in Sheoratan Agarwal [(1984) 4 SCC
352 : 1984 SCC (Cri) 620] does not correctly lay
down the law and, accordingly, is hereby
overruled. The decision in Anil Hada [(2000) 1
SCC 1: 2001 SCC (Cri) 174] is overruled with the
qualifier as stated in para 51. The decision in
Modi Distillery [(1987) 3 SCC 684: 1987 SCC
(Cri) 632] has to be treated to be restricted to its
own facts as has been explained by us
hereinabove."
(emphasis supplied)
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18. Though contentions about denial of opportunity and
complaint being malafide to harass petitioners besides being in
nature of defence requiring trial would fade at this stage as there
is prima facie explanation that petitioners were given opportunity,
petition would succeed on contention about failure to array
Company as accused. Consequently, following:
O R D E R
allowed
Petition is , order dated 15.03.2019 passed by IV
ACMM, Bengaluru in CC no.6398/2019, taking cognizance of
offences punishable under Sections 406 and 409 of Indian Penal
Code, 1860 ( IPC ) as well as entire proceedings therein are
quashed against petitioners no.1 and 2.
Sd/-
(RAVI V HOSMANI)
JUDGE
YKL
List No.: 1 Sl No.: 71