State Insurance Corporation Vs. Hotel Kalpaka International  INSC 30 (15 January 1993)
S. (J) Mohan, S. (J) Sawant, P.B.
1993 AIR 1530 1993 SCR (1) 219 1993 SCC (2) 9 JT 1993 (1) 139 1993 SCALE (1)130
Employees State Insurance Act, 1948:
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.
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.
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 219 220 appellant was not
justified in proceeding against the Respondent 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.
the appeal, this Court,
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.
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.
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,  4 SCC 365, relied on.
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.
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]
APPELLATE JURISDICTION: Civil Appeal No. 1854 of 1992.
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
and R. Sasiprabhu for the Respondent.
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. No.
800/90 dated 18.12.90. The short facts leading to this appeal are as under:
respondent-Hotel is situated in Kaloor, Cochin 17.
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.
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.
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 222 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.
reminder was sent on 22.9.88. No reply was received.
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.
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.
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.
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.
order dated 6th June,
1990 the Employees' Insurance Court, Alleppey came to the following
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 opposite party after the 223
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.
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.
M.L. Verma, learned senior counsel for the appellant urges the 224 following:
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.
R.M. Lakshmanamurthy v. The Employees' State Insurance Corporation, Bangalore,  4 SCC 365. This Court has
held that it is a beneficial piece of social security 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
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.
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
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.
order to appreciate the rival contentions, it would be useful to set 225 out
the necessary legal background.
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.
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.
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.
says as follows:
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 that there is an
entrustment. In other words, the employer is a trustee.
section 44 there is an obligation on the employer to furnish returns and
benefits available to the insured persons are stated in section 46:
Injury 5. Medical treatment for and attendance on insured persons.
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.
facts stare at us.
liability to contribution of the respondent- employer relates to a period
between 11.7.85 to 31.3.88.
respondent-establishment was closed on 31.3.88.
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
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.
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.
the above statutory provisions, it would be clear that from out 227 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 :
Act is thus a beneficial piece of social security legislation in the interest
of labour in factories at the first instance and with power to extend to other
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.
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
equally fallacious to conclude that because the employees had gone away there
is no liability to contribute.
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
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.
it matters little when notice was issued, calling upon to pay the contribution.
our considered view, such a notice is only a reminder to the employer to
discharge his statutory obligation.
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.
the appeal will stand allowed with costs.