Manipal Academy of Higher
Education Vs. Provident Fund Commissioner  Insc 429 (12 March 2008)
Dr. Arijit Pasayat & P.
CIVIL APPEAL NO. 1832 OF 2004 (with Civil Appeal Nos. 2535, 2536, 2539,2540
and 2541 of 2004) Dr. ARIJIT PASAYAT, J.
1. In all these appeals common points of law are involved and therefore they
are disposed of by a common judgment.
2. The dispute in each case is whether the amount received by encashing the
earned leave is a part of "basic wage" under Section 2(b) of the Employees'
Provident Fund and Miscellaneous Provisions Act, 1952 (in short the 'Act')
requiring pro rata employer's contribution. In each case the Regional Provident
Fund Commissioner (in short the 'Commissioner') held that the amount received
on encashment of earned leave has to be reckoned for the purpose of Section
2(b) of the Act. Accordingly, demands were raised. Appeal was preferred before
the Employees Provident Fund Appellate Tribunal (in short the 'Tribunal') which
held that it is not a part of basic wages. However, it was observed that a
different view was taken by the Bombay High Court and, therefore, the
respondent in the appeals i.e. the Commissioner should take up the matter
before the Karnataka High Court. Accordingly, Writ Petitions were filed before
the Karnataka High Court. A learned Single Judge allowed the Writ Petitions and
set aside the impugned orders. The present appellant preferred Writ Appeals
before the Karnataka High Court which came to be dismissed by the common
3. Learned counsel for the appellant pointed out that the impugned judgment
cannot be sustained as it merely followed the judgment of the Bombay High Court
in Hindustan Lever Employees' Union v. Regional Provident Fund Commissioner and
Anr. (1995 (2) LLJ. 279). It is pointed out that different view has been taken
by the Madras High Court in Thiru Arooran Sugar Ltd. and Ors. v. Assistant
Provident Fund Commissioner, Employees Provident Funds Organisation and
connected cases disposed of by judgment dated 12.10.2007. It is submitted that
the controversy was settled long back in Bridge & Roof Co. (India) Ltd. v.
Union of India (1963 (2) SCR 978) which was followed in Jay Engineering Works
Ltd. and Ors. v. Union of India and Ors. (1963 (3) SCR 995); and the concept of
beneficial legislation is misplaced philanthropy where the statutes and
principles underlying it are clear and the question is no longer res integra.
4. Learned counsel for the respondent on the other hand submitted that even
applying Bridge Roof's case (supra) the view taken by the Bombay High Court and
the Karnataka High Court in the present impugned judgment reflects the correct
position in law.
5. Sections 2(b) and 6 of the Act read as follows:
"2(b) "Basic wages" means all emoluments which are earned by
an employee while on duty or on leave or on holidays with wages in either case
in accordance with the terms of the contract of employment and which are paid
or payable in cash to him, but does not include- (i) the cash value of any food
(ii) any dearness allowance (that is to say, all cash payments by whatever
name called paid to any employee on account of a rise in the cost of living),
house rent allowance, overtime allowance, bonus, commission or any other
similar allowance payable to the employee in respect of his employment or of
work done in such employment;
(iii) any presents made by the employer.
6. Contributions and matters which may be provided for in the Scheme- The
contribution which shall be paid by the employer to the Fund shall eight and
one-third per cent of the basic wages dearness allowances and retaining
allowance (if any) for the time being payable to each of the employees (whether
employed by him directly or by or through a contractor) and the employees'
contribution shall be equal to the contribution payable by the employer in
respect of him and may if any employee so desires and if the Scheme makes
provision therefore be an amount not exceeding eight and one-third per cent of
his basic wages dearness allowances and retaining allowance (if any) subject to
the condition that the employer shall not be under an obligation to pay any
contribution over and above his contribution payable under this section;
Provided that in its application to any establishment or class of establishments
which the Central Government after making such inquiry as it deems fit may by
notification in the Official Gazette specify this section shall be subject to
the modification that for the words "eight and one-third per cent" at
both the places where they occur the words "ten per cent"
shall be substituted:
Provided further that where the amount of any contribution payable under
this Act involves a fraction of a rupee the Scheme may provide for the rounding
off of such fraction to the nearest rupee half of a rupee or quarter to a
Explanation 1: For the purposes of this section dearness allowance shall be
deemed to include also the cash value of any food concession allowed to the
Explanation 2: For the purposes of this section retaining allowance means an
allowance payable for the time being to an employee of any factory or other
establishment during any period in which the establishment is not working for
retaining his services."
6. In Bridge Roof's case (supra) it was inter-alia observed as follows:
"8. The main question therefore that falls for decision is as to which
of these two rival contentions is in consonance with s. 2(b).
There is no doubt that "basic wages" as defined therein means all
emoluments which are earned by an employee while on duty or on leave with wages
in accordance with the terms of the contract of employment and which are paid
or payable in cash. If there were no exceptions to this definition, there would
have been no difficulty in holding that production bonus whatever be its nature
would be included within these terms. The difficulty, however, arises because
the definition also provides that certain things will not be included in the
term "basic wages", and these are contained in three clauses. The first
clause mentions the cash value of any food concession while the third clause
mentions that presents made by the employer. The fact that the exceptions
contain even presents made by the employer shows that though the definition
mentions all emoluments which are earned in accordance with the terms of the
contract of employment, care was taken to exclude presents which would
ordinarily not be earned in accordance with the terms of the contract of
employment. Similarly, though the definition includes "all emoluments"
which are paid or payable in cash, the exception excludes the cash value of any
food concession, which in any case was not payable in cash. The exceptions
therefore do not seem to follow any logical pattern which would be in
consonance with the main definition.
9. Then we come to clause (ii). It excludes dearness allowance, house-rent
allowance, overtime allowance, bonus, commission or any other similar allowance
payable to the employee in respect of his employment or of work done in such
employment. This exception suggests that even though the main part of the
definition includes all emoluments which are earned in accordance with the
terms of the contract of employment, certain payments which are in fact the
price of labour and earned in accordance with the terms of the contract of
employment are excluded from the main part of the definition of "basic
wages". It is undeniable that the exceptions contained in clause (ii)
refer to payments which are earned by an employee in accordance with the terms of
his contract of employment. It was admitted by counsel on both sides before us
that it was difficult to find any one basis for the exceptions contained in the
three clauses. It is clear however from clause (ii) that from the definition of
the word "basic wages" certain earnings were excluded, though they
must be earned by employees in accordance with the terms of the contract of
employment. Having excluded "dearness allowance" from the definition
of "basic wages", s. 6 then provides for inclusion of dearness
allowance for purposes of contribution. But that is clearly the result of the
specific provision in s. 6 which lays down that contribution shall be 6- 1/4
per centum of the basic wages, dearness allowance and retaining allowance (if
any). We must therefore try to discover some basis for the exclusion in clause
(ii) as also the inclusion of dearness allowance and retaining allowance (for
any) in s. 6. It seems that the basis of inclusion in s. 6 and exclusion in
clause (ii) is that whatever is payable in all concerns and is earned by all
permanent employees is included for the purpose, of contribution under s. 6,
but whatever is not payable by all concerns or may not be earned by all
employees of a concern is excluded for the purpose of contribution.
Dearness allowance (for examples is payable in all concerns either as an
addition to basic wages or as a part of consolidated wages where a concern does
not have separate dearness allowance and basic wages. Similarly, retaining
allowance is payable to all permanent employees in all seasonal factories like
sugar factories and is therefore included in s. 6; but house-rent allowance is
not paid in many concerns and sometimes in the same concern it is paid to some
employees but not to others, for the theory is that house-rent is included in
the payment of basic wages plus dearness allowance or consolidated wages.
Therefore, house-rent allowance which may not be payable to all employees of a
concern and which is certainly not paid by all concern is taken out of the
definition of "basic wages", even though the basis of payment of
house- rent allowance where it is paid is the contract of employment.
Similarly, overtime allowance though it is generally in force in all concerns
is not earned by all employees of a concern. It is also earned in accordance
with the terms of the contract of employment; but because it may not be earned
by all employees of a concern it is excluded from "basic wages". Similarly, commission or any other similar allowance is excluded from the
definition of "basic wages" for commission and other allowances are
not necessarily to be found in all concerns; nor are they necessarily earned by
all employees of the same concern, though where they exist they are earned in
accordance with the terms of the contract of employment. It seems therefore that the basis for the exclusion in clause (ii) of the
exceptions in s.
2(b) is that all that is not earned in all concerns or by all employees of
concern is excluded from basic wages. To this the exclusion of dearness allowance
in clause (ii) is an exception. But that exception has been corrected by
including dearness allowance in s. 6 for the purpose of contribution. Dearness
allowance which is an exception in the definition of "basic wages",
is included for the propose of contribution by s. 6 and the real exceptions
therefore in clause (ii) are the other exceptions beside dearness allowance,
which has been included through s. 6.
7. Similarly in Jay Engineering's case (supra) it was observed as follows:
"9. Finally, it was urged that even if the payment for production
between the quota and the norm is not production bonus which can be taken out
of definition of basic wages in the Act, it should be treated as payment in the
nature of "other similar allowance" appearing in s. 2(b)(ii). We are
of opinion that this payment for work done between the quota and the norm
cannot be treated as any "other similar allowance". The allowances
mentioned in the relevant clause are dearness allowance, house-rent allowance,
overtime allowance, bonus, and commission. Any "other similar
allowance", must be of the same kind. The payment in this case for
production between the quota and the norm has nothing of the nature of an
allowance, it is a straight payment for the daily work and must be included in
the words defining basic wage i.e., "all emoluments which are earned by an
employee while on duty or on leave with wages in accordance with terms of the
contract of employment".
10. In the view we have taken of the scheme in this case, the petition succeeds
partly. We direct that the petition of the payment which is made by the
petitioner for production above the "norm" would be production bonus
and would be covered by the judgment of this Court in Bridge and Roof Company,
but that portion of the payment which is made by petitioner for production up
to the quota as well as production between the "quota" and the
"norm" is basic wage within the meaning of that term in the Act. The
petition is therefore partially allowed as indicated above. In the circumstances
we pass no order as to costs."
8. It is to be noted that in the case before the Bombay High Court the
factual scenario was somewhat peculiar. There the employer was including the
amount of leave encashment as emoluments for the purpose of calculating
provident fund dues from the employer as well as employee's contribution.
When the Employees' Union took up the issue to the Commissioner it was
informed that the provision does not provide for deduction of provident fund on
9. On the strength of the letter dated 3.7.1991 of the Commissioner,
Hindustan Lever Ltd. decided to make provision for deduction. It was this
direction of the department which was challenged by the Union. In this context
the High Court has held that the Commissioner's letter/circular was illegal and
leave encashment dues should be included for provident fund contribution. In
fact it was the understanding of the parties over the period that leave
encashment will be included in the wages.
10. The basic principles as laid down in Bridge Roof's case (supra) on a
combined reading of Sections 2(b) and 6 are as follows:
(a) Where the wage is universally, necessarily and ordinarily paid to all
across the board such emoluments are basic wages.
(b) Where the payment is available to be specially paid to those who avail
of the opportunity is not basic wages. By way of example it was held that
overtime allowance, though it is generally in force in all concerns is not
earned by all employees of a concern. It is also earned in accordance with the
terms of the contract of employment but because it may not be earned by all
employees of a concern, it is excluded from basic wages.
(c) Conversely, any payment by way of a special incentive or work is not
11. In TI Cycles of India, Ambattur v. M.K. Gurumani and Ors. (2001 (7) SCC
204) it was held that incentive wages paid in respect of extra work done is to
be excluded from the basic wage as they have a direct nexus and linkage with
the amount of extra output It is to be noted that any amount of contribution
cannot be based on different contingencies and uncertainties. The test is one
of universality. In the case of encashment of leave the option may be available
to all the employees but some may avail and some may not avail. That does not
satisfy the test of universality. As observed in Daily Partap v. Regional
Provident Fund Commissioner (1998 (8) SCC 90) the test is uniform treatment or
nexus under- dependent on individual work.
12. The term 'basic wage' which includes all emoluments which are earned by
an employee while on duty or on leave or on holidays with wages in accordance
with the terms of the contract of employment can only mean weekly holidays,
national holidays and festival holidays etc. In many cases the employees do not
take leave and encash it at the time of retirement or same is encashed after
his death which can be said to be uncertainties and contingencies. Though
provisions have been made for the employer for such contingencies unless the
contingency of encashing the leave is there, the question of actual payment to
the workman does not take place. In view of the decision of this Court in
Bridge Roof's case (supra) and TI Cycles's case (supra) the inevitable
conclusion is that basic wage was never intended to include amounts received
for leave encashment.
13. Though the statute in question is a beneficial one, the concept of
beneficial legislation becomes relevant only when two views are possible.
14. The appeals deserve to be allowed which we direct. But if any payment
has already been made it can be adjusted for future liabilities and there shall
not be any refund claim since the fund is running one. There will be no order
as to costs.