Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2415 OF 2003

DELHI GYMKHANA CLUB LTD. ..Appellant

VERSUS

EMPLOYEES STATE INSURANCE CORPN. ..Respondent

J U D G M E N T

R. BANUMATHI, J.

Short point falling for consideration in this appeal is

whether kitchen of the appellant-club and catering section

thereon come within the meaning of “factory” and

“manufacturing process” as defined in Employees’ State

Insurance Act, 1948 (for short ‘ESI Act’).

2. The appellant-Delhi Gymkhana Club is a member

club, duly registered under the Companies Act. Appellant-

Page 2 club has a kitchen to cook food items to provide food and

refreshment to its members. On 20.03.1975, a notification

was issued by the Delhi Administration, in exercise of the

powers conferred under Section 1(5) of the ESI Act, stating

that the provisions contemplated under the Act shall be

extended to the establishments specified in the Schedule

thereon. In furtherance of the said notification, the

respondent-ESI Corporation sought to apply the provisions of

the Act on the appellant-club, on the ground that the

preparation of food items amounts to “manufacturing process”

and that the appellant–club is a factory/establishment covered

under the provisions of the ESI Act. After issuing the show

cause notice, ESI Corporation passed the order on 4.8.1986

under Section 45-A of the ESI Act, holding that M/s. Delhi

Gymkhana Club Limited is covered under the provisions of

Employees State Insurance Act, directing the appellant to pay

Rs.6,82,655.40 as a contribution of insurance in respect of

employees for the period from 1.02.1980 to 31.08.1985, along

with interest @ 6% per annum.

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Page 3 3. Aggrieved, the appellant filed a petition in the ESI

Court which, by a judgment dated 25.11.1986, while allowing

the petition of the appellant-club, held that preparation of

eatables does not fall under “manufacturing process” and

hence, ESI Act is not applicable to the appellant-club and the

appellant was not liable to pay contribution. Aggrieved by the

same, respondent-corporation preferred appeal before the High

Court. The High Court allowed the appeal and held that the

kitchen is an integral part of the club and that cooking of

foodstuffs amounts to ‘manufacturing process’ falling within

the meaning of sub-section (14AA) of Section 2 of the ESI Act,

thereby falling within the meaning of ‘factory’ as defined under

Section 2(12) of ESI Act. Being aggrieved, the appellant-club

is in appeal before us.

4. Contention of the appellant is that the Club is a

non-profit organization, exclusively rendering facilities to its

members and that the ESI Act is not applicable to them. It is

contended that social security perks, better than the ones

contemplated under the ESI Act, are already put in place for

the benefit of employees. Contending that preparation of food

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Page 4 items does not amount to ‘manufacturing process’ and that

provisions of ESI Act are not applicable to the club, the

appellant placed reliance on the decision of this Court in

Indian Hotels Co. Ltd. Vs. I.T.O. (2000) 7 SCC 39, wherein it

was held that preparation of foodstuffs in hotel kitchen is

merely processing of food to make it edible and that there is no

manufacturing process.

5. Per contra, learned counsel for the respondent

submitted that the purpose is to extend the benefit of the

scheme to the employees working in the appellant-club and

while doing so, the object of welfare legislations, like the ESI

Act, ought to be kept in mind. Refuting the appellant’s

contention that preparation of foodstuffs in the kitchen does

not amount to ‘manufacturing process’, the respondent placed

reliance on the decision of this Court in G.L. Hotels vs. T.C.

Sarin (1993) 4 SCC 363, wherein it was held that cooking

forms part of manufacturing process, as it alters and treats or

otherwise adapts an article of food or substance with a view to

its use, sale, delivery or disposal in the club. It was submitted

that the High Court rightly held that the kitchen of the

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Page 5 appellant falls within the meaning of ‘factory’ as defined under

Section 2(12) of the ESI Act.

6. We have carefully considered the submissions and

perused the materials on record.

7. ESI Act is made applicable under Section 1(4) to all

factories including factories belonging to the Government,

other than seasonal factories. Proviso appended to Section 1(4)

of the ESI Act carves out an exception. Sub-section (4) of

Section 1 of the ESI Act shall not apply to a factory or

establishment belonging to or under the control of the

Government whose employees are otherwise in receipt of

benefits substantially similar or superior to the benefits

provided under this Act.

8. The provisions of Section 1(5) of the ESI Act enable

the appropriate government to issue notification in respect of

any other establishment or class of establishments, industrial,

commercial, agricultural or otherwise. In exercise of its

powers under Section 1(5) of the Act, the Delhi

Administration issued the notification dated 20.03.1975

extending the provisions of the Act to certain establishments.

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Page 6 Relevant portion of the said notification reads as under:

“1.Any premises including the

precincts thereof whereon ten or

more persons but in any case less

than twenty persons, are employed

or were employed for wages on any

day of the preceding twelve months

and in any part of which a

manufacturing process is being

carried on with the aid of power or

is ordinarily so carried on; but

excluding a mine subject to the

operation of the Mines Act 1952 (35

of 1952) or railway running shed or

an establishment which is

exclusively engaged in any of the

manufacturing process specified in

clause (12) of Section 2 of the

Employees State Insurance Act,

1948 (34 of 1948).

In the

Union

Territory

of Delhi.

2. Any premises including the

precincts thereof whereon twenty or

more persons are employed or were

employed for wages on any day of

the preceding twelve months, and in

any part of which a manufacturing

process is being carried on without

the aid of power, or is ordinarily so

carried on; but excluding a mine

subject to the operation of the Mine

Act, 1952 (35 of 1952) to a railway

running shed or an establishment

which is exclusively engaged in any

of the manufacturing process

specified in clause (12) of Section 2

of the Employees’ State Insurance

Act, 1948 (34 of 1948).

3…………..”

In the

Union

Territory

of Delhi.

In furtherance of the above notification, the ESI Corporation

sought to apply the provisions of the Act to the appellant-club.

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Page 7 9. The word “factory” has been defined in Section 2(12)

of ESI Act as under:-

”2(12) “factory” means any premises including the

precincts thereof whereon twenty or more persons are

employed or were employed for wages on any day of

the preceding twelve months, and in any part of which

a manufacturing process if being carried on with the

aid of power or is ordinarily so carried on but does

not include a mine subject to the operation of the

Mines Act, 1952 (35 of 1952), or a railway running

shed.”

The above definition is prior to the amendment Act 29/1989.

In this appeal, we are concerned with the definition of “factory”

as it existed prior to October 20, 1989.

10. Prior to Act 29/1989, in Section 2(12) of the ESI

Act, the expressions “manufacturing process”, “power” shall

have the meaning respectively assigned to them in the

Factories Act, 1948. After Act 29 of 1989, a separate

definition for “manufacturing process” has been incorporated

in sub-section (14AA) of Section 2 which practically has the

same effect. It is seen from the definition of “factory” that the

following conditions are to be satisfied in order to make any

premises including the precincts thereof a factory:

(1) in the premises including the precincts thereof

twenty or more persons are employed or were

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Page 8 employed for wages on any day of the preceding

twelve months;

(2) in any part of these premises or precincts, a

manufacturing process is being carried on, and

(3)such manufacturing process must be carried on

with the aid of power, or is ordinarily so carried

on.

11. “Manufacturing process” has been defined in

Section 2(k) of the Factories Act, 1948 as under:-

“2. (k) ‘manufacturing process’ means process for –

(i) making, altering, repairing, ornamenting,

finishing, packing, oiling, washing, cleaning,

breaking up, demolishing, or otherwise

treating or adapting any article or substance

with a view to its use, sale, transport,

delivery or disposal; or

(ii)pumping oil, water, sewage or any other

substance; or

(iii)generating, transforming or transmitting

power; or

(iv)composing types for printing, printing by

letter press, lithography, photogravure or

other similar process or book binding; or

(v)constructing, reconstructing, repairing,

refitting, finishing or breaking up ships or

vessels; or

(vi)preserving or storing any article in cold

storage.”

For the purpose of this appeal, we are concerned only with

Section 2(k) (i) of the Factories Act.

12. We need not go into the details of the number of

employees working in the kitchen of the appellant-club, as

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Page 9 admittedly more than 20 persons are employed in preparation

of foodstuffs and serving in the kitchen-catering division and

those employees are paid salary, wages, gratuity etc.

Admittedly, the club maintains a kitchen, refrigerator, geyser

and other equipments are used in making and preparation of

foodstuffs wherein power is used. That food items are being

prepared in the kitchen and being served in the kitchen of the

appellant-club to appellant-club’s members and their guests

for payment is not disputed.

13. The object of the appellant-club is to promote polo,

hunting, racing, tennis and other games, athletic sports and

recreations amongst its members. Huge contribution is

collected for becoming members of the club and only the

privileged can become the members of the appellant-club.

There are wide range of sports activities, recreations and big

budget is involved. The kitchen of the club has a direct

connection with the activities carried on in the rest of the club

precincts. The members and the guests of the members share

the services of the kitchen. The ESI Act is enacted to provide

certain benefits to employees in case of sickness, maternity in

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Page 10 case of female employees, employment injury and to make

provision in certain other matters in relation thereto. We find

no reason as to why the employees of the appellant-club

should be kept out of the welfare coverage of the beneficial

legislation like ESI Act.

14. Let us now examine whether preparation of food

items in the kitchen of the appellant-club amounts to

“manufacturing process” bringing the club within the purview

of the definition of ‘factory’. It has been consistently held by

this Court that preparation of foodstuffs in hotels and

restaurants amounts to manufacturing process, thereby

invoking the applicability of the provisions of the ESI Act. This

Court in G.L. Hotels Limited and Ors. vs. T.C. Sarin and Anr.,

(1993) 4 SCC 363 has affirmed the views of the High Court

that “since the manufacturing process in the form of cooking

and preparing food is carried on in the kitchen and the

kitchen is a part of the hotel or a part of the precinct of the

hotel, the entire hotel falls within the purview of the definition

of “Factory”.”

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Page 11 15. In Bombay Anand Bhavan Restaurant vs. Deputy

Director, Employees State Insurance Corporation And Anr. ,

(2009) 9 SCC 61, the question for consideration was whether

the appellant-restaurant, which was using LPG gas for

preparation of coffee, tea and other beverages, is covered

under the ESI Act. Observing that it is a settled position of

law that cooking, preparing of food items qualifies as

manufacturing process and that the use of LPG satisfies the

definition of power, this Court in paragraphs (27) and (39)

held as under:-

27. Both the appellants prepare sweets, savouries and

other beverages in their establishments. It is a settled

position of law that cooking and preparing food items

qualifies as manufacturing process. In ESI v. Spencer

& Co. Ltd. (1978 Lab IC 1759 Mad) the Madras High

Court held, while dealing with the case of a hotel run

by Spencer and Co., that preparation of coffee, peeling

of potatoes, making bread toast, etc. in a hotel, involve

“manufacturing process”. Similarly, the Bombay High

Court in Poona Industrial Hotel Ltd. v. I.C. Sarin (1980

Lab IC 100 Bom), held that the kitchen attached to

Hotel Blue Diamond run by the petitioners therein,

should be considered as a “factory” for the purpose of

the ESI Act. Hence, it is beyond doubt that there is

manufacturing process involved in the establishment

of the appellants.

………………

39. In our view, the use of LPG satisfies the definition

of power as it is mechanically transmitted and is not

something generated by human or animal agency.

Since the establishments of the appellants involve a

manufacturing process with the aid of LPG, which can

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Page 12 now be termed as power, the establishments of the

appellants can be termed as factories, and therefore,

the ESI Act will apply to these establishments.”

16. On behalf of the appellant, it is contended that the

above decisions are in respect of hotels and the appellant is

only a club which has been running a kitchen and catering

division only for the benefit of its members and the same is

not for the purpose of making any profit and it should be held

that the appellant-club does not fall within the definition of

“factory” under Section 2(12) of the ESI Act. We find no merit

in the above submission.

17. The appellant-club is catering to the elite people of

Delhi. Appellant-club provides various services to its members

and organizes several sports activities. Wide range of activities

of the club are associated with the large number of staff.

Kitchen is an integral part of the club which caters to the

needs of its members and their guests, on payment of money

either in cash or by card, where the food items are put for

sale, thereby making the appellant-club fall within the

definition of ‘factory’ under Section 2(12) of the ESI Act. All

the persons employed for the purpose of supply and

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Page 13 distribution of food prepared in the kitchen and for doing

other incidental duties in connection with the kitchen and

catering are to be regarded as employees of the factory. It

hardly matters for the employee whether the appellant’s

kitchen is run with any profit making motive or not.

18. The object of ESI Act is to provide certain benefits

to the employees in case of sickness, maternity and

employment injury and also to make provision for certain

other matters in relation thereto. ESI Act is a beneficial piece

of social welfare legislation aimed at securing the well-being of

the employees and the court will not adopt a narrow

interpretation which will have the effect of defeating the

objects of the Act.

19. In the case of Bombay Anand Bhavan Restaurant

vs. Dy. Director ESI Corporation & Anr. (2009) 9 SCC 61 in

paragraph 20 it has been held as under :-

“20. The Employees’ State Insurance Act is a beneficial

legislation. The main purpose of the enactment as the

Preamble suggests, is to provide for certain benefits to

employees of a factory in case of sickness, maternity

and employment injury and to make provision for

certain other matters in relation thereto. The

Employees’ State Insurance Act is a social security

legislation and the canons of interpreting a social

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Page 14 legislation are different from the canons of

interpretation of taxation law. The courts must not

countenance any subterfuge which would defeat the

provisions of social legislation and the courts must

even, if necessary, strain the language of the Act in

order to achieve the purpose which the legislature had

in placing this legislation on the statute book. The Act,

therefore, must receive a liberal construction so as to

promote its objects.”

The same principle was reiterated in Transport Corporation

of India vs. Employees’ State Insurance Corporation & Anr.,

(2000) 1 SCC 332 and Cochin Shipping Co. vs. ESI Corporation

(1992) 4 SCC 245.

20. Even though the term “kitchen”, “catering” of a club

may not be called a factory in common parlance, having regard

to the definition of “manufacturing process” and that ESI Act

is a beneficial legislation, a liberal interpretation has to be

adopted. Therefore, so long as manufacturing process is

carried on with or without the aid of power by employing more

than twenty persons for wages, it would come within the

meaning of “factory” as defined under Section 2(12) of the ESI

Act. The contention that the appellant-club is a non-profit

making organization would not take away the same from the

purview of the Act.

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Page 15 21. In The Bangalore Turf Club Ltd. vs. Regional

Director, Employees State Insurance Corporation reported in

(2014) Vol.9 Scale 177, the question which was referred to a

larger Bench was “whether the Bangalore Turf Club Ltd.

being engaged in organizing sports activities which involves

providing of serviceto the members of the Club and outsiders

can be construed as a “shop” for the purpose of extending the

benefits under the ESI Act.” Referring to Cochin Shipping Co.

vs. ESI Corporation (supra) and Bombay Anand Bhavan

Restaurant vs. Deputy Director ESI Corporation & Anr. (supra),

in paragraphs (71) and (72), it was held as under:

“71.It has consistently been the stand of the

Appellants- herein that the term ‘shop’ must be

understood in its ‘traditional sense’. However, as has

been observed by this Court in the case of Bombay

Anand Bhavan Restaurant (supra), the language of the

ESI Act may also be strained by this Court, if

necessary. The scheme and context of the ESI Act

must be given due consideration by this Court. A

narrow meaning should not be attached to the words

used in the ESI Act. This Court should bear in mind

that the ESI Act seeks to insure the employees of

covered establishments against various risks to their

life, health and well-being and places the said charge

upon the employer.

72.We find that the term ‘shop’ as urged to be

understood and interpreted in its traditional sense

would not serve the purpose of the ESI Act. Further in

light of the judgments discussed above and in

particular the Cochin Shipping Case (supra) and the

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Page 16 Bombay Anand Bhavan Case (supra), this Court is of

the opinion that an expansive meaning may be

assigned to the word ‘shop’ for the purposes of the ESI

Act. As has been found above, the activities of the

Appellant-Turf Clubs is in the nature of organized and

systematic transactions, and further that the said

Turf Clubs provide services to members as well as

public in lieu of consideration. Therefore, the

Appellant-Turf Clubs are a ‘shop’ for the purpose of

extending the benefits under the ESI Act.”

22. In Employees State Insurance Corporation vs.

Hyderabad Race Club, (2004) LLR 769 (SC)=(2004) 6 SCC 191,

this Court has clarified that a club will be coverable under the

ESI Act.

23. In Cricket Club of India, Bombay vs. Employees’

State Insurance Corporation (1998) LLR 729 (Bombay HC), the

Bombay High Court has held that ESI Act will apply to a club

since there was no distinction between a hotel and a club. In

Employees’ State Insurance Corporation vs. Jalandhar

Gymkhana Club, (1992) LLR 733 (P & H HC), the Punjab and

Haryana High Court considered the question whether

manufacturing process is being carried on in the kitchen of

the club, rendering catering services to its members. It was

held that a perusal of sub-clauses (i) to (vi) of Section 2(k) of

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Page 17 the Factories Act would make it clear that preparation of the

items which are prepared in the kitchen and the preservation

and storing of any articles in the cold storage would amount to

a manufacturing process.

24. The counsel for the appellant claimed exemption

under Section 1(4) of the ESI Act, contending that the club is

already providing medical facilities and that they have staff

welfare fund out of which employees are paid in cases of

death, funeral expenses and in case of illness and hence ESI

Act is not applicable to them. The provisions of ESI Act must

be construed along the lines of the objects of the Act so that

the benefits of welfare legislation are not curtailed. ESI Act

provides a kind of social security and employees are one of the

most vulnerable and deprived section of the society, who are in

the constant need of protection, security and assistance. The

social security system needs to be effective and constructive

and should have more coverage areas. Government has the

obligation to protect working class from uncertain

contingencies so that they can happily contribute towards

social security schemes. ESI Act and all the provisions of the

1

Page 18 Act are significant and are meant to realize State’s obligation

in safeguarding the rights provided under Part IV of the

Constitution. The appellant’s contention regarding adequate

social security benefits being already in place is not tenable.

25. In the light of the various decisions and the view

taken by this Court in G.L. Hotels case, the High Court has

rightly held that the preparation of food items in the kitchen

of the appellant-club amounts to “manufacturing process”

and that the employees are covered under the purview of the

ESI Act. Considering the activities of the appellant-club and

that the kitchen catering forms an integral part of the

appellant-club, the High Court rightly held that the appellant-

club falls within the purview of the ESI Act and we do not find

any infirmity in the order passed by the High Court.

26. Learned counsel for the appellant-club then

submitted that the order under Section 45-A was passed in

1986 and by this time the contribution amount payable would

have accumulated and, therefore submitted that in case if the

Court holds that the employees of the appellant-club are

covered under the ESI Act, the contribution should be made

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Page 19 prospective from the date of the order passed by this Court.

The Act being a beneficial legislation, the above contention

cannot be countenanced. ESI contribution ought to have been

paid when the demand was made in 1986. It is very

unfortunate that the appellant-club has not paid the ESI

contribution of its employees for more than three decades and

is not justified in seeking for prospective operation of the

order.

27. The impugned order of the High Court does not

suffer from any infirmity warranting interference. We find no

merit in the appeal and the same is dismissed.

…………………………… ..J.

(T.S. Thakur)

…………………………… . J.

(R. Banumathi)

New Delhi;

October 28, 2014

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