http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7

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

220

appellant was not justified in proceeding against the

Respondent

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7

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.

221

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.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7

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

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.

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7

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.

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

224

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7

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

226

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

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 :

"The Act is thus a beneficial piece of social

security legislation in the interest of labour

in factories at the first instance and with

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7

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.

228

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.

229