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CASE NO.: Appeal (civil)  1832 of 2004

PETITIONER: Manipal Academy of Higher Education

RESPONDENT: Provident Fund Commissioner

DATE OF JUDGMENT: 12/03/2008

BENCH: Dr. ARIJIT PASAYAT & P. SATHASIVAM

JUDGMENT: JUDGMENT

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 impugned judgment.  

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.

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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 concession;

(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 rupee.    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  employee.    Explanation 2: For the purposes of this section

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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

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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

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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 leave encashment.  

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

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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 basic wages.

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.