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PETITIONER: REGIONAL DIRECTOR EMPLOYEES A STATE INSURANCE CORPORATION TR

       Vs.

RESPONDENT: RAMANUJA MATCH INDUSTRIRS

DATE OF JUDGMENT27/11/1984

BENCH: MISRA RANGNATH BENCH: MISRA RANGNATH SEN, AMARENDRA NATH (J)

CITATION:  1985 AIR  278            1985 SCR  (2) 119  1985 SCC  (1) 218        1984 SCALE  (2)815  CITATOR INFO :  RF         1991 SC1806  (8)  RF         1992 SC 573  (11)

ACT:      Employees  State   Insurance  Act   1948  section  2(9) ’employee’-Meaning   of  Partners of a firm receiving salary or  of  her remuneration - Whether employee.      Indian   Partnership Act  1931  sections  4  and  30(1) ’partner’ - ’partners in a firm’ - Not employees.      Interpretation   of statutes:  Beneficent   legislation to receive  liberal  interpretation - However Court  not  to travel beyond  scheme of statute and extend scope of statute on   pretext of  extending statutory  benefit to  these  not covered by the scheme of the statute.

HEADNOTE:      The Respondent-firm  was engaged  in the  manufacturing of matches.  The Inspector  of the Employees State Insurance Corporation   who  inspected the firm found that there  were 18   regular employees   and  three of  the partners  worked regularly for   wages.  As the number of employees were over 20 he  held that  the Respondent-firm incurred liability for contribution under the  Employees State Insurance Act 1948.      The   Respondent   challenged   its   liability  before the Employees   Insurance  Court by contending that partners were   not employees  and  that when the three partners were excluded,  the total  number of employees did not exceed the statutory   minimum. The  Insurance Court found in favour of the respondent.  The Employees   State Insurance Corporation appealed to.  The   High   Court, which  held following  its earlier decision in Regional Director of E.S.I.  Corporation v. Mls.  Oosmalua  Tiite  Works,  Alwayes    I.L.R.  1975(2) Kerala   201 that  partners were  not   employees.   In  the appeal to  this Court on the question whether a partner of a firm is  an   "employee’l within the meaning of section 2(9) of  the  Employees State Insurance Act 1948, H 120 Dismissinhe Appeal, ^ HELD:   1. The  three partners  were not employees. On  this admitted   fact the total number of employees would be  less than 20.  The Employees  State Insurance  Act 1948 would not

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therefore be  applicable  to  the  respondent-establishment. [128C]      2.   The term  ’employee’ has  been defined  in section 2(9) of   the   Employees  State Insurance Act 1948 to  mean any   person employed for wages in or in connection with the work of  a factory  or    establishment  to  which  the  Act applies...". Wages")  has   been defined in sub-section (22) of that section to mean all remuneration paid or payable, in cash to  an employee,  if the  terms of  the  contract    of employment, express  or implied,  were    fulfilled...".  In order that  some one  may be  an employee within the meaning of the   Act,  he has  to be employed for wages. The concept of   wages would   bring  in the contract of employment, and the  concept  of employee would take with it the correlation of the  employer.  The term  ’employer’ has not been defined in the  Act. In  the   absence of   an  employer  who  would provide the  employment, there would  be no employee. (122D- F)      3.   A partnership  firm is  not a  legal entity.  In a partnership each  partner acts as an agent of the other. The position of a partner qua the firm is thus not that a master and a  servant or   employer   and  employee  which  concept involves an   element   of  subordination    but    that  of equality.   The    partnership    business  belongs  to  the partners and  each one  of them  is  an  owner  thereof.  In common parlance  the status  of a  partner qua  the firm  is thus different from employees working under the firm, it may be that  a partner  is being  paid some remuneration for any special attention  which  he  devotes  but  that  would  not involve any  change of   status  and bring  him  within  the definition of employee.      Seth   Hira   Lal   & Anr-v.  Sheikh   Jammaluddin  and anr. [1946] 224 Indian Cases 1O6 & Regional Director of E.S. 1. Corporation  v. M/s.  Osmanja Tile  Works, Alwaye, I.L.R. 1975 (2) Kerala 207 approved.      Regional Director  of  E.S.I.  Corporation,  Jaipur  v. P.C. Kasliwal  and Anr. (1931) Labour & Industrial Cases 671 reversed  4.  In   the  United  States,  Great  Britain  and Australia,   a partner  is not treated as an employee of his firm merely  because he  receives a wage or remuneration for work done for  the  firm, which   is in  complete accord  with  the    jurisprudential approach. [127D-E]      Dube   v.  Robinson  92 N 312. United  States  Fidelity JUDGMENT: Smith   202 N.Y.S.  514  & Berger v. Fldility Union Casualty Co,   Tayes,   293 S.W.  235 &  Weaver v.  Wcinberger 392 F. Suppl. 721 Crooks v. Glena Falls  Indemnity  Co,  268 P. 2d. 203   &  Morfci  Corporation  v. US.D.C.  California, 500 F. Suppl. 714 & Burker v. Friedman,  556 F.  2d 687 & Wright v. Deareter 442 P. 2d 888 Ellies v. Joseph  & Co. [1905] 121 K B.  324 &  Rose v. Federal Commissioner of Taxation [1951] 84 C.L R. 118 A referred to.      5.   Beneficial   legislation   should   have   liberal construction with  a view  to implementing  the  legislative intent but where such beneficial legislation has a scheme of its own  there is  no warrant for the Court to travel beyond the scheme  and extend  the scope  of  the  statute  on  the pretext of  extending the statutory benefit to those who are not covered by the scheme. [127F-G]      6. The  employees State  Insurance Act  1948 covers all factories or establishment with 20 or more employees and the benefit is  intended to  be given  to institutions with more than that  number. Because  the legislation is beneficial it

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should also  apply to  factories or establishments with less than 20  employees is  not the  contention on  behalf of the appellant. If  that be  not so,  in finding  out  whether  a partner would  be an  employee a liberal construction is not warranted. [127H, 128A]

&      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 3500 of 1984.      Appeal by  Special leave  from the  Judgment and  order dated the  3rd August,  1981 of  the Kerala  High  Court  in M.F.A. No. 442 of 1979.      M.K. Banerjee,  Addl. Sol.  General, Girish Chandra and R.N. Poddar for the Appellant.      The Judgment of the Court was delivered by      RANGANATH MISRA,  J. The  short point  which arises for determination in  this appeal  by special  leave  is  as  to whether a  partner of  a firm  is an  "employee ’ within the meaning of  Section 2(9)  of the  Employees State  Insurance Act,  1948   (hereinafter  called   ’the  Act’).  Respondent Ramanuja Match  Industries which  is a  firm is  engaged  in manufacturing of  matches within  the Trichur area of Kerala State and the question as to whether it is covered under the provisions of  the Act fell for consideration. The Inspector found that  there were 18 regular employees and three of the partners who  worked regularly  for wages  were  to  be  put together. Thus the number of 20 employees as required by the Act was satisfied and the respondent did incur liability for contribution The  respondent challenged its liability before the Employees  Insurance Court at Calicut by contending that partners were not employees and when the three partners were excluded, the  total number  of employees did not exceed the statutory minimum. The 122 Insurance Court  found in  favour of  the respondent  and an appeal under  the Act  was carried  to the High Court by the appellant and  a Division  Bench of that Court following its earlier decision  in Regional Director of E.S.I. Corporation v. M/s.  Oosmanja Tile  Works, Alwaye,(l) held that partners were not  employees. It  is against  this decision  that the present appeal has been carried.      There is  no dispute  that under  the Act, liability to pay contribution  arises only  when 20  or more  persons are employed for wages. It is also not disputed that in the case of the  respondent unless  the three  partners are included, the basic number of 20 is not reached and no liability under the Act accrues.      The term  ’employee’ has been defined in s. 2(9) of the Act to  mean  "any  person  employed  for  wages  in  or  in connection with  the work  of a  factory or establishment to which the Act applies and-"one of the alternative in clauses (i), (ii)  or (iii). ’Wages’ has been defined in sub-s. (22) of that  section to  mean "all remuneration paid or payable, in cash  to an  employee, if  the terms  of the  contract of employment, express  or implied,  were fulfilled..  " It  is thus clear  that in  order that  some one may be an employee within the  meaning of  the Act,  he has  to be employed for wages. The  concept of  wages would bring in the contract of employment. The  Shorter oxford English Dictionary gives the meaning of  ’employ’ to  be "to use the services of for some special business;  to have or maintain in one’s service". In common parlance  the concept  of employee would take with it the correlation of the employer. The term ’employer’ had not

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been defined  in the  Act but  in the absence of an employer who would  provide the  employment, there would indeed be no employee. In  fact, that  concept is  clear in the scheme of the Industrial  Disputes Act  of 1947  and the definition of the term  ’employer’ in  s.  2(g)  of  that  Act  makes  the position clear.      It is  appropriate that  at this  stage we refer to the position of  a partner  qua  the  firm.  Section  4  of  the Partnership Act,  1932 defines  ’partnership’ and one of the essential requisites of a partner ship is that there must be mutual agency between the partners.      (1) I.L.R. 1975 (2) Kerala 207. 123 Full Bench  of the  Patna High Court in Seth Hira Lal & Anr. v. A  Sheikh Jamaluddin and Anr.,(1) rightly emphasised upon the position  that an important element in the definition of partnership is  that it must be carried on by all or any one of  the   partners  acting   for  all.  Section  18  of  the Partnership Act  statutorily declares every partner to be an agent of  the firm  for the  purposes of the business of the firm and Section 19 states that an act of a partner which is done to  carry on,  in the  usual way,  business of the kind carried on  by the  firm, binds the firm. A partnership firm is not  a legal entity. This Court in Champaran Cane Concern v. State  of Bihar  and  Anr.,(2)  pointed  out  that  in  a partnership each  partner acts  an agent  of the  other. The position of  a partner  qua the  firm is  thus not that of a master and  a servant  or employee which concept involves an element  of   subordination  but   that  of   equality.  The partnership business belongs to the partners and each one of them is an owner thereof. In common parlance the status of a partner qua  the  firm  is  thus  different  from  employees working under  the firm,  it may  be that a partner is being paid some  remuneration for  any special  attention which he devotes but  that would not involve any change of status and bring him within the definition of employee.      Learned counsel  for the appellant strongly relied on a case of  the Rajasthan  High Court  in Regional  Director of E.S.I. Corporation, Jaipur v. P.C. Kasliwal and Anr.,(3) The learned Single  Judge has  taken the view that a partner can be employed  by the  firm and  if he draws emoluments within the prescribed  limits for the work of the factory, he would be an  employee under  s. 2(9)  of  the  Act.  In  the  same decision it  has also  been held  that  a  sleeping  partner drawing a  monthly allowance  merely because he is a partner would not  come within  the ambit  of the Act as an employee and contribution  in respect  of such  partner would  not be payable. As  against this  view there  is a  Division  Bench decision of  the Kerala  High Court  in Regional Director of E.S.I. Corporation  v.  M/s.  Oosmanja  Tile  Works,  alwaye (supra), where it has been held that a managing partner of a firm is  not an  employee if  merely he  receives salary  or other remuneration. Strong reliance has been placed by      (1) [1946] 224 Indian Cases 106.      (1) [1964] 2 S.C.R. 921.      (2) [1981] Labour & Industrial Cases 671. 124 the Kerala  High Court  on the  position that  such managing partner is  not an  employee who is working under a contract of service.  In fact,  in the  present case support has been drawn from  this decision  of the  High Court as a precedent and following the ratio of that decision, the High Court has decided against  the appellant. The Rajasthan High Court has obviously not  been alive  to the  definition  of  the  term ’employee’ in  s. 2(9)  of the Act though the definition has

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been extracted  in extenso.  The status of a partner qua the firm with reference to the provisions of the Partnership Act the concept  of "employer" and "employee" and the importance of the definition of "wages" have also been lost sight of in adjudicating whether  a partner  is  an  employee.  We  are, therefore, not  inclined to accept the view of the Rajasthan High Court.  On the other hand, the view taken by the Kerala High Court  seems to be the correct one and fits in with the position of  a partner  qua his firm and the jurisprudential approach to the matter.      The respondent  did not  choose to appear in this Court to support  the order  of the  High Court. We have, however, come  across  several  judicial  opinions  of  American  and English Courts  taking the  view that a person cannot be the employee of  the firm of which he is a partner. In Words and Phrases Permanent  Edition Vols.  14 and 14A (1974 reprint), several such  decisions of  the American  State Courts  have been referred  to in  support of  the view  that  a  partner cannot be an employee of his firm and we propose to refer to some of  the more  apt ones.  In Dube  v. Robinson(1) it has been held  that in a partnership each partner is an agent of the others  as well as a principal; but he is not in hire as an employee  and that  he may  perform labour  even with the employees of  the partnership  and of  the same kind as they perform does  not make him an employee of the other partners or of  the partnership,  and hence  such partner  cannot  be counted to  constitute one  of the  workmen’  necessary  for application  of   the  Employers’  Liability  and  Workman’s Compensation Act  to the  partnership  business.  In  United States Fidelity  & Guarantee  Company v. Neal(2) it has been held that  a partner  not an  employee  of  the  partnership within the Compensation Act though at the time of the injury he was  performing special  services under contract with his partner,       (1) 92 N.H. 312.       (2) 188 Ga. 105. 125 separate and  independent from  the articles of partnership, and is  A being  paid compensation  therefore in addition to his shale in profits. Again, in Le Clear v. Smith,(1) it was held that a partner, though he received a salary in addition to his  share of  the profits,  was an  employer and  an not employee  entitled   to  compensation  under  the  Workman’s Compensation Law,  where the  insurer  did  not  insure  the employers.  In   Berger  Fidelity  Union  Casualty  Co.,  v. Texas,(2) it has been held that a member of an employer firm cannot be  an employee  thereof. In Wearer v. Weinberger,(3) it was  held that "employee" is a person who renders service to another,  usually for  wages, salary  or other  financial consideration, and  who, in  performance of such service, is entirely subject  to the direction and control of the other, such  other  being  the  employer.  Crooks  v.  Glena  Falls Indemnity Co.,(4)  is an  authority for  the  view  that  an employee is  one who  is subject to the absolute control and direction of  the employer  in regard  to any act, labour or work to  be done  in course  and scope of his employment. In Morici Corporation  v. U.S.D.C.  California.,(5)  the  Court held that  the test  to  determine  whether  one  person  is another’s employee,  is whether  or not  he  is  subject  to control of  the other  person. In  Burker v. Friedman,(6) it was held  that partners  cannot  be  regarded  as  employees rather than  as employers  who own  and manage  operation of business, and,  hence,  cannot  be  included  as  employees. Wright v.  Deareter(7) took  the view that partners were not employees for  purposes of requirement that compensation law

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be complied  with when  there are  three or  more employees. Though we  have not  come across  any decision  of the  U.S. Supreme Court  on the point, these authorities under various legislations are  clearly indicative of the principle that a partner who  belongs to the class of employer cannot rank as employee  because   he  also   works  for   wages  for   the partnership.  Undoubtedly  the  term  employee  is  the  co- relative of employer.      (1) 202 N.Y.S. 514.      (2) 293 S.W. 235.      (3) 392 F. Suppl.      (4) 268 P. 2d. 203.      (5) 500 F. Suppl. 714.      (6) 556 F. 2d 827.      (7) 442 P. 2d 888. 126      We may  usefully refer here to an English decision. The Court of  Appeal in  Ellis v.  Joseph Ellis  &  Co.,(1)  was called upon  to decide  whether a partner of a firm could be its employee.  The short  facts  relevant  for  our  purpose available in the judgment of Collins M.R. are:      "The deceased  appears to  have been  a skilled workman      and, by  agreement with  his partners, he worked at the      mine, sometimes  on the  surface  and  sometimes  under      ground, for  wages; and,  while working underground, he      met with  an accident  which occasioned  his death. His      representative thereupon claimed compensation under the      Workman’s Compensation Act, 1897, on behalf of her self      and his  children.  The  question  is  whether,  having      regard to  his position  as one of the partners, he can      be  regarded   as  a  workman  in  the  employ  of  the      partnership, and  the partners  as his employers within      the  meaning   of  the  Act.  When  one  looks  at  the      provisions of  the  Act,  they  do  not  appear  to  be      applicable to  a case like the present. The supposition      that the  deceased man was employed, within the meaning      of that  term as  used in  the Act  (not very different      from the definition here), would appear to involve that      he, as  one of  the partners,  must be  looked upon  as      occupying  the   position  of  being  one  of  his  own      employers. It  seems to  me that,  when  one  comes  to      analyse an  arrangement of  this kind,  namely, one  by      which a  partner himself works, and receives sums which      are  called  wages,  it  really  does  not  create  the      relation of employers adjusting the amount that must be      taken to  have  been  contributed  to  the  partnership      assets by  a partner  who has  made what  is  really  a      contribution in  kind, and does not affect his relation      to the  other partners  which is  that of co-adventurer      and not employee". Lord Justice Mathew pithily but with emphasis added:      "The argument on behalf of the applicant in this appeal      appears to  involve a legal impossibility, namely, that      the same  person can  occupy the position of being both      master and servant, employer and employed."      (1) [1905] 1 K.B. 324. 127 Lord Justice Cozens-Hardy also spoke in the same strain:      "All that  our decision  in this  case  amounts  to,  I      think, is  that the  Act only applies where there is on      one side  an employer, and on the other side a workman,      who are different persons." This is in complete accord with our view.      F.C. Bock  and F.F. Manix in their book, the Australian Income Tax  Law and  Practice (1960 Edn., Vol. 3, page 3092)

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have said:      "The decision  of the  High Court  in Rose  v.  Federal      Commissioner of  Taxation(l) established  that there is      nothing  in  the  relevant  income-tax  legislation  to      warrant treating  a partnership  as  a  distinct  legal      entity. A partner cannot therefore, also be an employee      of the  partnership,  for  a  man  cannot  be  his  own      employer .......... "      It is  thus clear  that in  the  United  States,  Great Britain and  Australia, a  partner  is  not  treated  as  an employee of  his firm  merely because  he receives a wage or remuneration for  work done  for the  firm. This  view is in complete accord  with the  jurisprudential approach.  In the absence of  any statutory  mandate, we do not think there is any scope  for accepting  the view  of  the  Rajasthan  High Court.      Counsel for  the appellant  emphasised on  the  feature that the  statute is  a beneficial  one and the Court should not interpret  a provision  occurring therein  in such a way that the benefit would be withheld from employees. We do not doubt  that  beneficial  legislations  should  have  liberal construction with  a view  to implementing  the  legislative intent but where such beneficial legislation has a scheme of its own  there is  no warrant for the Court to travel beyond the scheme  and extend  the scope  of  the  statute  on  the pretext of  extending the statutory benefit to those who are not covered  by the  scheme. The Act covers all factories or establishment with  20 or  more employees and the benefit is intended to  be given  to institutions  with more  than that number. It is not the      (1) [1951] 84 C.L.R. 118. 128 contention  of  counsel  that  because  the  legislation  is beneficial  it   should   also   apply   to   factories   or establishments with  less than  20 employees. If that be not so, in  finding out whether a partner would be an employee a liberal construction  is not  warranted. A  person who would not answer  the definition  cannot be taken into account for the  purpose  of  fixing  the  statutory  minimum.  We  are- therefore, not  inclined to accept the contention of counsel that on the basis of the statute being beneficial, a partner should also count as an employee.      Once  we   hold  that   the  three  partners  were  not employees,  on   the  admitted  fact  the  total  number  of employees would  be less  than 20,  the  Act  would  not  be applicable to  the establishment  in question.  There is  no merit in  the appeal  and the  same  is,  therefore,  to  be dismissed.  At   the  hearing   the   respondent   was   not represented; we, therefore, make no direction for costs. N. V. K.                                   Appeal dismissed. 129