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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

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  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.

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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

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             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

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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

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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

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             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