REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7050 OF 2002

    M/s Hotel New Nalanda    ….Appellant

Versus

    Regional Director, E.S.I. Corporation    ….Respondent

J U D G M E N T

AFTAB ALAM, J.

1. In an inspection held on May 7, 1991, the officers of the Employees’  

State  Insurance  Corporation  found  that  there  were  15  persons  working  as  

employees in the appellant-establishment, called M/s. Hotel New Nalanda.  They  

also  found  a  refrigerator  and  an  electric  grinder  in  use  there  in  the  

‘manufacturing  process’.   On  the  basis  of  the  inspection  the  officers  of  the  

Corporation took the view that the appellant-establishment was a factory within  

the meaning of section 2(12) of the Employees’ State Insurance Act, 1948 and it  

came  within  the  purview of  the  Act.  They,  accordingly,  asked  the  Managing  

Director  of  the  establishment  to  comply  with  the  provisions  of  the  Act  

provisionally with effect from May 7, 1991, the date of the inspection.

2. The appellant  did not accept the findings recorded in course of the  

inspection and filed an application under section 75 read with section 77 of the

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Act (E.I.C. 55/91) before the Employees’ Insurance Court, Kozhikode, seeking a  

declaration that the establishment in question was not covered by the Act and  

that the applicant/appellant was not bound to observe the provisions of the Act.  

According to the applicant/appellant,  the establishment called M/s.  Hotel New  

Nalanda was a tourist home where rooms were let out to people on monthly or  

daily  rent  basis.  The establishment never  employed more than 8  persons.  No  

manufacturing process was carried on there, much less with the aid of power.  

The establishment did not constitute a factory as defined under section 2(12) and  

it was not covered by the E.S.I. Act. The applicant/appellant also pleaded that at  

the time of inspection there were only 8 persons working as employees in the  

establishment; the other 7 persons whose names were mentioned in the inspection  

report were actually brokers/agents/errand boys who brought prospective clients  

to  the  tourist  home  from  the  railway  station  and  bus  stand  etc.  for  small  

commission and used  to  hang around there  for  carrying  out  errands  for  the  

residents staying there on payment of tips by them.  

4. The  Regional  Director,  ESI  Corporation,  the  opposite  party  in  the  

application filed an objection relying upon the findings recorded in the inspection  

report.  On behalf  of the opposite party reliance was also placed on a written  

statement submitted by the applicant to the Insurance Inspector at the time of  

inspection  stating  the  names  with  designation  of  the  15  persons  working  as  

employees in the establishment.  

5. Before  the  Insurance  Court,  the  applicant/appellant  examined  four  

witnesses; PW1 was the applicant-appellant himself and PWs 2 & 4 were persons  

who were shown in the inspection report as employees in the establishment but

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who came before the court to depose that they were not employees in the tourist  

home  but  were  only  brokers  and  errand  boys.  The  applicant-appellant  also  

produced a number of documents that were marked as exhibits P-1 to P-18. On  

behalf of the Regional Director ESI Corporation, the Insurance Inspector who  

had made the inspection of the establishment was examined as DW1 and three  

documents were produced that were marked as exhibits D1 to D3; exhibit D1 was  

the written statement submitted by the applicant-appellant and exhibit D2 the  

inspection report.

6.     On hearing the parties and on a consideration of the materials on record, the  

Insurance  Court  found  and  held  that  as  a  matter  of  fact  14  persons  were  

employed  in  the  establishment;  the  fifteenth  person  named in  the  inspection  

report  was  the  Managing  Partner  and  he  could  not  be  counted  among  the  

employees in the establishment. The Insurance Court further held there was no  

satisfactory evidence that there was a refrigerator and a grinder being used in  

any manufacturing process being carried on in the establishment. On the basis of  

the second finding the Insurance Court came to hold that the establishment in  

question was not a factory within the meaning of section 2(12) of the ESI Act and  

it was not covered by the Act. It, accordingly, allowed the application filed by the  

appellant by its judgment and order dated April 2, 1998.

7.  Against  the  aforesaid  judgment  the  Regional  Director  ESI  

Corporation  preferred  an  appeal  (MFA No.  879  of  1998  B)  before  the  High  

Court.   In  appeal,  the High Court  reversed the  Insurance  Court’s  finding  in  

regard to use of power in manufacturing process in the establishment. The High  

Court observed that exhibit D-2, the inspection report, showed the presence of a

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grinder and a refrigerator in the establishment and found it sufficient to hold  

that  there  was use  of  power  in  the  manufacturing process.  The  High  Court,  

accordingly, allowed the appeal of the Regional Director by a brief judgment and  

order dated November 8, 2001.  

8.  The appellant then filed a Review Petition (RP No. 647 of 2001 in  

MFA No. 879 of 1998) on the plea that the High Court order was completely  

silent on the question of maintainability of the appeal, though on behalf of the  

Review Petitioner (appellant) it was specifically contended that the appeal was  

not  maintainable.  It  was  submitted  that  an  appeal  against  the  order  of  the  

Insurance  Court  was  maintainable  under  section  82(2)  of  the  Act  only  on  a  

substantial  question  of  law.  It  was  further  stated  that  the  matter  before  the  

Insurance Court  was concluded by a finding of  fact  and did not  involve  any  

question of law, much less any substantial question of law. The appeal filed by  

the  Regional  Director  was,  therefore,  not  maintainable  and  was  liable  to  be  

dismissed on that score alone.  The High Court, however, overlooked the plea and  

allowed  the  appeal  without  considering  the  appellant’s  objections  to  its  

maintainability.  

9. The High Court rejected the Review Petition by order dated April 12,  

2002 observing that even if there was no substantial question of law involved, the  

Court was competent to entertain the appeal if the judgment of the Court below  

was perverse. It went on to hold that on the basis of the materials on record the  

finding of the Insurance Court that in the establishment in question  there was no  

use of power in the manufacturing process, was quite perverse and hence, it was  

justified in entertaining the appeal and interfering  with the finding.

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10. The short question that arises for our consideration is whether, having  

regard to the materials on record, the finding recorded by the Insurance Court  

can be said to be perverse and fit to be interfered with in appeal under section  

82(2) of the Act.    

11.    On the issue whether power was used in any manufacturing process in the  

establishment the Insurance Court considered the evidences led by the two sides  

in considerable detail and rejected the case of the Corporation giving a number  

of reasons.  It pointed out that in the inspection report it was simply stated that a  

Kelvinator  fridge  (sic  refrigerator)  and  a  one  litre  grinder  were  used  in  the  

manufacturing  process.  But  the report  was completely  silent  in regard to the  

activities that were termed as ‘manufacturing process’ and the purpose for which  

the two electrical appliances were used. The report left it completely for the court  

to presume that the cooking of food was the ‘manufacturing process’ and the two  

appliances were used in that connection. The Insurance Court next observed that  

both PW1, the Managing Director and PW3, the person who was named in the  

inspection report as operating the grinder, in their deposition before the court  

denied the use and even presence of the two appliances in the establishment. But  

neither  of  them  was  even  cross-examined  on  that  issue.  The  court  further  

observed that the Insurance Inspector had obtained a written statement from the  

appellant  containing a list  of all  the fifteen persons who were working in the  

establishment as employees. In the same way he could obtain a statement about  

the use of the two appliances in the establishment for cooking food. But there was  

no such statement and the grinder and the refrigerator found a vague and cryptic

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mention only in the inspection report. In its order the Insurance Court stated as  

follows:

“Next  aspect  to  be  considered  is  whether  the  applicant  has  used  power in the manufacturing process being carried on there.  It is the  specific plea of the respondent that the applicant has used a grinder  and  a  fridge  in  their  establishment  in  order  to  carry  out  the  manufacturing process.  It is refuted by the applicant.  The applicant  as PW-1 testified before me that no grinder and fridge are used in  their establishment. This aspect of his evidence is not controverted in  his cross examination by the counsel  for the respondent.   It is not  elicited as to what are all the manufacturing process being carried on  in  the  applicant  establishment  and  how  they  are  got  done.  It  is  pertinent to note that there is no mention about the use of power in  the  manufacturing  process  in  Ext.D-1  letter  elicited  from  the  applicant  by  the  Insurance  Inspector.   It  is  common  case  that  Govindan was an employee of the applicant establishment. He was  examined as PW-3 before me. He testified before me that there was  no grinder or fridge used in the applicant establishment. There is no  cross  examination  at  all  on  the  above  aspect  and  therefore  his  testimony in this regard stands unchallenged.   

The DW-1 Insurance Inspector  has  noted in his  Ext.D-2  report that a grinder and a fridge are being used in the applicant  establishment.  It is pertinent to note that the Ext.D-2 report is silent  with regard to what are the manufacturing processes being carried  on in the applicant establishment and the purposes for which above  equipments are used.   A sweeping statement that there is a grinder of  10 litre capacity and a Kelvinator fridge is made in the D-2 report.”

The High Court reversed the findings observing as follows:

“Ext.D-2 survey report shows that grinder and fridge there. In Ext.D- 2  it  is  stated  that  there  was  a  grinder  of  1-  liter  capacity  and  a  Kelvinator fridge. Merely because the details of which is not stated is  not a ground to discard the evidence of DW-1 and Ext.DW-2 report.  At the time of examination, DW-1 stated that the grinder was being  operated  by  one  Damodaran  Nair,  a  worker  of  the  respondent’s  establishment. In the application itself it is submitted by the applicant  that  he  is  running  a  Tourist  home  and  the  rooms  are  let  out  on  monthly as well as a daily basis.  The name of the establishment is  styled as “Hotel New Nalanda”. DW-1 found grinder and fridge in  the  kitchen.  Those  who occupy  a  hotel  do  depend  upon  the  food  which are prepared in the hotel.  It is not possible to conceive of a  hotel  without  a  kitchen.  Lodging  and  boarding  are  both  essential  components of the service rendered by a Hotel. Hence, it cannot be

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denied  no  manufacturing  process  is  being  conducted  in  the  establishment of the respondent.”

12. We are unable to appreciate the way the High Court considered the  

evidence and deemed fit  to interfere  with the finding of  fact recorded by the  

Insurance  Court.  The  High  Court  seems  to  have  taken  the  inspection  report  

exhibit D2 and the testimony of the Insurance Inspector DW1 as non-rebuttable,  

conclusive pieces of evidence. Further, for filling-up what remained unsaid in the  

inspection report and the testimony of DW1, it took recourse to presuming that  

the establishment must have kitchen where food would be cooked using the two  

appliances running with the aid of power. The High Court did not even advert to  

the reasons given by the Insurance Court for not accepting the Corporation’s  

case  on  that  issue.  The  Insurance  Court  had  rightly  pointed  out  that  the  

inspection  report  did  not  state  the  process  or  the  work  that  was  called  ‘the  

manufacturing process’. It did not even say that the refrigerator and the grinder  

were used in connection with cooking food in the establishment.  

13. For holding an establishment to be a ‘factory’ within the meaning of  

section 2(12) of the Act it must first be established that some work or process is  

carried  on  in  any  part  of  the  establishment  that  amounts  to  ‘manufacturing  

process’  as defined under section 2(k) of  the Factories  Act,  1948.  In case the  

number of persons employed in the establishment is less than twenty but more  

than ten then it must further be established that the manufacturing process in the  

establishment is being carried on with the aid of power. Further, the use of power  

in the manufacturing process should be direct and proximate.  The expression  

‘manufacturing process being carried on with the aid of power’ in section 2(12)  

of the Act does not mean a very indirect  application of power such as use of

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electric  bulbs  for  providing  light  in  the  work-area.  Unless  the  links  are  

established, that is to say, it is shown that some process or work is carried on in  

the establishment which qualifies as ‘manufacturing process’ within the meaning  

of section 2(k) of the Factories Act and the manufacturing process is carried on  

with the aid of power,  the mere presence of a refrigerator and a grinder there,  

even though connected to the main power line may not necessary lead to the  

inference that the establishment is a factory as defined under section 2(12) of the  

Act.    

14. On hearing counsel for the parties and on a careful consideration of  

materials  on record we are satisfied that  the Insurance Court  had come to a  

reasonable  finding  of  fact.   Against  this  finding  neither  any  appeal  was  

maintainable under section 82(2) of the Act nor was the High Court justified in  

interfering  with  it.   We,  accordingly,  find  the  judgment  of  the  High  Court  

unsustainable.  It is set aside.  In the result the appeal is allowed but with no  

order as to costs.  

       ……………………………. J.

      [TARUN CHATTERJEE]

…………………………….J.  [AFTAB ALAM]

New Delhi, July 15,  2009.

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ITEM NO. 1-A           ( For  Judgment )

           COURT No.4     SECTION  XV

              S U P R E M E   C O U R T   O F   I N D I A                            RECORD OF PROCEEDINGS

Civil Appeal No. 7050 of 2002

M/s Hotel New Nalanda ..   Appellant(s)

   Versus

Regional Director, E.S.I. Corpn. ..   Respondent(s)

DATE : 15/07/2009      This matter was called on for pronouncement  of judgment today.  

                                                                                For Appellant(s) Mr. Subramonium Prasad, Adv.

   For Respondent(s) Mr. V.J. Francis, Adv.

              --- Hon'ble Mr. Justice Aftab Alam pronounced the judgment of the  

Bench comprising Hon'ble Mr. Justice Tarun Chatterjee and his Lordship.

The appeal is allowed with no order as to costs, in terms of the  

signed judgment which is placed on the file.

[ S. Thapar ]     PS to Registrar

   [ Madhu Saxena ]    Court Master  

[ Signed reportable judgment is placed on the file ]