IN THE HIGH COURT OF KERALA AT ERNAKULAM
MFA No. 1007 of 2002()
1. THE EMPLOYEES STATE INSURANCE
... Petitioner
2. THE RECOVERY OFFICER, REGIONAL OFFICE,
Vs
1. K.N.PREMANANDAN, KURATHUPARAMBIL HOUSE,
... Respondent
2. K.N.VIDYANANDAN, KURATHUPARAMBIL HOUSE,
For Petitioner :SRI.T.P.M.IBRAHIM KHAN,SR.SC, RAILWAYS
For Respondent :SRIR.AZAD BABU
The Hon'ble MR. Justice M.RAMACHANDRAN
The Hon'ble MR. Justice S.SIRI JAGAN
Dated :25/01/2007
O R D E R
M. Ramachandran & S. Siri Jagan, JJ.
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M.F.A No. 1007 of 2002
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Dated this, the 25th January, 2007.
J U D G M E N T
Siri Jagan, J.
This appeal is filed at the instance of the Employees State
Insurance Corporation against the order of the Employees Insurance
Court, Alappuzha in I.C.No. 104/1999 raising the following substantial
questions of law:
(1) Whether the Financial difficulties or the pendency
of litigation will absolve the Employer from the payment of
damages by way of Penalty.
(2) Whether Sakthi Tiles’ case (Supra) will empower
the E.I. Court to reduce the quantum of damages imposed on
the ground of pendency of litigation and the financial
difficulties.
(3) Whether Section 85-B of the Employees State
Insurance Act and the Regulation given unfettered right to
the Corporation to impose damages by way of penalty for the
belated payment of Contribution upto 100 percent.”
The basic facts from which the above questions of law are sought to
be raised are as detailed under.
2. The respondents herein were the employers who filed the I.C
challenging the order of the appellants imposing on them damages to
the tune of Rs.79,969/- under Section 85B of the Employees State
Insurance Act, 1948 for delayed payment of contributions for the
period from October, 1986 to March,1987, October, 1987 to March,
1988, April, 1988 to March, 1989 and May, 1990 to March, 1991. In
the I.C, the employers, after admitting that there was, in fact, delay in
payment of contributions, contended that for that delay, no damages
could have been imposed under Section 85B, since the delay was on
account of the pendency of litigations in respect of the liability to pay
contributions themselves as also financial difficulties. The appellants
herein contended before the Insurance Court that once delay is
admitted, the fact that there were litigations pending and the
M.F.A. No. 1007/2002. -: 2 :-
employers were in financial difficulties are not factors which could be
taken into account to reduce the damages payable under Section 85B
of the Act, imposition of which is at the discretion of the authorised
officer under Section 85B. Repelling these contentions, based on a
Division Bench decision of this Court in Regional Director, E.S.I
Corporation v. Sakthi Tiles, [1988 (2) KLT 280], the Insurance Court
reduced the damages leviable to Rs. 27,500/-. This decision of the
Insurance Court, is under challenge in this appeal.
3. First we shall consider the second question of law raised as
above as to whether the Insurance Court has jurisdiction to consider
the question of waiver or reduction of damages imposed under
Section 85B in exercise of its jurisdiction under Section 75 of the Act.
4. Of course, Section 75 which is the provision under which the
I.C has been filed, does not specifically refer to damages as such. But,
clause (g) of sub-section (i) of Section 75 would be relevant for our
purpose in deciding this question, which reads as under:
“75. Matters to be decided by Employees’ Insurance
Court:- (1) any question or dispute arises as to–
xx xx xx (g) any other matter which is in dispute between a principalemployer and the Corporation, or between a principal employer and
an immediate employer or between a person and the Corporation or
between an employee and a principal or immediate employer, in
respect of any contribution or benefit or other dues payable or
recoverable under this Act, or any other matter required to be or
which may be decided by the Employees’ Insurance Court under this
Act,
such question or dispute, subject to the provisions of sub-section (2A)
shall be decided by the Employees Insurance Court in accordance with
the provisions of this Act.”
Although, this clause does not specifically refer to damages as such,
it specifically refers to other dues payable or recoverable under the
Act. We are of opinion that the question as to whether the damages
M.F.A. No. 1007/2002. -: 3 :-
imposed under Section 85B is justifiable or whether the quantum of
damages imposed is in accordance with principles for computing the
damages is certainly a dispute, which would fall within the ambit of
clause (g) of Section 75(1). We are supported in this view by two
Division Bench decisions of this Court. First is the case referred to
by the Insurance Court itself, namely, Sakthi Tiles’s case, wherein,
this Court has categorically held as follows:
” . . . . . In this perspective, we hold that the Insurance Court which is a
proper forum prescribed by the Act to adjudicate as to whether the
order or proceeding initiated by the Corporation to recover damages is
justified can evaluate the entire matter, and if it is satisfied that there
are extenuating circumstances, it can dispense with the recovery of
damages, or delete or reduce the quantum of damages levied or afford
such other relief, which in its opinion, is deserved in the circumstances.
Following the said decision, another Division Bench of this Court in
E.S.I. Corporation v. Hindustan Tile Works, 1999 (2) KLT 851,
specifically answered this question with reference to Section 75(1)(g)
as follows:
“On detailed consideration of the arguments raised by both
sides, we are not convinced that there is any merit in the aforesaid
contention of the appellant. The first contention that the E.S.I. Court
had no jurisdiction to adjudicate the matter has no merit in view of
the specific provisions in S. 75(1)(g) of the Act which empowers the
court to adjudicate on any dispute on any matter which is in dispute
between a principal employer and the Corporation, in respect of any
contribution or benefit or other dues payable or recoverable under the
Act or any other matter required to be or which may be decided by the
Employees’ Insurance Court under the Act. The penalty contemplated
in S. 85-B definitely falls under ‘other dues’ contemplated in the
aforesaid provision and as such the Employees’ State Insurance Court
had full jurisdiction to decide the issue.”
5. In view of the above findings of the two Division Benches,
with which we respectfully agree, we have absolutely no doubt in our
mind that the Insurance Court has jurisdiction to decide the question
as to whether damages imposed under Section 85-B of the Act is
justifiable or not.
6. The other questions of law raised by the appellants in this
M.F.A. No. 1007/2002. -: 4 :-
appeal essentially relate to the various aspects of imposition of
damages under Section 85-B and therefore can be considered
together.
7. Before going into these aspects, we may observe that the
wording of Section 85-B was not the same as sit stood in the statute
book at the time of Sakthi Tiles’s case. Therefore, we shall first note
Section 85-B as it stood prior to 1989. At that time, Section 85-B
read thus:
“85B: Power to recover damages:- (1) Where an
employer fails to pay the amount due in respect of any
contribution or any other amount payable under this Act, the
Corporation may recover from the employer such damages
not exceeding the amount of arrears as may think fit to
impose:
Provided that before recovering such damages, the
employer shall be given a reasonable opportunity of being
heard.”
(Emphasis supplied)
Thereafter, amendments were introduced to Section 85-B, by Act 29
of 1989 with effect from 1-1-1992 and thereafter Section 85-B reads
as follows:
“85-B. Power to recover damages:- Where an employer
fails to pay the amount due in respect of any contribution or
any other amount payable under this Act, the Corporation may
recover from the employer by way of penalty such damages
not exceeding the amount of arrears as may be specified in the
regulations:
Provided that before recovering such damages, the
employer shall be given a reasonable opportunity of being
heard:
Provided further that the Corporation may reduce or
waive the damages recoverable under this section in relation
to an establishment which is a sick industrial company in
respect of which a scheme for rehabilitation has been
sanctioned by the Board for Industrial and Financial
Reconstruction established under Section 4 of the Sick
Industrial Companies (Special Provisions) Act, 1985 (1 of
1986), subject to such terms and conditions as may be
M.F.A. No. 1007/2002. -: 5 :-
specified in regulations.
(2) Any damages recoverable under sub-section (1) may
be recovered as an arrear of land revenue or under section
45C to section 45-I.”
(Emphasis supplied)
We are not unaware of the fact that the periods of delay in payment
of contribution in this case are between October, 1986 to March, 1991
and in fact except for three months, damages imposed related to the
pre-amendment period of Section 85-B. But, we are of opinion that in
the view we are inclined to take, the same is not material at all for
deciding this case.
8. Before amendment, the wording used was different in the
section. At that time, the words used were “the Corporation may
recover from the employer such damages, not exceeding the arrears
as it may think fit to impose.” This wording was changed as “the
Corporation may recover from the employer by way of penalty such
damages not exceeding the amount of arrears as may be specified in
the regulations.” As such, by the amendment, the legislature had
made it abundantly clear that the imposition of damages by way of
Section 85-B is in the nature of penalty. But, even without the word
‘penalty’ in that section prior to the amendment, in the decision of
Shakti Tiles’s case, a Division Bench of this Court came to the
conclusion that the imposition of damages under Section 85-B is in
the nature of penalty which only has been subsequently made clear by
the legislature by amending the section, by expressly stating that the
power to recover damages under Section 85-B is by way of penalty.
If imposition of damages is by way of penalty, then such damages can
be imposed only in accordance with the principles applicable for
imposing penalty for failure to carry out a statutory obligation.
9. The Supreme Court had, as early as in 1970, in the decision
of M/s. Hindustan Steel Ltd. v. The State of Orissa, AIR 1970 S.C.
M.F.A. No. 1007/2002. -: 6 :-
253, laid down guidelines in the matter of imposition of penalty for
failure to carry out a statutory obligation in the following words:
” . . . . . An order imposing penalty for failure to carry
out a statutory obligation is the result of a quasi-criminal
proceeding, and penalty will not ordinarily be imposed unless
the party obliged either acted deliberately in defiance of law or
was guilty of conduct contumacious or dishonest, or acted in
conscious disregard of its obligation. Penalty will not also be
imposed merely because it is lawful to do so. Whether penalty
should be imposed for failure to perform a statutory obligation
is a matter of discretion of the authority to be exercised
judicially and on a consideration of all the relevant
circumstances. Even if a minimum penalty is prescribed, the
authority competent to impose the penalty will be justified in
refusing to impose penalty, when there is a technical or venial
breach of the provisions of the Act or where the breach flows
from a bona fide belief that the offender is not liable to act in
the manner prescribed by the statute. . . . .”
(Emphasis supplied)
Although, Shakthi Tiles’s case does not specifically refer to the above
Supreme Court decision, the Division Bench had, in fact, borrowed
the words of the Supreme Court in the above decision in coming to
the following conclusion:
“It was not disputed that from any levy of damages it is
open to the employer to take up the matter before the
Insurance Court under S. 75 read with S.78 of the Act. The
only question focussed was that the Insurance Court cannot
interfere with the quantum of damages. A mere look at S.
85B will show that even where the employer fails to pay the
amounts due in respect of any contribution payable under
the Act, it is not obligatory o the Corporation to levy or
recover damages. The power to levy damages is
discretionary. The section has only stated, the maximum
amount that can be so recovered. The power to levy and
recover damages provided in S. 85B of the Act is in the
nature of a quasi-penal provision. An order, levying
damages for failure to pay the amount due in respect of any
contribution payable under the Act, is a quasi judicial
proceeding. The proviso to S. 85B itself indicates that
before recovering such damages, the employer should be
given a reasonable opportunity of being heard. It
postulates that there should be an adjudication in the
matter. Since the failure to carry out the statutory
obligation should be adjudicated by a quasi judicial enquiry,
and the levy of damages is quasi penal in character, we are
M.F.A. No. 1007/2002. -: 7 :-
of the view that such damages will not ordinarily be
imposed unless the party obliged to pay the amount due,
acted either deliberately or in defiance of law, or was guilty
of contumacious or dishonest conduct, or acted in conscious
disregard of its obligation. The mere fact that the
Corporation is empowered to recover damages does not
mean that the Corporation can act mechanically and
without taking into account the facts and circumstances of
each case. It is to be noted that the statutory provision
does not prescribe any minimum to be recovered as
damages. What is provided is the maximum that can be
recovered. We are of the view, that since the opportunity
that is provided before recovering the damages should be
effective and meaningful, the authority empowered to levy
damages should have the discretion either to levy the
damages or to dispense with the levy of the damages. The
Corporation will not be justified in levying the damages in
case where the employer, or the person,who is bound to
pay the amount in respect of the contribution payable in
this regard, is able to offer sufficient or cogent explanation
for non-remittance, or in case where there is only a
technical or venial breach of the provision of the Act, or
there exists bona fide circumstances, which will point out
that there was no deliberate omission on the part of the
employer. In this perspective, we hold that the Insurance
Court, which is a proper forum prescribed b the Act to
adjudicate as to whether the order or proceeding initiated
by the Corporation to recover damages is justified, can
evaluate the entire matter, and if it is satisfied that there
are extenuating circumstances, it can dispense with the
recovery of damages, or delete or reduce the quantum of
damages levied or afford such other relief, which in its
opinion, is deserved in the circumstances. Delivering the
judgment of the Bench, Subramonian Poti, J. in C.L. Anand
v. Regional Director, (1980 KLT 139 : 1980 Lab I.C. 90)
stated thus:
“Being a provision which confers a power to
impose penalty, S. 85(B) of the Employees’ State
Insurance Act must be taken to confer a discretion on the
Regional Director in the matter of determining the
quantum. But, that discretion calls for objective exercise
within the limit pointed out in that Section and such
exercise must be apparent in the order. We have also
indicated that it is necessary to find guilty conduct on the
part of a parity to justify the imposition of damages and
the quantum of guilt or the gravity of misconduct should
naturally determine the gravity of the punishment.
Therefore while one would not expect the order of the
Regional director to state with precision how exactly the
damages have been assessed, it must be possible to see
M.F.A. No. 1007/2002. -: 8 :-
from the order the presence of punitive circumstance
justifying the imposition of damages and the gravity of
the punitive element. That would be necessary to
appreciate whether the damages imposed could be said
to be reasonable. . . . . . . If the damages is imposed as
merely related to the delay without reference to the
punitive element, that may not be justifiable.”
We fully concur with the above statement of the law. In I.C.
20 of 1986 the Insurance Court held that the period of delay in
remitting the amount varies from 11 days to 473 days and
mechanical levy of 19 per cent damages for all the periods is
irrational and unfair. So holding, the Insurance Court directed
the Corporation to fix damages at the rate of 10 per cent for all
periods involved in the case. Similarly, in I.C.42 of 1986 the
Insurance Court adverted to the fact that the employer
(applicant) is a Co-operative Society registered under the Co-
operative Societies Act and the Government has register it as a
sick unit. In view of the matter, interests of justice require a
reduction of damages and directed the Society to pay 10 per
cent of the contribution as damages. We are of the view that
the direction given by the Insurance Court to limit the
percentage of damages in both the cases at 10 per cent is well
justified and do not call for any interference. The Insurance
Court has acted in accordance with law. At any rate we are of
the view, that no substantial question of law is involved in
both these appeals.”
(Emphasis supplied)
This decision was followed by another Division Bench in Hindustan
Tile Works’s case and quoting the first of the passages quoted above,
the Division Bench followed the said decision and held that unless,
by not paying the contributions in time, employers have acted either
deliberately or in defiance of law or are guilty of contumacious or
dishonest conducts and acted in disregard of its obligation, penalty
cannot be imposed by way of damages under Section 85-B. We also
note that in a still later Division Bench decision of this Court in E.S.I
Corporation v. Bhaskaran, reported in 1998 (1) KLT S.N. 24 at page
28, it was held that since the failure to carry out the statutory
obligation should be adjudicated by a quasi judicial enquiry and the
levy of damages is quasi penal in character, such damages will not
ordinarily be imposed unless the party obliged to pay the amount due
M.F.A. No. 1007/2002. -: 9 :-
acted either deliberately or in defiance of law, or was guilty of
contumacious or dishonest conduct, or acted in conscious disregard of
its obligation. Since all these decisions categorically use the very
same words used by the Supreme Court in Hindustan Steel Ltd.’s
case, it is apparent that all the Division Benches were of the
unanimous opinion that the imposition of damages under Section 85-B
regardless of the change in wording before and after amendments
was in the nature of penalty and therefore the principles enunciated
by the Supreme Court in that decision regarding imposition of
penalty, squarely apply to recovery of damages under Section 85-B.
10. Of course, the appellants have another case that by virtue
of the introduction of the said second proviso to Section 85-B, the
interference with the discretion exercised by the Corporation to
impose damages can only be in cases covered by the said proviso, ie,
only in cases were the establishment on which the damages are to be
imposed is a sick industrial company in respect of which a claim for
rehabilitation has been sanctioned by the BIFR under the Sick
Industries Companies (Special Provisions) Act, 1985. We are unable
to agree. That proviso was introduced in tune with the object and
purpose of the Sick Industries Companies (Special Provisions) Act,
1985 and does not exclude the necessity to consider the question as to
whether damages are to be imposed or how much damages are to be
recovered taking into account the circumstances which compelled the
employer to commit default in payment of contributions. Right of
hearing was always a precondition before imposition of damages and
if we accept the contentions as raised by the Corporation, we may
have to totally ignore the first proviso, which, of course, would
amount to going against the express words of the Statute, and is
uncalled for. Therefore, even in cases where the establishment is not
a sick industrial company, the principles enunciated in the above said
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decisions would squarely apply notwithstanding the introduction of
second proviso to Section 85-B.
11. In this connection, an argument has also been raised by the
appellants on the basis of Regulation 31C of the Employees State
Insurance (General) Regulations, 1950 which reads as under:
“3C. Damages or contributions or any other amount due,
but not paid in time:- If an employer fails to pay contributions
within the periods specified under regulation 31, or any other
amount payable under the Act, the corporation may recover
damages, not exceeding the rates mentioned below, by way of
penalty:
—————————————————————————————————
Period of delay Maximum rate of damages in per cent
per annum of the amount due.
—————————————————————————————————
(i) Less than 2 months 5% (ii) 2 months and above But less than 4 months 10% (iii) 4 months and above but less than 6 months 15% (iv) 6 months and above 25%—————————————————————————————————
Provided that the Corporation, in relation to a factory or
establishment which is declared as sick industrial company and in
respect of which a rehabilitation scheme has been sanctioned by
the Board for Industrial and Financial Reconstruction, may:-
(a) in case of a change of management including transfer
of undertaking(s) to workers’ Co-operative(s) or in case of merger
of amalgamation of sick industrial company with a healthy
company, completely waive the damages levied or leviable;
(b) in other cases, depending on its merits, waive upto 50
per cent damages levied or leviable;
(c) in exceptional hard cases, waive either totally or
partially the damages levied or leviable.”
Counsel for the appellants would submit that since under Section 85-
B, the penalty to be imposed as damages for delayed payment of
contribution is as specified in the regulations, and Regulation 31C
M.F.A. No. 1007/2002. -: 11 :-
specifically lays down the percentage of damages to be imposed on
the basis of the period of delay, all what the Corporation is bound to
take into account is the extent of delay for deciding the damages
imposed. That also may not be the correct interpretation of the
provisions. At the most, Regulation 31C would only be guidelines in
the matter of imposition of damages. Further, Regulation 31C also
specifically states not exceeding the rates mentioned below, which
shows that the percentage fixed there is not absolute. This is
exemplified by the fact that in the proviso to Regulation 31C in the
case of a sick industrial company, separate guidelines have been
prescribed for imposition of damages, which also would go to show
that the discretion vested in the Corporation under Section 85-B read
with Regulation 31C has to be exercised judicially. The same being by
way of penalty, the Corporation is bound to adhere to the principles
for imposition of penalty as laid down in Hindustan Steel Ltd.’s case.
12. Viewed thus, the fact that there were three litigations
pending before the Insurance Court, namely, I.C.Nos. 23/1988 and 63
and 64 of 1993 in respect of the liability of the respondents herein to
pay contributions itself and the financial difficulties projected by them
are certainly matters which should have been taken into account by
the Corporation while imposing damages under Section 85-B for
delayed payment of contribution for the periods in question under
Section 85-B.
13. In this connection, we may note with approval the decision
rendered by one of us (S. Siri Jagan, J.) in the decision of Indian
Telephone Industries Ltd. v. Asst. P.F. Commissioner & others,
reported in 2006 (3) KLJ 698, albeit in the context of imposition of
damages under Section 14-B of the Employees Provident Funds and
Miscellaneous Provisions Act (‘Provident Fund Act’ for short). We
note that the provisions relating to imposition of damages for delayed
M.F.A. No. 1007/2002. -: 12 :-
payment of contribution under both these enactments are in pari
materia. The amendment brought out in the section are also identical.
Prior to the amendment of Section 14-B in 1988, in the Provident
Fund Act, the Section read thus:
“Power to recover damages:- Where an employer makes
defaults in the payment of any contribution to the Fund (the
Family Fund or the Insurance Fund) or in the transfer of
accumulations required to be transferred by him under sub-
section (2) of Section 15 (for sub-section 17) or in the
payment of any charges payable under any other provision of
this Act or of (any scheme or Insurance Scheme) or under any
of the conditions specified under Section 17, (the Central
Provident Fund Commissioner, or such other office as may be
authorised by the Central Government, by notification in the
official gazette in this behalf) may recover from the employer
such damages, not exceeding the amount of arrear, as it may
think fit to impose:
Provided that before levying and recovering such
damages, the employer shall be given a reasonable
opportunity of being heard.: (Emphasis supplied).”
Later on, the said Section was amended by Act 33/1988, after which
the Section reads as follows:
“14-B. Power to recover damages:- Where an employer makes
default in the payment of any contribution to the Fund (the
Family Pension Fund of the Insurance Fund) or in the transfer
of accumulations required to be transferred by him under sub-
section (2) of Section 15 (or sub-section (5) of Section 17) or in
the payment of any charges payable under any other provision
of this Act or of any Scheme or Insurance Scheme or under any
of the conditions specified under Section 17, officer as may be
authorised by the Central Government by notification in the
official Gazette, in this behalf may recover from the employer
by way of penalty such damages, not exceeding the amount of
arrears as may be specified in the Scheme:
Provided that before levying and recovering such
damages, the employer shall be given a reasonable opportunity
of being heard:
Provided further that the Central Board may reduce or
waive the damages levied under this section in relation to an
establishment which is a sick industrial company and in respect
of which a scheme for rehabilitation has been sanctioned by the
M.F.A. No. 1007/2002. -: 13 :-
Board for Industrial Financial Reconstruction established under
Section 4 of the Sick Industrial Companies (Special Provisions)
Act, 1985 (1 of 1986), subject to such terms and conditions as
may be specified in the Scheme. ” (Emphasis supplied).
Clause 32A in Employees Provident Fund Scheme is somewhat similar
to Regulation 31C of the ESI Act, which reads thus:
“32A. Recovery of damages for default in payment of any
contribution:- (1) Where an employer makes default in the payment
of any contribution to the fund, or in the transfer of accumulations
required to be transferred by him under sub-section (2) of section 15
or sub-section (5) of section 17 of the Act or in the payment of any
charges payable under any other provisions of the Act or Scheme or
under any of the conditions specified under Section 17 of the Act, the
Central Provident Fund Commissioner or such officer as may be
authorised by the Central Government, by notification in the Official
Gazette in this behalf, may recover from the employer by way of
penalty, damages at the rates given below:-
Period of Default Rates of damages (% of arrears per annum. (a) Less than two months 17 (b) Two months and above But less than four months. 22 (c) Four months and above But less than six months. 27 (d) Six months and above 37"Considering the above said provisions, in the above said decision, the
learned Judge held as follows:
“16. I am of opinion that merely because there is
belated payment of contributions, liability to pay damages does
not automatically arise, but the same shall be decided by
applying mind to the merits of each case and not by resorting
to mere arithmetic calculation of damages. Even though
liability to pay contributions is statutory, to hold that delay
automatically attracts damages would be too rigid a way of
construing the Section, especially since the imposition of
damages is punitive in nature. There must be application of
mind taking into account the reasons for delay and whether the
delay could have been avoided by ordinary diligence by the
M.F.A. No. 1007/2002. -: 14 :-
employer. For this, one cannot with any amount of certainty
say what are the circumstances which would mitigate the
damages and which would not. The same would differ from
case to case, which requires exercise of judicial discretion by
the authority imposing damages by application of mind to the
circumstances pleaded and proved by the defaulting
employer.”
We are in complete agreement with the principles laid down in that
decision and are of opinion that those principles squarely apply to
the interpretation of Section 85-B of the ESI Act since the relevant
provisions in the two beneficial legislations are in pari materia with
each other.
14. While at it, we may also note a contention of the appellants
to the effect that the damages leviable under Section 85-B is
compensatory in nature and therefore damages cannot be decided by
applying the principles applicable for imposing penalty alone. This
question was answered in the negative as early as in 1980 by a
Division Bench of this Court in E.S.I Corporation v. Meecos Ltd., 1980
KLT 179. The Division Bench in that decision described the character
of the imposition as follows:
“The Employees’ State Insurance Act is intended to
provide certain benefits to employees in case of sickness,
maternity and employment injury and to make provision for
certain other matters relating to benefit to the employees. The
scheme cannot be worked out without making effective
provisions for levying contributions under the Act. The
employer as well as the employees contributes which
contribution is ploughed back for the benefit of the employees
by working out various schemes intended to serve the
employees covered by the Act. The time within which
contributions are to be made is provided by the Act read with
the Regulations made thereunder. S. 84 of the Act enables
prosecution for false representations or false statements made
with a view to avoid payment under the Act. Defaults to pay
contribution under the Act or failure to furnish return under
the Act and similar matters which would necessarily hamper the
proper implementation of the Act are made punishable by S. 85
of the Act. Provision for enhanced punishment in cases of
previous conviction is made under S. 85A of the Act. It is in
that context that S. 85B appears in the Act and that provides
for recovery of ‘damages’ where the employer defaults to pay
M.F.A. No. 1007/2002. -: 15 :-
contribution payable under the Act. But the Section provides
that the recovery of such ‘damages’ shall not be in excess of the
arrears and the amount of such damages is to be such as the
Corporation may think fit to impose. Sub-section (2) of S. 85B
enables recovery of such damages as an arrear of land revenue.
It may also be pertinent to note that despite the provision for
imposition of damages, there is an independent provision under
S. 97(2)(iii-a) of the Act enabling regulations to be made in
regard to levy of interest at a rate not exceeding 6 per cent per
annum on contributions due, but not paid. That such
Regulations have been made enabling interest to be levied at 6
per cent is admitted. The levy of interest at 6 per cent on the
defaulted amount is therefore not as damages but as interest
recoverable pursuant to the said Regulation. The power to
impose damages is conferred on the Corporation
notwithstanding the right to levy interest independently and
evidently therefore ‘damages’ for delayed payment cannot be
equated with interest on the defaulted payments. The statute
contemplates liability for such damages when once failure to
pay is established. What such damages should be in any
specific case is another mater. The use of the term ‘imposed’ in
S. 85B suggests that the ‘damages’ as contemplated in that
section is different from the concept envisaged by that term in
relation to contracts or torts. ‘Imposition’ is normally
associated with the authority to create an obligation. Taxes are
imposed, duties are imposed and penalties are imposed whereas
damages in torts and contracts ‘arise’. The damages
contemplated in S. 85B is therefore not compensation for loss
on account of the default of a party, but is in the nature of a
penalty that could be imposed for non-compliance with the
statute to the extent indicated.”
(Emphasis supplied)
This decision is in keeping with the statutory provisions as obtaining
now. The compensatory part is taken care of by other provisions in
the Act for realisation of interest on the delayed payment. Even
before a specific provision under the Act was introduced by way of
sub-section (5) of Section 39 by Act 29 of 1989, the Employees State
Insurance (General) Regulations contained a provision for recovery of
interest on delayed payments, which was substituted by a notification
dated 9-3-1983 reads as follows:
“31A. Interest on contribution due, but not paid in
time:- An employer who fails to pay contribution within the
periods specified in regulation 31, shall be liable to pay simple
M.F.A. No. 1007/2002. -: 16 :-
interest at the rate of fifteen per cent per annum in respect of
each day of default or delay in payment of contribution.”
In fact, that regulation is referred to in the Meecos’s case in the
portion extracted above. The Parliament gave statutory backing to
the power to levy interest by introducing sub-section (5) to Section 39
of the ESI Act itself which reads thus:
39. Contributions:-
xx xx xx(5) (a) If any contribution payable under this Act is not
paid by the principal employer on the date on which such
contribution has become due, he shall be liable to pay simple
interest at the rate of twelve per cent per annum or at such
higher rate as may be specified in the regulations till the date
of its actual payment:
Provided that higher interest specified in the regulations
shall not exceed the lending rate of interest charged by any
scheduled bank.
(b) Any interest recoverable under clause (a) may be
recovered as an arrear of land revenue or under section 45C to
section 45I.
Explanation:- In this sub-section, “scheduled bank”
means a bank for the time being included in the Second
Schedule to the Reserve Bank of India Act, 1934 (2 of 1934).”
In fact, in Indian Telephone Industries case also, after noting similar
provisions in the EPF & MP Act and the Scheme thereunder, the
learned Single Judge had also come to the same conclusion, which
also we approve of. As such, the compensatory part has been taken
care of by stipulating payment of interest for delayed payments and
therefore it is abundantly clear that imposition of damages under
Section 85B is purely penal in character and therefore the principles
to be applied while computing the damages payable would be as
applicable for imposition of penalties as elucidated by the Supreme
Court in Hindustan Steel’s case.
M.F.A. No. 1007/2002. -: 17 :-
In view of our above findings, we are of opinion that applying
the said principles to the present case, the fact that there were
litigations pending between the parties in respect of the very liability
of the respondents to pay contributions under the Act which led to
delay in paying contribution were certainly matters which should have
been taken into account by the appellants while determining the
amount of damages under Section 85B. Likewise, the paucity of
liquid cash which is not very uncommon cannot also result in a
penalty without an appropriate probe into the causes thereof.
Evidently, the Insurance Court has taken into account all those
circumstances to come to the conclusion that the amount of Rs.
27,500/- would be the appropriate damages to be imposed on
respondents in this case. When a fact finding authority has arrived
at that conclusion taking into account all the facts, evidence and
circumstances proved before it, we do not think that it is for us to hold
otherwise, in exercise of our limited jurisdiction which can be
exercised only to decide substantial questions of law under Section 82
of the E.S.I Act. Therefore, we do not find any merit in the
contentions in this appeal and accordingly, the same is dismissed.
Sd/- M. Ramachandran, Judge.
Sd/- S. Siri Jagan, Judge.
Tds/
[True copy]
P.S to Judge.