Karnataka High Court
The Esi Corporation vs M/S Renram Fashions India Pvt. Ltd on 19 November, 2024
Author: H.P.Sandesh
Bench: H.P.Sandesh
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MFA No. 3186 of 2017
C/W MFA No. 3185 of 2017
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 19TH DAY OF NOVEMBER, 2024
BEFORE
THE HON'BLE MR JUSTICE H.P.SANDESH
MISCELLANEOUS FIRST APPEAL NO. 3186 OF 2017 (ESI)
C/W
MISCELLANEOUS FIRST APPEAL NO. 3185 OF 2017(ESI)
IN MFA No. 3186/2017:
BETWEEN:
THE ESI CORPORATION
SRO-PEENYA
HARINI TOWERS, 3RD MAIN
3RD CROSS,
INDUSTRIAL SUBURB,
YESHWANTHPUR,
BENGALURU 560 022.
...APPELLANT
(BY SRI. C SHASHIKANTHA, ASG)
AND:
M/S RENRAM FASHIONS INDIA PVT. LTD.,
NO.1/1, 1ST CROSS,
Digitally signed SOMESHWARA NAGAR INDUSTRIAL,
by DEVIKA M
SUBURB, APMC YARD,
Location: HIGH
COURT OF YESHWANTHPURA
KARNATAKA BENGALURU 560 022
BY ITS MANAGING DIRECTOR
SRI. VEERA MARE GOWDA.
...RESPONDENT
(BY SRI. J KANIKARAJ.,ADVOCATE)
THIS MFA IS FILED U/S 82(2) OF EMPLOYEES STATE
INSURANCE ACT 1948, AGAINST THE ORDER DATED
31.01.2017 PASSED IN ESI. APPLICATION NO.28/2014 ON
THE FILE OF THE EMPLOYEES STATE INSURANCE COURT,
BENGALURU, PARTLY ALLOWING THE APPLICATION FILED
UNDER SECTION 75 OF THE ESI ACT, 1948.
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MFA No. 3186 of 2017
C/W MFA No. 3185 of 2017
IN MFA NO. 3185/2017:
BETWEEN:
1. THE ESI CORPORATION
SRO PEENYA
HARINI TOWERS, 3RD MAIN, 3RD CROSS,
INDUSTRIAL SUBURB,
YESHWANTHPUR,
BENGALURU 560 022.
...APPELLANT
(BY SRI. C SHASHIKANTHA, ASG)
AND:
M/S RENRAM FASHIONS INDIA PVT. LTD.,
NO.1/1, 1ST CROSS,
SOMESHWARA NAGAR
INDUSTRIAL SUBURB, APMC YARD,
YESHWANTHPURA
BENGALURU - 560 022.
BY ITS MANAGING DIRECTOR
SRI.VEERA MARE GOWDA.
...RESPONDENT
(BY SRI. J KANIKARAJ .,ADVOCATE)
THIS MFA FILED U/S 82(2) OF EMPLOYEES STATE
INSURANCE ACT 1948, AGAINST THE ORDER DATED
31.01.2017 PASSED IN ESI. APPLICATION NO.27/2014 ON
THE FILE OF THE EMPLOYEES STATE INSURANCE COURT,
BENGALURU, PARTLY ALLOWING THE APPLICATION FILED
UNDER SECTION 75 OF THE ESI ACT, 1948.
THESE APPEALS, ARE COMING ON FOR ADMISSION, THIS
DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER:
CORAM: HON'BLE MR JUSTICE H.P.SANDESH
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MFA No. 3186 of 2017
C/W MFA No. 3185 of 2017
ORAL JUDGMENT
Heard learned ASG for the appellant and learned counsel
for the respondent.
2. MFA No.3185/2017 is filed against the order of the
ESI Court dated 31st January 2017 allowing the E.S.I.
Application No.27/2014 in part and setting aside the order
dated 13.6.2014 passed under Section 85-B of the Employees'
State Insurance Act, 1948 ('the ESI Act' for short) claiming
the contribution of Rs.26,34,569/- and directing the applicant
to pay the damages to an extent of Rs.6 lakhs only by
modifying the order passed under Section 85-B of the ESI Act
to that extent.
3. MFA No.3186/2017 is filed against the order of the
ESI Court dated 31st January 2017 allowing the E.S.I.
Application No.28/2014 in part and setting aside the order
passed under Section 45-A of the ESI Act claiming the interest
of Rs.13,04,074/- for the disputed period of 01/2009 to
06/2013 and directing to pay Rs.3 lakhs only to the ESI
Corporation by modifying the order passed under Section 45-A
to that extent.
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4. For the sake of convenience, these appeals are taken
up together for common disposal.
5. The factual matrix of the case in MFA No.3186/2017
is that respondent paid ESI contributions belatedly for the
period from January 2009 to June 2013, in all amounting to
Rs.40,30,086/-, warranting action to levy interest, as a
statutory mandate and hence the respondent was issued a
notice claiming Rs.13,04,074/- as interest on account of delay
in payment of contributions invoking Section 39(5) of the ESI
Act. The respondent filed ESI application No.28/2014 before
the ESI Court and the same was allowed in part reducing the
claim to Rs.3,00,000/-. Hence, the appellant/ESI Corporation
approached this Court contending that respondent did not remit
the contributions on due dates as envisaged under Section 40
of the ESI Act r/w Regulation 31 of the Employees' State
Insurance (General) Regulations, 1950 ('the Regulations' for
short) and the contributions were paid belatedly and delay
ranged from 212 days to 1813 days and the delay in payment
of contributions warranted levy of interest under Section 39(5)
of the ESI Act.
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6. The factual matrix of the case in MFA No.3185/2017
is that respondent paid ESI contributions belatedly for the
period from January 2009 to June 2013, in all amounting to
Rs.40,30,086/-, warranting action to levy damages, as a
statutory mandate and hence the respondent was issued a
notice claiming Rs.26,34,569/- as damages on account of
delay in payment of contributions invoking Section 85B of the
ESI Act. The respondent filed ESI application No.27/2014
before the ESI Court and the same was allowed in part
reducing the claim to Rs.6,00,000/-. Hence, the appellant/ESI
Corporation approached this Court contending that respondent
did not remit the contributions on due dates as envisaged
under Section 40 of the ESI Act r/w Regulation 31 of the
Regulations and the contributions were paid belatedly and delay
ranged from 212 days to 1479 days and the delay in payment
of contributions warranted levy of damages under Section 85B
of the ESI Act.
7. Learned ASG appearing for the appellant vehemently
contended that the ESI Court committed an error in reducing
the damages to Rs.6,00,000/-. He brought to the notice of this
Court Section 85B of the ESI Act and also Regulation 31C of
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the Regulations and contends that the ESI Court is not justified
in arbitrarily reducing the amount of damages claimed under
Section 85B of the ESI Act.
8. Learned ASG in support of his arguments also relied
upon judgments of the Apex Court as well as this Court.
9. Firstly, learned ASG relied upon judgment of this
Court in the case of The Director, ESI Corporation -vs- M/s
Vikram Hospital Pvt. Limited in MFA No.5144/2017 (ESI)
dated 2nd June 2023, wherein this Court with regard to
damages is concerned relied upon the judgment of the Apex
Court in the case of Horticulture Experiment Station
Gonikoppal, Coorg -vs- Regional Provident Fund
Organization reported in (2022)4 SCC 516, wherein the Apex
Court held that failure to deposit contribution - breach of civil
obligations/liabilities committed by employer, is sufficient for
imposition of penalty or damages and there is no further
requirement on authority concerned to examine the existence
of element of actus reus/mens rea or to examine issue of
justification, for imposing damages and having applied the
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principle, this Court allowed the appeal and set aside the
impugned order therein.
10. Secondly, learned ASG relied upon the judgment of
this Court in the case of ESI Corporation -vs- Karnataka
State Open University in MFA 3912/2021 (ESI) dated 21st
June 2013, wherein also this Court discussed the very same
judgment of the Apex Court in the case of Horticulture
Experiment Station Gonikoppal, Coorg (supra) and also
taken note of the judgment in the case of ESI -vs- HMT Ltd.,
and another reported in 2008(116) FLR page 543 (SC) and
allowed the appeal and set aside the impugned order therein.
11. Thirdly, learned ASG relied upon the judgment in the
case of the Director -vs- M/s N J K Enterprises in MFA
No.3055 of 2017 (ESI) dated 24th August 2023, wherein also
this Court discussed the very same judgment in the case of
Horticulture Experiment Station Gonikoppal, Coorg
(supra) as well as HMT Limited (supra) and allowed the
appeal.
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12. Learned ASG contends that the ESI Court is not
justified in arbitrarily reducing the interest to Rs.3,00,000/-
in MFA No.3186/2017.
13. Learned ASG relied upon the judgment in the case of
M/s Goetze (India) Limited -vs- Employees State
Insurance Corporation reported in AIR 2008 SC 3122,
wherein the Apex Court held that "Section 39 of the ESI Act -
Regulation 31A - Contribution - Delay in making payment -
Liability to pay interest is statutory - There is no power of
waiver - No question of compromise or settlement arises".
14. Learned counsel appearing for respondent concedes
that payment of interest is a statutory liability and does not
dispute payment of interest is concerned and submits ESI Court
committed an error.
15. Per contra, learned counsel appearing for the
respondent in respect of damages is concerned, has relied upon
the judgment of the Apex Court in the case of M/s Hindustan
Steel Limited -vs- The State of Orissa reported in AIR 1970
SC 253 and brought to the notice of this Court regarding
imposition of penalty - considerations - persons in charge of
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affairs of a Company failing to register it as a dealer in honest
and genuine belief that it was not a dealer - imposition of
penalties, held not justified. The Apex Court further held that
the liability to pay penalty does not arise merely upon proof of
default in registering as a dealer. 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 of 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 bonafide belief that the offender is not
liable to act in the manner prescribed by the statute.
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16. Learned counsel for the respondent relying upon the
judgment in the case of M/s Hindustan Steel Limited
(supra) contend that the said judgment was delivered by three-
Judge Bench and the judgment in the case of Horticulture
Experiment Station Gonikoppal, Coorg (supra) was
delivered by Division Bench and the same cannot be relied
upon by this Court.
17. Learned counsel for respondent also relied upon the
judgment in the case of The Regional Director/Recovery
Officer & Another -vs- Nitinbhai Vallabhai Panchasara
reported in 2022 LiveLaw (SC) 983, wherein it is held that the
liability to pay the interest is from the date on which such
contribution has become due and till the date of its actual
payment.
18. Learned counsel for the respondent relied upon the
judgment in the case of Horticulture Experiment Station
Gonikoppal, Coorg (supra), which has also been relied upon
by the counsel for the appellant and brought to the notice of
this Court paragraph-12, wherein while referring to the
judgment in the case of Union of India -vs- Dharmendra
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Textile Processors and others reported in (2008)13 SCC 369
held that as far as the penalty inflicted under the provisions is a
civil liability is concerned, mens rea or actus reus is not an
essential element for imposing civil penalties and overruled the
two-Judge Bench judgment in Dilip N. Shroff v. Joint
Commissioner of Income Tax, Mumbai and Another
reported in (2007)6 SCC 329 and approved the view expressed
by a two-Judge Bench of the Apex Court in the case of
Chairman Sebi -vs- Shriram Mutual Fund reported in
(2006)5 SCC 361 and held in paras 18 and 20 accordingly. It
is also held that it is well- settled that mens rea or actus reus is
not an essential element for imposing penalty or damages for
breach of civil obligations and liabilities.
19. Learned counsel for respondent also relied upon the
judgment of this Court in the case of The Director, ESI
Corporation and another -vs- M/s Vijaya Vittala
Vidyashala in MFA No.5438/2017 dated 16th February 2018
and brought to the notice of this Court paragraph-7, wherein
also having taken note that the applicant therein had pleaded
its financial inability to pay the contributions on time and taking
into consideration that establishment is a social service
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organization and also keeping the interest of the Corporation,
has reduced the damages to an extent of 50% and balance
50% has been waived and also observed that the said finding
recorded by the ESI Court is a finding of fact and no question of
law is involved for being formulated and adjudicated and the
appeal came to be dismissed. Counsel referring to this
judgment contend that it is the discretion and the Court can
take into note all the material on record.
20. In reply, learned ASG for the appellant brought to
the notice of this Court Section 85B of the ESI Act, wherein it is
observed that where an employer fails to pay the amount due
in respect of any contribution, 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. Further, the proviso to Section 85B prescribes 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,
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subject to such terms and conditions as may be specified in
regulations. Learned counsel referring to this contend that in
case of sick industrial company, a specific proviso is made and
under said circumstances only can reduce the damages.
21. Learned ASG also brought to the notice of this Court
Regulation 31C of the Regulations and while referring to tabular
column in the said regulation contend that if there is a delay of
more than 6 months in payment of contributions, maximum
rate of damages would be 25%. Learned ASG contend that in
the case on hand, for more than 5 years, contribution was not
paid. Hence, the maximum rate of damages has to be levied.
22. Learned ASG also brought to the notice of this Court
proviso to Regulation 31C, which provides that the Corporation,
in relation to a company in respect of which a Resolution Plan
has been sanctioned by the National Company Law Tribunal
under the Insolvency & Bankruptcy Code, 2016 may waive up
to 50% of the damages levied or leviable depending upon
merits of the case and in exceptional hard cases, waive either
totally or partially the damages levied or leviable. Learned ASG
referring to these provisos contend that no such circumstances
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are made out by the respondent. Only plea taken is ignorance
of law and the same cannot be a ground. Therefore, the ESI
Court committed an error in passing the impugned orders.
23. There is no dispute with regard to payment of interest
is concerned in MFA No.3186/2017 and respondent also
concedes that payment of interest is a statutory liability and
the ESI Court ought not to have reduced the same and hence,
the MFA 3186/2017 has to be allowed setting aside the order of
the ESI Court.
24. Regarding the other appeal - MFA 3185/2017 is
concerned, since issue is only imposing of damages and it is
purely question of law, admitting the appeal, calling for records
and framing substantial questions of law is not required.
25. Having heard learned counsel for the appellant and
learned counsel appearing for respondent and also considering
the grounds urged before this Court, the main issue is whether
the ESI Court is justified in reducing the damages to
Rs.6,00,000/-. Section 85B of the ESI Act is very clear and in
case payment has not been made within the time stipulated,
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powers are given to recover damages. No doubt, damages is
levied by way of penalty for non-payment of contributions.
26. On perusal of the impugned order, it is seen that the
ESI Court has come to the conclusion that levying of damages
to the tune of Rs.26,34,569/- is erroneous and reduced the
same to Rs.6,00,000/- and while doing so, in paragraph-20,
the ESI Court observed that the applicant was not aware of the
quantification of payment of contribution to the ESI during the
disputed period and he has not paid the contribution and soon
after orders came to be passed under Section 45A, he had paid
the entire contribution, which discloses that the applicant has
no intention to hold the payment of contribution to the ESI
Corporation. It seems that the situation was beyond his control
as he has stated in his chief examination that, he was not
keeping good health and therefore not attended the personal
hearing and orders came to be passed under Section 85B of the
ESI Act, prior to the order under Section 45A of the ESI Act and
the applicant had paid total contribution within one payment.
Considering all these aspects, the ESI Court has come to the
conclusion that there is no mens rea for the delay in making
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the payment and hence, exercised the powers in reducing the
damages.
27. Having considered the reasoning, admittedly the
contribution is not paid and the ground urged is that
respondent was not aware of quantification of the contribution
and also he was not keeping good health. No other defence is
raised by the respondent. Once the respondent is registered, it
is the bounden duty to pay the contribution and admittedly, the
contribution is not paid, that too from 2009 to 2013 for a
period of five years. Law is also very clear and in the judgment
of Horticulture Experiment Station Gonikoppal, Coorg
(supra), it is held that mens rea is not required and the same is
not an essential consideration for imposing the penalty.
28. In the case on hand, admittedly contribution is not
paid for a period five years from 2009 to 2013 and also the
ground urged is that same was not quantified. There are no
disputed facts in the case. Law is very clear that contribution
should be voluntarily paid and it is the bounden duty to pay the
same and need necessary to quantify the same. No doubt,
counsel for respondent relied upon the judgment in the case of
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The Director, ESI Corporation and another -vs- M/s
Vijaya Vittala Vidyashala in MFA No.5438/2017 dated 16th
February 2018, which was dismissed at the time of admission
considering the factual aspects and the same is not applicable
to the facts of the case on hand and the facts of the said case
are different.
29. It is also very clear from the proviso to Section 85B
of the ESI Act that the Corporation may reduce or waive the
damages 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 and it
is not the case of the respondent before the ESI Corporation
that the respondent company is a sick company.
30. It is also brought to the notice of the Court that the
damages recoverable under sub-section (1) of Section 85B can
be recovered as arrears of land revenue as per sub-section (2)
of Section 85B and it is also by way of penalty. Also
Regulation 31C of Regulations is very clear with regard to
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damages and as per the periodical tabular column under
Regulation 31C, it is clear that if the delay in payment of
contributions is more than 6 months, the maximum percent of
damages to be imposed is 25%. In the present case, the delay
is more than 5 years and therefore damages at the rate of 25%
has been imposed. Further, the proviso to Regulation 31C is
very clear that the Corporation in relation to a company in
respect of which a Resolution Plan has been sanctioned by the
National Company Law Tribunal under the Insolvency &
Bankruptcy Code, 2016 may waive upto 50% of the damages
levied or leviable depending upon merits of the case and in
exceptional hard cases, waive either totally or partially the
damages levied or leviable. No such circumstances are
warranted in the case on hand and the very admission is very
clear that contribution was not paid and that too for a period of
5 years from 2009 to 2013. When such contribution was not
paid, notice was issued and thereafter imposed the interest as
per the statute. Under the circumstances, damages is also
payable under Section 85B of the ESI Act as well as Regulation
31C of the Regulations and circumstances which have been
explained in Section 85B and Regulation 31C is very clear as to
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under what circumstances, the Corporation can reduce the
damages and the reason assigned by the ESI Court is that it is
pleaded that respondent was not keeping good health and he
was not aware of quantification of contribution and the same
cannot be a ground to reduce the damages. The other reason
is that immediately after the issuance of the notice, the amount
was paid and the same also cannot be a ground to reduce the
damages and the same is not permissible as enshrined in
Section 85B and Regulation 31 C.
31. To come to the conclusion that no intention for
non-payment and in respect of the same also no such ground
has been urged. The judgment relied upon by the respondent's
counsel in Hindustan Steel Limited (supra) is also very clear.
Only in case of any defiance in payment, the Court has to take
note of the said fact into consideration. In the case on hand,
for a period of five years, the contribution was not paid. Even
in the case of Hindustan Steel Limited (supra), it is made
clear that 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
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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 statutory obligation is a
matter of discretion of the authority to be exercised judiciously
and on a consideration of all the relevant circumstances.
32. There is no dispute with regard to the principle in the
above judgment, but in the case on hand, the Court has to take
note of the fact from 2009 to 2013, no contribution was paid
and there are lapses on the part of the respondent and only on
issuance of notice, respondent has come forward to make
payment. That itself is nothing but defiance of law. When the
statute says contribution has to be paid voluntarily, it is the
bounden duty to pay the same and since the same has not
been paid, the interest also levied as per the statute. The
grounds urged are that the respondent was not aware of
quantification of contribution and further he was not keeping
good health and the same cannot be a ground to reduce the
damages. This Court has come to the conclusion that it is a
voluntary act to make payment of contribution. So also no
bonafide belief is in existence and it is nothing but dishonest
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intention contribution not paid and no valid reasons are
assigned. Non quantification cannot be a bonafide belief and
not keeping good health also only an attempt made to get the
lenience from the Court. The payment of contribution is
bounden duty and to pay the same voluntary and statute
demands the same. Under the circumstances, damages is
payable as per Section 85B of the ESI Act and Regulation 31C
of the Regulations and not comes within the proviso of
Exceptions.
33. Therefore, the reasoning given by the ESI Court is
erroneous and exercising power to reduce the amount is also
not in consonance with Section 85B of the ESI Act as well as
Regulation 31C of the Regulations. Hence, it requires
interference of this Court to set aside the order of the trial
Court in MFA 3185/2017.
34. Accordingly, I pass the following:
ORDER
i) The appeals are allowed.
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ii) The impugned order dated 31st January 2017
passed in ESI Application No.27/2014 on the file
of the ESI Court at Bengaluru, is set aside.
iii) The impugned order dated 31st January 2017
passed in ESI Application No.28/2014 on the file
of the ESI Court at Bengaluru, is set aside.
Sd/-
(H.P.SANDESH)
JUDGE
GSS
